How To Deal With The Gift And Hospitality Challenges And "Hidden" Rules In China?

This is a commentary previously published by Thomson Reuters West Law Magazine. I believe it is still relevant and highly applicable even today. 

Commentary: Moutai, the FCPA and Doing Business with China

(Editor’s note: Moutai is an alcoholic beverage that has been dubbed the “national liquor of China.”)

For many foreign corporations, developing the Chinese market has become a top priority. Although the situation has shown signs of improvement, foreign corporations and executives still face a dilemma when doing business with China: how to deal with the gift and hospitality challenges and, at times, the customs of unspoken or “hidden” rules?

A recent study showed that 64 percent of the 500,000 corruption cases investigated by the Chinese authorities over the past decade involved foreign companies. Included among the cases were major multinational corporations with well-known names such as McKinsey, Alcatel-Lucent, IBM, Wal-Mart, DPC, Carrefour and Siemens AG. The list has far more big-name multinationals than many would have expected.

FCPA: A TRUE COMPETITIVE DISADVANTAGE?

Conventional wisdom has it that U.S. firms and citizens, bounded by the rules of the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, are viewed at a naturally competitive disadvantage when competing for deals with their Chinese or even other foreign counterparts. It is especially the case in certain industries and sectors such as the pharmaceutical and energy industries. Yet, some would argue that it was perhaps not exactly true on multiple grounds.

First, more multinational companies are increasingly playing by the same rules. The FCPA is a U.S. law that shapes the business behaviors of U.S. companies and indi-viduals. However, the recently enacted U.K. Bribery Act, which turned out to be more stringent than the FCPA, actually raised the bar on standards for anti-bribery compliance. Therefore, multinational cor-porations conducting businesses on a global scale need to understand the implications of both the U.K. Bribery Act and the FCPA and be compliant with both.

Second, any business practices that do not respect the FCPA or the Bribery Act are not sustainable business practices. By failing to comply with the FCPA or the U.K. Bribery Act, companies may have a “short-term win” but may, sooner or later, suffer “long-term pain.” Short-term wins and long-term pain are definitely not the recipe for success, and they are not a sustainable business model for global corporations.

Last, ethical business conduct helps multinational corporations address the
No. 1 challenge in China, which is to win the battle for talent. An employee survey for a top U.S. multinational company showed that ethics have become one of the top three reasons why employees choose to work for a company. Many talented Chinese individuals would choose to work for multinational corporations and U.S. companies while expecting those companies to behave ethically and have the right code of conduct. By failing to do so, companies would face higher reputational risk and hence the risk of losing talent. Doing business in the right way and doing the right thing would help companies forge their own competitive advantage to attract, develop and retain talent.

ASYMMETRY OF ENFORCEMENT ENCOURAGES COOPERATION ACROSS
BORDERS

Foreign corporations and individuals are facing more rigorous scrutiny from Chinese authorities. In the past, multinational companies conducting business in China could perhaps enjoy a slight “comfort” that Chinese authorities appeared to be more cautious and reluctant to prosecute foreign companies for bribery. In recent years, however, although largely perceived as sporadic and politically motivated, there has been an increasing trend that foreign corporations and individuals may face more rigorous scrutiny from Chinese authorities. A notable case would be the detention and prosecution of four Rio Tinto employees for allegations of commercial bribery and stealing trade secrets.

The Chinese government has continued to roll out new initiatives in its fight against corruption. These have included messages from President Hu Jintao and Premier Wen Jiabao on the government’s anti-corruption efforts, the launch of a national hotline available to whistle-blowers seeking to anonymously report corrupt officials, the release of new regulations intended to strengthen anti-corruption powers and promote the accountability of government officials and state-owned enterprise leaders, and the increased prosecution of senior government officials.

Perhaps few countries share the same characteristics as China. The recent
announcement by Jiabao of a ban on officials using public funds to buy premium cigarettes, alcohol and gifts contributed to a sharp fall (about a third) in the price of Moutai — the first decline in nine years.

Yet enforcement in China and the United States may still be asymmetrical, and
cooperation across borders is highly encouraged. The United States has cracked down on corporate bribes. U.S. prosecutors have dramatically increased the number of FCPA cases in recent years. Such actions were concentrating on the supply side by targeting Western companies and individual that offer bribes to government officials in China. Still, we have heard on a few occasions that the Chinese officials at the receiving or demand side were actually prosecuted. Therefore, cooperation among governments is highly encouraged.

TACKLING THE ‘HIDDEN’ RULE DILEMMA IN CHINA

Hospitality, gifts and kickbacks are often viewed as the norm or an integral part of Chinese business culture. Overcoming such cultural norms is often incredibly difficult, partly because people often have a wrong idea about what constitutes another culture. The truth is that just because you are doing business with China, you do not have to do whatever your counterparts ask you to do. Most importantly, you have to find a common ground and a sustainable way of doing business with each other: a “short-term pain” in exchange for a “long-term gain.”

OUTLIER OR CONFORMER: IS THERE A MIDDLE GROUND?

What are the choices that companies and executives have — do they have to be a conformer that plays by the customs or “hidden” rules, or an outlier that refuses to follow suit? It might be politically incorrect to say there is a middle ground. The essence is that companies need to gain an accurate understanding of the local business culture and inherent risks, and they should tailor their global compliance programs for operations in a specific country.

Yet a message needs to come from the top that promotes the right values and culture.

There is no doubt that companies need to win. Yet it is not only about winning, but also about winning in the right way. Build an organization that cherishes doing things in the right way. Siemens, on the contrary, set the tone at the top that bribery was tolerated and even rewarded. This tone eventually turned into, by far, the most staggering case in the history of FCPA enforcement in terms of the scope of the corruption and size of the penalty imposed.

EDUCATE, CONTROL AND MONITOR

These days, companies place much emphasis on compliance programs, whether conducted in person or online. Compliance programs can help to improve awareness and educate employees and the organization, but they are rarely enough for prevention. A rough estimate may give you an indication as to where companies should focus their efforts: fraud or misconduct is spotted 20 percent of the time by internal auditing and 10 percent of the time by external auditing, while 70 percent comes from employee reporting.

As such, companies need to create an environment where employees are at ease to address their concerns about possible misconduct or potential violations. Even though bad incidents, such as misconduct or violations, may still take place, such an environment will encourage employees to report or address their concerns earlier so problems can be resolved and remedies made. No system can make companies perfect, but systems and processes can help keep the situation within control even if bad incidents occur.

Companies need to establish processes to ensure standard procedures, checks
and balances, and to decrease the possibility of collusion through, for instance, job rotations and the design of different processes for commercial counterparts and government officials.

CONCLUSION

Go to China with an open mind and an open heart. U.S. companies and individuals, especially, should forgo the conceived notion that the FCPA is a natural barrier for success in China. Instead, view it as a competitive advantage to build a sustainable business model and a way to attract, develop and retain talent — the key to your success. Yet, one needs to commit necessary time and resources to understand what the local business culture constitutes and to tailor global compliance programs accordingly. “Do unto others as you would have them do unto you,” as one Chinese saying goes. I’m sure that if you hold firmly on certain principles and values that you cherish (including the FCPA), you will be able to gain respect from your Chinese counterparts and thus develop a partnership leading to a “long-term gain.”

©2012 Thomson Reuters