New Criminal Actions Against Volkswagen, U.S. Meat Supplier

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 |  Includes: GSK, VLKAY
by: Doug Young

Most of the recent flood of probes against foreign firms have been of the civil variety, resulting in stiff fines for anti-competitive behavior but few or no criminal charges and prison time. But that trend could be changing, with officials at car maker Volkswagen (OTCPK:VLKAY) and a former major meat supplier to McDonald's (NYSE:MCD) and KFC (NYSE:YUM) being probed or charged with crimes that could end with lengthy prison terms. It's probably still too early to say if criminal charges against executives at major multinationals will become a trend. But if it does, it could certainly send a new chill into China's rapidly worsening relationship with western businesses and governments.

The criminal probes against Volkswagen and meat supplier Shanghai Husi Food Group come amid a much broader flood of similar corruption investigations against government officials and executives at major state-run firms, mostly over allegations of corruption. A criminal investigation is also underway against a number of executives at British drug maker GlaxoSmithKline (NYSE:GSK), which could eventually extend to the company's top China executive, a British citizen.

All that said, let's turn our attention to the latest corruption-busting headlines starting with Volkswagen, where an executive is being probed from the company's joint venture with local car maker FAW. In this instance the executive, An Dewu, is a former FAW official and presumably a Chinese citizen. The reports say An was being investigated for "suspected serious violations of the law", which is usually another way of saying corruption and accepting bribes.

Word of this latest investigation comes just days after China's anti-corruption agency, the Central Commission for Discipline Inspection, said it was investigating another current and one former company employee for similar violations. In this case, it's probably somewhat significant that all of the accused are probably Chinese citizens, and that all 3 are also probably former FAW officials. Thus some might interpret the latest probes as an extension of China's recent relentless pursuit of corrupt officials at big state-owned enterprises.

Next there's Husi, the scandal-wracked meat supplier owned by US-based OSI Group. Husi has been in the headlines nonstop since July, after investigative reporters found the company engaged in unsavory practices like recycling expired meat. Now Chinese media are reporting that 6 Husi employees have been arrested in connection with the case, and are being treated in accordance with the law. (Chinese article)

The reports don't contain any additional information, except to give one of the suspect's names, Hu Jun, and to say the 6 are suspected of making and selling sub-standard food products. There's no mention of whether any foreigners were among the arrested. But in this case it appears that once again, all of the arrested employees were Chinese citizens.

The Husi case is different from the others so far involving arrests, because it centers on accusations of sub-standard business behavior. By comparison, all the other cases, including the one against GSK, involve allegations of corruption. What's more, the Husi case was actually uncovered by local investigative reporters here in Shanghai and is being handled by the Shanghai court system. In all the other cases the wrongdoing was uncovered and is being investigated by central authorities working from Beijing.

All of that said, it's probably safe to say we're not yet looking at a major new trend targeting foreign company executives for criminal charges. But that doesn't mean that multinationals now being probed for anti-competitive behavior might not face unrelated criminal charges in the near term. The most vulnerable companies could be ones like Volkswagen with major domestic joint venture partners, whose executives are far more prone to the kind of corrupt behavior than their western counterparts.

Bottom line: Criminal investigations against Volkswagen and a major foreign meat supplier don't appear to indicate a new trend, but show that some multinationals may be vulnerable to such probes.

Disclosure: None.

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