03 July 2013

问题: Anti-Bribery and Guanxi - No Red Envelopes Please

There is an almost unanimous consensus (see your favorite how-to-do-business-in-china book or talk to the suited 老外on the streets of Beijing) that cultivating relationships is the kernel of any business venture in China. It’s called guanxi, key component of Chinese social culture with a practice dating back into the annals of history. 

The concept alludes to the Confucian (yes, him again – just as the West venerates the Athenian philosophers and credits them with the essence of Western thought, the Chinese hold a special place in their hearts for 孔子师傅) structural idea of a “government of the people” as opposed to the more legalist “government of laws”. There is no denying that maintaining good relationships with regulators and officials is crucial to any enterprise, in China and elsewhere. However, for some reason, guanxi is oft misinterpreted. The result of this misunderstanding: a belief that bribery and corruption are the norm in China and a required rite of passage for any foreign investor.

Bribery is not “the way things are done in China”. Bribery is bad. It is illegal and can put both nationals and foreigners away for a long-time. The media is rampant with horror stories of foreign companies that have run afoul of anti-bribery and anti-corruption legislation (the Rio Tinto fiasco put away Stern Hu, Australian citizen, for a seven year prison term on a bribery charge, one of the harshest sentences handed down to a foreign executive of a multinational corporation). Yes, maybe giving a local official in a second-tier/third-tier city a red envelope might yield short-term results – a relaxation of the stringent requirements for the establishment of a WFOE, for example – but this type of personal guanxi will not contribute to a stable long-term future. The reach of the national government – in the form of required audits and the like – is not to be underestimated. 

Within China, anti-bribery regulation is outlined in China’s Criminal Law (CCL). Convictions of bribery, thanks to Xi Jinping’s noble quest to fight corruption, are proliferating. The agencies mustered in this witch hunt are spearheaded by the Anti-Bribery and Embezzlement section of the People’s Procuratorate Office, with aid from the Central Committee for Discipline Inspection (CCDI) in the case of tracking down CPC members. In May 2011, the law was extended to include the bribery of foreign officials as well. Art. 164 does not seem like much at first glance – it does not provide for internal control requirements nor does it clearly define any of the critical terms (who exactly is a foreign official remains to be determined). An encouragement for greasing the wheels? No. Art 164’s extraterritorial applications are vast. 

Hypothetical: a WFOE trying to secure a development project in Nigeria has their employee pay a Nigerian local government official a nice vacation. Bribery within the jurisdiction of Art. 164? Yes. And prosecutable in Chinese courts. 

And, of course, foreigners must not forget the wide jurisdictional scope of the US Foreign Corrupt Practices Act (FCPA) and the new “gold standard” in anti-bribery legislation, the UK Bribery Act 2010. The latter creates a new corporate offence of failing to prevent bribery (s.7), with the sole defense requiring the company to demonstrate (and with a very high bar to meet) that they had adequate procedures in place specifically tailored to preventing bribery. And voluntary disclosure will not save you, in neither the US, the UK or in China. 

Bottom line: best to avoid bribery and follow the law. Always sage advice. 

So, what should be the consensus on guanxi? Mathematically: guanxi ≠ bribery and a more institutional approach is recommended. Enterprises that contribute to local development will likely be recognized and supported by the government. That is the way to cultivate a relationship. Anti-bribery crusades are not disjoint with Chinese social culture and structure, as some would lead you to believe.

Red might be auspicious, but red enveloped are certainly not.

KEYWORDS: Anti-Bribery, Anti-Corruption, Extraterritorial, FCPA, UK Bribery Act 2010, China's Criminal Law, Art. 164

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