How to Deal with Corruption in China

This column originally appeared in Forbes.

It happened to Coca-Cola (KO) on September 14 and to Rio Tinto (RTP)a month before. Even the management consulting firm McKinsey & Co. has been hit. The Chinese government has now investigated employees at all three of those companies in high-profile corruption cases. At Coke, a bottling plant employee was accused of taking $1.5 million in bribes.

When your company is charged with corruption in China, you have to worry about not only bad publicity but also running afoul of America's Foreign Corruption Practices Act and a Chinese government that is increasingly clamping down on the corrupt activities of foreigners.

How big a problem is corruption in China? It's serious. Almost every day the Chinese government arrests someone. A few years ago, it was the Communist Party secretary of Shanghai, Chen Liangyu. Recently the mayor of Shenzhen was sacked. The country's richest man, Huang Guangyu, founder of the electronics retailer Guomei, was arrested. How do you prevent corruption from hurting your operations? And do you really have to give bribes to make money?

Most analysts lump all corruption together, but there is a big difference between government and commercial corruption. Unless, as a foreign executive, you do big real estate deals or projects that involve alcohol, you're unlikely to run into government corruption. It exists, but most officials don't feel comfortable taking money from foreigners.

Not only are there language and cultural barriers, but also they don't trust foreigners to understand how to play the game. The risks of being caught are too high, especially if they find themselves on the wrong side of a government factional fight down the road.

Often around the world, businesses must adhere to the adage "When in Rome, do as the Romans do." Don't in this case. It's not worth the risk. When political power shifts in China, politicians on the losing side often get arrested--along with businessmen who worked with them. No one is untouchable, and you don't want to end up in a Chinese jail.

Although you're unlikely to run into officials asking for bribes, multinationals often have to deal with commercial corruption. Either their employees take kickbacks or their potential clients demand them. Those situations are rampant, and in many ways they're more insidious than government corruption.

For example, a new vice president of marketing at a large company asked my firm, the China Market Research Group, to help him pick a new marketing agency for the company's China operations. He invited a leading firm to pitch against the one that already had the job--an agency I'd never heard of. He invited all 80 members of his China marketing and sales department to vote on the choice, thinking his team would be excited that he was clearly committed to China and wanted their input.

The challenger's presentation displayed great expertise; the incumbent's was amateurish at best. But when the vote was tabulated, it went 78 to 2 against the challenger. The vice president's shocked reaction: "Now I know why so many of them are driving BMWs and Mercedes when they only make $20,000 a year."

Commercial corruption is a very serious problem. You end up working with the wrong partners and suppliers. If the corruption is extensive, your own team members are working more for themselves than for you. Getting a handle on it is critical, but there is no silver bullet. Here are a few things to keep in mind.

First, many employees aren't loyal to the companies they work for. They think of themselves as free-agent entrepreneurs who use their employers as a way to make money, for themselves and for their guanxi social-circle network. They treasure their guanxis, as I wrote in "How to Avoid Getting Kidnapped in China," and they see helping them as a primary goal in life.

In the U.S., people generally trust others until proven wrong. In China, it's the other way around. You have to have serious checks and balances. Bring in outside experts to help choose important partners like public relations firms and outside accountants. That way you can point to those experts when corrupt team members complain that you didn't pick their choices. Also, rotate your employees into different divisions often, so they don't forge strong relationships with particular suppliers.

Second, tell potential clients asking for bribes that the American government is strict about corruption and there is nothing you can do. Playing the helpless foreigner works in these situations. Your Chinese employees can use this excuse, too.

The good news is that commercial corruption is decreasing. Executives are starting to see that they can make more money conducting business honestly. Younger executives, especially ones who have studied abroad, know about Western business practices.

When China initially embarked on its economic reforms, in the late 1970s, corruption helped grease the wheels of commerce. The laws on the books were outdated and not fit for a market economy. Now that the laws are more pro-business, corruption is nothing but a danger. That's why the Central government is clamping down hard.

