This column originally appeared in Forbes.
It happened to Coca-Cola (NYSE: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.