Where does China rank on the TRACE Matrix, and what are notable forms of corruption?
China, which ranks 130th out of 199 countries on the TRACE Matrix, is characterized as a high-risk country for corruption. One cause of corruption is that interactions with government officials tend to be more frequent and bureaucratic in China than in many other countries. Moreover, Chinese laws are typically simple and vague, giving bureaucrats substantial discretionary power. Administrative and bureaucratic bodies are decentralized among local, provincial and national levels, which often creates duplicative offices and incompatible rules. Moreover, state agencies are granted regulatory powers without institutional constraints, allowing cadres to exploit the rapid growth in businesses and the economy.
Another significant corruption risk in China results in part from the complexity of its mixed economy, which is dominated by state-owned enterprises (SOEs). Comprising an estimated 30 percent of China’s GDP and labor force, SOEs often hold administrative monopolies over basic economic inputs, such as electricity and land, and considerable power in other markets, such as steel and minerals. As a result, it is not unusual for SOEs to engage in “rent-seeking” behavior – in other words, seeking bribe payments from companies in exchange for access to the services that the SOEs monopolize.
What kind of issues do these corruption risks create for foreign businesses?
Business licensing and approval processes are often reported as the greatest operating issues in China. Notably, China is considered one of the worst countries in the world with respect to construction permits, a process that requires 25 administrative procedures and estimated costs of 345 percent income per capita. It follows that industries that require the most extensive approval processes face the greatest risks in China.
At the same time, the number of anti-bribery enforcement actions by Chinese authorities against foreign companies appears to be on the rise. In July 2013, the Ministry of Public Security detained four GlaxoSmithKline executives when it began investigating GlaxoSmithKline’s alleged use of travel agencies to funnel bribes to doctors, hospitals, medical associations, foundations and government officials.
Are there specific foreign business sectors that are more vulnerable to corruption than others?
Recent investigations related to bribes paid in China center around sales practices in the pharmaceutical industry, hiring practices in the financial industry and obtaining access rights in the entertainment and film industry. For example, Bristol-Myers Squibb paid USD $14.6 million in returned profits and penalties to settle charges brought by U.S. authorities, alleging that its subsidiary in China gave gifts, meals, travel and entertainment benefits to health care providers from state-run facilities to secure and retain sales. JPMorgan Chase & Co. is under investigation by U.S. authorities for allegedly hiring relatives of Chinese government officials to help the bank win business. And a number of entertainment companies, including Dreamworks Animation SKG, Inc., are being investigated by U.S. authorities over their dealings with Chinese government officials.
What steps will help foreign companies reduce their risks and exposure to corrupt business practices?
Foreign companies will benefit from gaining an understanding of common business etiquette prior to entering the Chinese market; good preparation can help avoid awkward interactions. For example, central to Chinese culture are the practices of guanxi, which – although not synonymous with corrupt behavior – nevertheless contribute to the prevalence of corruption by foreign companies in China. Guanxi refers to personalized networks of influence and trust – usually made through extended family and school connections – that bind reciprocal obligations on both parties. Intertwined with guanxi is the practice of gift-giving, a separate but equally vital function in building interpersonal relationships. Gift-giving, particularly giving and receiving red envelopes around the holidays, poses substantial problems for businesses operating in China. Guanxi favors and gifts are expected by Chinese officials, who may interpret inexpensive gifts and unwillingness to perform favors as disrespectful or insulting.
What anti-bribery compliance support is available in China?
Companies operating in China should familiarize themselves as much as possible with local organizations and resources. The Hong Kong-based Independent Commission Against Corruption (ICAC), for example, publishes numerous best practices guidelines for doing business in China. In conducting proper due diligence of Chinese-based third parties, companies should also consult the National Online Database for Bribery Convictions.
Companies can also work with TRACE Certified companies, which have completed a rigorous due-diligence process based on international standards, including training and daily monitoring of international sanctions and enforcement lists.
Companies that are members of TRACE International may also review the China Country Bulletin and Gifts and Hospitality Guideline prepared by a local TRACE Partner Law Firm and available on the TRACE Resource Center for a better understanding of local laws and regulations governing retention of commercial intermediaries in China, and of local monetary thresholds for providing anything of value to Chinese government officials.
Companies may also refer to TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost. The database supports the efforts of companies seeking to conduct business ethically.
This Q&A article was originally produced for ExportWise.ca, Export Development Canada’s online magazine, and is republished here with permission.
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TRACE International and TRACE Incorporated are two distinct entities with a common mission to advance commercial transparency worldwide by supporting the compliance efforts of multinational companies and their third-party intermediaries. TRACE International is a nonprofit business association that pools resources to provide members with anti-bribery compliance support while TRACE Incorporated offers both members and non-members customizable risk-based due diligence, anti-bribery training and advisory services. Working alongside one another, TRACE International and TRACE Incorporated offer an end-to-end, cost-effective and innovative solution for anti-bribery and third-party compliance. For more information, visit www.TRACEinternational.org.