In the end, never give a bribe. You can make money in China without it. Even if you have to give up some opportunities, the risks aren't worth it. The U.S. government will hold you accountable, and the Chinese government may nail you as it looks for more high-profile targets like Coke and McKinsey to show that it takes corruption seriously, and to set an example. You don't want to be that example.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

Disclosure: none

Comments

[semuren:]

The Rio Tinto case is not really about any sort of "corruption." It is about putting pressure on Rio (and BHP and Vale) in contract negotiations over the ore price. It is more akin to the PRC government allowing Chinese firms to break derivatives hedging contracts with foreign banks. In other words it is the PRC government violating the customary business practice because it can. But in the long run that is going to cost the PRC as it increases the risks of doing business with PRC based entities. So, the Rio case is not really a good example for the point the author want to make here.

Oct 08 07:44 AM

[rlirph:]

It is easy to view corruption in China in the same sense as other westerners. Unlike the US China has a one party system. There are different factions fighting each other for power and territory within the party. In other countries you get loyalty when you empower some one. In China the loyalty comes when you give power and authority (hence corruption). In other words it is the corruption that holds different government officials together. For this reason it will be many years before the country will ever get rid of corruption.

In the case of Huang Guangyu, he does not become the richest man in China at one time without having friends at the highest level of the central government. When his friends loses in power struggle he will be swept away just like any disfavored politician. In China he's accused of committing commercial crimes (insider trading). Does anyone knows the exact definition of 'money laundering' in China? If you ask me to wire money to your friends in the US I can be guilty of money laundering because the money is not mine. However, the government only allows Chinese citizens to send no more than US$50K a year. If one is a US expat like me there is no allowance. In other word you can bring all the US cash in and once it is converted to RMB I cannot send it out of the country. However, legally I can carry up to US$10K every time when I leave the country.

Oct 08 09:10 AM

[huangthomas:]

Corruption is part of Chinese culture for thousands of years. The system encourages corruption. Imagine that a chief of prefecture receive a monthly salary of $350. It is incurable. Try to learn to live with it.

Oct 08 11:29 AM

[The Khan:]

Dreadful, dreadful, those horrid little yellow men and their corrupt ways. That could never happen here. Could it?

Oct 09 09:55 AM

[coreopsis:]

Rein manifests a deplorable lack of historic knowledge for an individual purportedly doing business in China, but your comment is equally limiting.

Corruption exists wherever...there is man. Can you point to any society without it? Please spare us any lectures on the 'noble savage'.


On Oct 08 11:29 AM huangthomas wrote:

> Corruption is part of Chinese culture for thousands of years. The
> system encourages corruption. Imagine that a chief of prefecture
> receive a monthly salary of $350. It is incurable. Try to learn
> to live with it.

Oct 09 10:22 AM

[huangthomas:]

The question regarding corruption is not yes or no. It is the degree to which we are referring to. It is generally accepted that the Scandinavian countries are the least corrupt societies and the worst are the ex-communist countries. There is a world forum to rate the degree of corruption in major economy.

UK has a long term policy of paying civil servant well to prevent official corruption, which is always at the core of corruption. Singapore and Hong Kong, the previous British colonies also pay the civil servants well. The president of Singapore used to receive a salary much higher than the president of the United States and at one time it was twice that of the United States President. For that reason, I pointed out the low pay schedule of the Chinese official as one of the major reasons for corruption.

Historically Chinese officials receive only token salary from emperors (six to seven bags of rice a year). They have to take care of their own finance. Official corruption has been rampant in Chinese history. PRC follows the same system of low pay to civil servants. Corruption is inevitable.

Oct 13 12:12 AM

[huangthomas:]

Here is the ranking of corruption among Asian countries and regions: The most corrupt is Philippines followed by Indonesia and Thailand. India has slightly higher ranking than China. The below average are Malaysia, Taiwan, Macao. And, as expected, the lowest rankings go to Japan, Hong Kong, and Singapore.

Oct 13 01:21 AM