It has been a bruising week in the court of public opinion for Chinese companies working overseas. First anti-corruption campaigner Transparency International said that Chinese multinationals, along with their Indian counterparts, were most likely among companies from 28 countries involved in foreign direct investment to offer bribes to win business. Now the human-rights group, Human Rights Watch has accused China’s four copper miners operating in Zambia, all subsidiaries of the state-owned China Non-Ferrous Metals Mining Corp., of flouting local and international labor and safety standards. While acknowledging that there had been some improvement, Human Rights Watch’s most pointed comment was that China’s copper miners in Zambia treat their workers just as they do at home.
Tag Archives: Bribery
We suspect that IBM’s $10 million settlement with the U.S. securities regulator over accusations that it gave cash and gifts to Chinese and South Korean government officials in violation of the U.S. Foreign Corrupt Practices Act represents business as usual more than the rare bad apple. For the several years that what the U.S. Securities and Exchange Commission called IBM’s “conduits for bribes” continued, the company had anti-bribery policies in place, yet failed to detect the alleged transgressions. The question for Western multinationals operating in China to ask themselves now is whether they would have done better.
IBM neither admits nor denies wrongdoing, as is the practice in such cases. In its complaint filing the SEC, which handles Foreign Corrupt Practices Act cases; the U.S. Department of Justice would only be involved in a criminal case, said:
From at least 2004 to early 2009, employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd. (collectively, “IBM-China”), both wholly-owned IBM subsidiaries, engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-Chipa employees and more than 100 IBM China employees overall.
The SEC accused IBM employees of creating slush funds that were used to pay for overseas excursions by Chinese government officials masquerading as offsite training courses. IBM employees are also alleged to have given gifts, such as cameras and laptops to the officials. This how the SEC said it all worked:
As part of its business, IBM-China entered into contractual agreements with its government-owned or controlled customers in China for hardware, software, and other services. These contracts contained provisions requiring IBM-China to provide training to the employees of these customers given the high-tech nature of IBM’s products and services. In some cases, IBM held this training offsite and required the customers to travel. In advance of any training trips, IBM-China employees were required to submit a Delegation Trip Request (“DTR”) detailing the business purpose of the trip, all planned sightseeing or entertainment activities, and anticipated expenses. The DTRs required approval by IBM-China managers. IBM-China’s policies required customers to pay for side-trips and stopovers unrelated to the training.
Between 2004 and 2009, IBM’s internal controls failed to detect at least 114 instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; amI (6) trips where per diem payments and gifts were provided to Chinese government officials. Moreover, IBM-China personnel also used its official travel agency in China to funnel money that was approved for legitimate business trips to fund unapproved trips. IBM-China personnel utilized the company’s procurement process to designate its preferred travel agents as “authorized training providers.” IBM-China personnel then submitted fraudulent purchase requests for “training services” from these “authorized training providers” and caused IBM- China to pay these vendors. The money paid to these vendors was used to pay for unapproved trips by Chinese government employees.
The takeaway for multinationals doing business in China is that 114 instances over at least five years slipped through IBM’s internal policies and controls designed to prevent or detect such violations of the U.S.’s Foreign Corrupt Practices Act. Remember, it is not just the bribes that the act goes after, it is also the accounting tricks that companies employ to cover them up. For whatever reason, in this case those controls proved deficient in preventing employees of IBM’s subsidiaries and, in the South Korean case, joint ventures from using local business partners and travel agencies as “conduits for bribes or other improper payments to government officials over long periods of time.” Are you confident yours would?
It appears that it is full steam ahead for China’s high-speed rail network despite the bribery and corruption investigation around sacked railways minister Liu Zhijun. His replacement Sheng Guangzu says development will continue to plan. Shen also said that the ministry’s affiliated railway companies were holding 1.8 trillion yuan ($275 billion) in debt, which amounts to 56% of their assets–within “the safety zone”, according to Sheng. That said, the bank regulator, China Banking Regulatory Commission, has told banks to review their lending to high-speed rail projects.
Footnote: Our man in New York reminds us that America’s railway building boom in the 19th century, and particularly the transcontinental Union Pacific Railroad, was afflicted by bribery and corruption. The most notorious incident was the Credit Mobilier of America scandal in the 1860-70s in which 13 members of the U.S. Congress were implicated.
The web of corruption surrounding disgraced former railways minister Liu Zhijun was widespread and drew in equipment suppliers and middle- and high-level officials, Caixin reports. The publication also says that Ding Shumiao, the businesswoman whose own corruption investigation led to the detention of Liu, skimmed off at least 800 million yuan ($122 million) in kickbacks from railway equipment supply contracts as a result of her connection of Liu.
