Coping with Corruption in Trading with China

CASE 2-5 Coping with Corruption in Trading with China Corruption is on the rise in China, where the country’s press frequently has detailed cases of corruption and of campaigns to crack down on it. The articles primarily have focused on domestic economic crimes among Chinese citizens, and on local of? cials who have been ? red or assessed other penalties. Indeed, China has been rated by Transparency International as number 59 of the 102 countries the German organization rates on its “Corruption Perception Index. ”1 Finland is rated the least corrupt at number 1, the United States at 16, and Bangladesh the most corrupt at number 102.
Corruption’s long arm now is reaching out to touch China’s foreign business community. Traders, trade consultants, and analysts have said that foreign ? rms are vulnerable to a variety of corrupt practices. Although some of these ? rms said they had no experience with corruption in the People’s Republic of China (PRC), the majority said they increasingly were asked to make payments to improve business, engage in black-market trade of import and export licenses, bribe of? cials to push goods through customs or the Commodity Inspection Bureau, or engage in collusion to beat the system.
The Hong Kong Independent Commission Against Corruption reports that outright bribes as well as gifts or payment to establish guanxi, or “connections,” average 3 to 5 percent of operating costs in the PRC, or $3 billion to $5 billion of the $100 billion of foreign investments that have been made there. The most common corrupt practices confronting foreign companies in China are examined here. ANGLING FOR CASH MNCs also are asked sometimes to sponsor overseas education for children of trading of? cials. One person told a Chinese source that an MNC paid for that individual’s U.

S. $1,500-a-month apartment, as well as a car, university education, and expenses. Firms ? nd direct requests for cash payments—undeniably illegal—the most dif? cult. One well-placed source said that a major trader, eager for buyers in the face of an international market glut, had fallen into regularly paying large kickbacks into the Honduran, U. S. , and Swiss accounts of of? cials at a PRC foreign trade corporation. Refusing to make payments may not only hurt sales, it can also be terrifying. A U. S. ?rm was one of several bidders for a large sale; a Chinese of? ial demanded the MNC pay a 3 percent kickback. When the company representative refused, the of? cial threatened: “You had better not say anything about this. You still have to do business in China, and stay in hotels here. ” Not surprisingly, the U. S. company lost the deal. Traders of certain commodities may be tempted to purchase on the black market those import and export licenses that are dif? cult to obtain legally. A fairly disorganized underground market, for instance, exists for licenses to export China-made garments to the United States.
Some branches of the Commodity Inspection Bureau (CIB) also have posed problems for some traders. Abuses have emerged in the CIB since it started inspecting imports in 1987. A Japanese company, for instance, informed CIB of? cials of its intention to bring heavy industrial items into China—items that had met Japanese and U. S. standards. The of? cials responded that they planned to dismantle the products on arrival for inspection purposes. The problem was resolved only after the ? rm invited the of? cials to visit Japan. Some traders get around such problems by purchasing inspection certi? ates on the black market. According to press accounts, these forms, complete with signatures and seals, can be bought for roughly U. S. $200. Some claim that, for the appropriate compensation, customs of? cials in a southern province are very willing to reduce the dutiable value of imports as much as 50 percent. Because the savings can far exceed transport costs, some imports that would logically enter China through a northern port are redirected through the southern province. PAYING TO IMPROVE BUSINESS Foreign traders make several types of payments to facilitate sales in China.
The most common methods used are trips abroad. Chinese of? cials, who rarely have a chance to visit overseas, often prefer foreign travel to cash or gifts. (This was especially true when few PRC of? cials had been abroad. ) As a result, traders report that dangling foreign trips in front of their PRC clients has become a regular part of negotiating large trade deals that involve products with a technological component. “Foreign travel is always the ? rst inducement we offer,” said an executive involved in machinery trade. In most cases, traders built these costs into the product’s sale price.
Some trips are “reasonable and bona ? de expenditures directly related to the promotion, demonstration, or explanation of products and services, or the execution of a contract with a foreign government agency. ” But other trips, when of? cials on foreign junkets are offered large per diems and aren’t invited speci? cally to gain technical knowledge, may be another matter. Foreign travel isn’t always an inducement—it also can be extorted. In one case, a PRC bank branch refused to issue a letter of credit for a machinery import deal. The Chinese customer suggested that the foreign trader invite the bank of? ial on an overseas inspection tour. Once the invitation was extended, the bank issued the letter of credit. QUESTIONS 1. List all the different types of bribes, payments, or favors represented in this case and say why each is either legal or illegal. 2. For those practices that you say are illegal, classify each as lubrication, extortion, or subornation, and tell why. 3. Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA)? 4. Assuming that the FCPA did not exist, what is the ethical response to each of the payments, favors, or bribes you have See www. transparency. org for more details about their 2002 index. 572 Cases 2 The Cultural Environment of Global Markets you think bribery will become less prevalent in markets like China? 573 identi? ed? Read the section titled “Ethically and Socially Responsible Decisions” in Chapter 3 as a guide to assist you in your decision. 5. Now that the OECD has approved an FCPA-like treaty to ban commercial bribery by ? rms in member countries, do 6. List alternatives to paying bribes in international markets and discuss the pluses and minuses of each.