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November 8, 2006
The Cost of "Free Trade" in China: Corruption and the FCPA
Bloomberg reports that a Beijing court has fingered IBM in the China Construction Bank corruption prosecution of Zhang En-zhao, the bank's former Chairman and once winner of an"Economic Person of the Year" award. Zhang is now the Person of 15 Years, the length of his sentence.
Documents issued by the court state that the company paid an agent US$225,000, which sum was channeled to Zhang. (No, no, we're not talking about Wang Xue-bing, Zhang's predecessor, who was also forced to resign and convicted of bribery. This is the the new guy. Well, not any longer.) We must note, however, in all fairness, that the mere inclusion of this information in a Chinese court document does not necessarily make it true. Regardless, it is now in the public realm.
The idea that one must buy favor permeates Chinese society, even down to the lunch offered by a family member asking for assistance. But bribery and the Foreign Corrupt Practices Act do not mix well. Since most commercial transactions can not be accomplished in China without the former, in one form or another, the latter tends to suffer when sales figures must be met. As to the actual payment of moneys, most corporations in China who fork it over do not do so directly, but instead make use of third (and fourth) parties -- often foist upon them by potential customers, but sometimes selected. Payments may be made within China or even overseas through a wide range of entities that may help mask the payment. One can be as sure of crisp US $100 bills in a satchel as often as numbered Swiss accounts.
An important note: the use of agents does not necessarily shield the American executive from prosecution. Actual knowledge that a payment or a promise to pay will be forwarded to an official is not required: constructive knowledge -- you "should have" known, given the facts -- can make the exec just as liable.
And is it even debatable that Zhang is an official for the purposes of the FCPA, when the CCB is a quasi-governmental organ of the state of China? The big spender [click this link if you want a good time] in China remains the state. How does the exec defend foregoing a big sale to a quasi-governmental organ and a payment to its key decision-maker in a market your headquarters believes will save the company?
(By the way, when senior management passes out copies of the FCPA -- with the notation in biro "read this and make sure you do not violate this law," as once happened to an American I know, it does not mean they care whether you violate the law, but just that they don't.)
The U.S. Department of Justice has grown increasingly serious about enforcement of the FCPA in recent years -- note the FIS investigation already in progress at the DOJ and in China, also stemming from the Zhang corruption case. But the acts of corporate bribery in China are so numerous, the proof for which is at best difficult to develop, that this the notation in Chinese court documents is an obvious anomaly. (Then again, when all the facts are known, it may be as much of a slam-dunk as might be attributed to George Tenet.) A squealer would seem to be the more common route to an investigation.
If you have not seriously considered it before, now is the time to give serious consideration to the value of risky behavior in light of the demands presented by the FCPA, the DOJ and, now, it appears, the Chinese government.
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