It says that the practice of companies giving middlemen, such as Ding, a “commission fee” for help in winning contract bids was commonplace. It quotes one such arrangement in which “a large state-owned company gave Ding Shumiao…about 100 million yuan.” The fee would have been routed via a private sub-contractor and was said to be 3% of the total value of the project. Given that China is spending 2 trillion yuan on developing its high-speed rail network that works out at potentially a sizable chunk of change going to commission fees.
Update: Caixin has posted an English translation of its investigation.
The Economic Observer adds a second corruption inquiry that is possibly tied to under-investigation Railways Minister, Liu Zhijun. This involves Luo Jinbao, former chairman of China Railway Container Transport Corp., which is a subsidiary of the Ministry of Railways, and also of Shanghai-listed China Railway Tielong Container Logistics Co., from which he stepped down as chairman in October last year after only six months in the job and without explanation. The latter is the first publicly listed company to be connected to the investigations.
The publication says it was this case, on which it reported briefly in January, that first cracked open the possibility of high-level corruption around the development of the country’s high-speed rail network. It also adds that it was through Luo that Ding Shumiao, whose business dealings are also under investigation as we noted earlier, first met then Deputy Railways Minister Liu in 2000.
Local press reports are starting to peel back the case surrounding Liu Zhijun, the railways minister under investigation for apparent corruption. Caijing has reported that he is being accused of taking a more than 10 million yuan ($1.5 million) bribe to help a Shanxi company win a high-speed rail contract worth several hundred million yuan. Liu has already been sacked from his more senior post as Party secretary within the ministry.
Joining some dots, which may or not be connected, takes us back to reports in January of investigations into the business dealings of a prominent, wealthy and politically well connected Shanxi businesswoman and philanthropist, Ding Shumiao (also known as Ding Yuxin). Ding’s Broad Union business empire encompasses coal, coal shipping, railway investment, equipment and track building, station advertising and hotels. Its environmental protection equipment subsidiary, Shanxi Jinhande, won bids in 2008 to supply noise barriers along several high-speed rail lines worth a reported 836 million yuan between them. The following year Ding won a 2.3 billion yuan contract to build a coal freight line in Shanxi. Shanxi Jinhande recently changed its name to CREC Taikete Environmental Engineering, the latest move in a corporate reshuffling of Broad Union that has been underway for several years.
It is not clear what triggered the investigation into Ding’s dealings. Our experience is that there is usually a political agenda somewhere in the background when someone so prominent is involved. Liu, if it is shown there is a connection, may have been collateral damage, so to speak, and pretty extensive damage at that. The railways ministry has been a fiefdom unto itself, however. There are many among the reformers and anti-corruption campaigners in the Party who would jump on an opportunity to rein it in.
China is spending 700 billion yuan a year on building out the world’s largest high-speed rail network. That is, almost by definition, a honeypot sweet for the skimming. Whether prosecutors eventually find dots to connect between Liu and Ding, it seems a racing certainty that there will be many dots that will connect somewhere. They will be looked for. Events in Egypt have sharpened the appreciation in Beijing of the corrosion corruption can inflict on public trust in government.
No one will be surprised by a first official report on the subject that finds that corruption in China is a “still very serious” problem. Corruption is endemic among rank-and-file officials at all levels of government. A study for the Carnegie Endowment in 2007 estimated that 10% of government spending, contracts and transactions went to kickbacks and bribes or was otherwise syphoned off. That adds up to a staggering degree of illicit wealth redistribution. But a lined pocket beggars another. There is an economic cost to corruption, and at some point even China won’t be able to absorb it, particularly if and when growth slows.
There is a growing political dimension, too. The leadership increasingly sees corruption as a threat to social stability, and thus to its legitimacy to rule. And corruption is affecting a widening circle of issues beyond business where the leadership perceives itself as vulnerable to increasingly voluble public opinion: the environment, education, public health and food safety. Reasonably enough citizens don’t want their land polluted, their children’s schools to collapse, their water poisoned and their diary products tainted because an official is being paid to turn a blind eye.
Corruption is also an increasing obstacle to the policy changes needed to sustain the next phase of China’s economic growth, on which the leadership’s authority also rests. Vested interests, especially in the areas were there is heavy state involvement, have proved adept at keeping the resistance to change well oiled. If Beijing is to be serious about reorienting the economy and making Chinese companies world class as well as national champions, many of those vested interests will have to be made less obstructive.
The new report promises another round of tougher anti-corruption measures. New rules require Party members to report incomes and investments, in the hope that transparency will curb the worst excesses of the connections between officials and businesses, especially at the local and provincial level. The Party is also to curb spending on official entertaining and study groups, which can transmute seamlessly from hospitality into payola.
