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China’s Aggressive Enforcement of Domestic Corruption Laws

China corruptionLast year, when Chinese officials launched a broad prosecution of GSK and other drug companies for bribery, multinational companies shivered in fear.  Company officials were worried that they could fall under Chinese law enforcement scrutiny.

China is not known for promoting due process in its criminal justice system.  Much of its enforcement is shrouded in mystery and alleged criminals sometimes disappear for periods of time.

For multinational companies operating in China, they need to operate their businesses with ex-pats – citizens from other countries.  The ability to attract and retain ex-pats in China has been complicated by the increase in domestic bribery enforcement.

China is a very difficult country for multinational companies to operate in and comply with the FCPA.  I have always said that companies that operate in China are more than likely violating the FCPA.  The only question is one of degree — how significant are the FCPA violations?

China ranks number 80 on Transparency International’s Corruption Perception Index.   Russia ranks 127.  From my vantage point, it is hard to say that China’s level of corruption is 47 levels better than Russia’s level of corruption.

Over three-quarters of China’s economy is owned by the government.  Every company is virtually guaranteed to interact with government officials in its business and regulatory operations.  State-owned enterprises permeate the Chinese economy.

Financial controls and corporate governance principles are not well established in China.  Instead, the economy grew for years based on its large labor supply and government-controlled economic decisions.china

The number one risk to multinational companies in China is the absence of strict financial controls and the ease with which money can be extracted from a company’s controller and used for improper purposes – funneling bribes to a third party who is assisting in the scheme.  Government-owned businesses are rife with officials who demand bribes.

China is cracking down on domestic bribery.  The new, aggressive stance coincides with China’s internal politics and jockeying among factions in the Chinese central government.

President Xi Jinping has launched a broad attack against corruption and ensnaring government officials and businessmen.   His targets are people associated with Zhou Yongkang, a retired member of the Standing Committee, former head of the national oil company and China’s domestic security agency.

Corruption in China has grown to such an extent that it has become a significant drag on the economy.  President Jinping is using this initiative to consolidate power in the government.

Zhou himself may be under investigation.  Zhou’s son has been has been formally detained as part of a corruption investigation.

After the focus on drug companies, everyone expected more focus on multinationals.  Instead, China’s law enforcement focus turned to internal leaders who were associated with Zhou.

china2Whether China turns back onto multinationals will be something to watch.

China presents unique corruption risks.  A risk assessment in China, almost by definition, has to flag government interactions, third parties and gifts, meals and entertainment expenses as significant risk areas.  The mitigation of these risks requires enhanced anti-corruption controls.  Before entering China, companies have to build these controls, carefully implement them, and monitor its activities to ensure compliance.

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