This isn’t the first anti-corruption campaign to have been launched — often at times of leadership transition. Nor will it be the last. There are already more than a thousand anti-corruption rules on the books. As for the new additions, as so often, the devil won’t be so much in the details as in the implementation. Up to now, corruption has been a low-risk, high-reward activity for most officials. If corruption is to be reined in that balance will have to change.
If China is to have any realistic expectation of bidding for the 2026 FIFA World Cup, it will have to clean up the endemic corruption, match-fixing and illegal gaming in its domestic game. It now looks likely that early next year Chinese football will have the opportunity of a public cleansing with the trials of seven former Chinese Football Association officials on charges of bribery and match-fixing.
For more than a year, police have been cracking down on the rot within the game with a couple of teams-worth of players, referees and administrators across the country detained for questioning. Last September, Xie Yalong, the former head of the CFA was taken into police custody for questioning along with Wei Shaohui, a former manager of the national team, and Li Dongsheng, the CFA official who headed the referees’ commission. Police were said to be investigating whether the men had any connections to Xie’s successor, Nan Yong, and two of his colleagues at the CFA, Yang Yimin and Zhang Jianqiang, who had been detained early in the year on suspicion of bribe-taking and match-fixing. Now all six plus a seventh CFA official, Fan Guangming, whose arrest in November 2009 started it all, are to be prosecuted, according to reports earlier this week in the Guangdong-based newspaper Soccer Monday (via China Daily).
Xie, who was installed as head of the CFA in 2005 from outside the sport to clean up the domestic professional league and improve the standing of the national team, is reportedly accused of taking bribes to secure hosting the East Asian Football Championship for Chongqing in 2006. It is said he, along with Nan and Yang, will not face match-fixing charges, only those of bribery and malfeasance — which may make a conviction easier to obtain as, legal experts say, the law does not define match-fixing clearly. There may be a loophole if matches are shown to be fixed by nobbling referees rather than players.
That is likely to be fixed along with the same purpose as handing out some exemplary high-profile sentences. For a country that is investing a lot of money and effort into reflecting its national pride in its emerging global power in the mirror of its sporting prowess, the confluence in football of corruption and low sporting standing is of too great importance to the Party leadership for it to be a mere spectator even if 2026 or even 2030 still seem a long way off.
China ranks 78th in the latest index of the perception of corruption in the public sector published by Transparency International, with a score of 3.5. Denmark, New Zealand and Singapore top the list with scores of 9.3 out of a maximum of 10. Hong Kong ranks 13th with a score of 8.4, Taiwan 33rd with 5.8 and Macau 46th with 5.0.
Hong Kong’s score puts it in the company of countries like Canada, Switzerland and Australia; China’s puts it in the same band as Italy, Brazil, Thailand and India. TI’s regional ranking puts Hong Kong at 4th and China at 14th among 33 Asia Pacific countries.
TI, which advocates for the stricter implementation of the U.N. Convention against Corruption, says that nearly three quarters of the 178 countries in its list score below a 5, indicating a serious corruption problem around the globe.
With governments committing huge sums to tackle the world’s most pressing problems, from the instability of financial markets to climate change and poverty, corruption remains an obstacle to achieving much needed progress.
Last year, China ranked 79th out of 180 countries with a score of 3.6. The anti-corruption drive has kept China’s score stable but progress on reducing corruption remains slow at best and as we have noted before the country has an ambiguous relationship to corruption in business.
In an emerging economy like China where who you know matters so greatly to business relationships, the line between connections and corruption is simultaneously a broad and a fine one. The latest annual report by the anti-corruption group Transparency International illustrates that well, and also China’s rather ambiguous relationship with corruption.
China is a signatory to the UN Convention Against Corruption, but has not enacted the consequent required domestic legislation prohibiting foreign bribery. Where Chinese companies and individuals have been charged and convicted of bribery and corruption, it has been under other countries’ law. Even multinationals operating in China such as Siemens, UTStarcom, Lucent Technologies and Daimler, to name five over the past five years, have been involved in China-related bribery cases brought under U.S. law.
However, China does have provisions in a range of domestic legislation relating from accountancy to taxation designed to reduce corruption at home, and it has generally been tightening the reins on domestic corruption, resulting in some high-profile cases such as the one in Chongqing as well as regulations aimed at preventing senior officials in state-owned companies enriching themselves at their companies’ expense. And accepting bribes was one of the charges brought against the Rio 4, of course.
What is missing, Transparency International suggests, is a centralized legal framework and enforcement system that embraces corruption at home and abroad. For example, China does not require companies to show that they have effective anti-bribery compliance programs or to report on compensation for agents as a condition for export credit eligibility. Nor does China have mutual legal assistance treaties and other cooperation with OECD countries in anti-bribery matters. Beijing’s periodic anti-corruption drives shows it recognizes the corrosive effects of bribery and corruption in politics; dong the same for business is part of the necessary development of the economy.