A couple of very good comments to my post yesterday on the government’s arrest of several Rio Tinto employees on charges of bribery/industrial espionage prompts me to tackle a recurring question about foreign investors and corruption.

I can’t recall whether I’ve addressed this head-on before, but others certainly have. I would do some key word searching at China Law Blog or All Roads Lead to China for other views on this, and perhaps we can generate a couple more opinions on the subject.

Reader J throws the question out there:

I’m not entirely sure that large multinationals working in vital industries such as the steel one can genuinely succeed (at least as well as Rio Tinto appears to have done) in countries such as China without “some kickbacks or other shenanigans”.

Put another way, can a foreign company in China succeed in an industry where bribery is endemic?

First, as I noted yesterday, when you’re dealing with certain industries and high value transactions, corruption is relatively high.  The government knows this and has been cracking down for years.  The greater investigation of the steel industry (the Rio Tinto arrests seem to be a part of this) is just one example.  Other areas include anything involving a transfer of State assets to private individuals (especially real property) and government procurement (particularly local government).

Second, most companies know going in whether the industry has corruption problems. I suppose that some foreign investors might get blindsided with an official asking for a payoff well after the business is in operation, but I would guess that this is rare. If your knowledge of the industry is that limited, you are not going to succeed anyway, corruption notwithstanding.

Third, it would be a mistake to assume that at some point, all foreign companies make an affirmative decision at some point whether or not to engage in bribery or other forms of corruption. Some do, some don’t.

Often the extent of the actions of headquarters is to institute a company ethics policy (Rio Tinto has one) that expressly forbids this type of activity. Some companies assume that this eventually gets filtered down to all units of the company and is implemented, while others use this simply to cover their asses, suspecting that bad acts are occurring under the direction of regional or country executives. I think the operative phrase for this latter situation is “plausible deniability.”

Fourth, for companies that do make a real decision on the issue, what are the pros and cons? Well, sorry to be a tight-ass about this, but if you are even concerned about the pros and cons, I (as a lawyer) don’t really want to talk to you (as a client). Corruption is illegal, it’s a hot button issue in China, and there are very serious repercussions. That’s as far as I go as a lawyer.

Fifth, what if you can’t get any business done in an industry without engaging in corrupt activities? Very common problem, and it’s gut check time. If profits trump rule of law in your company, then you’re probably going to move forward and do things about which I don’t want to know. Know that you also risk damage to your reputation, future business opportunities in that country, etc. If after all that, knowing the risks, you go ahead . . . well, I just wish you are able to handle the consequences.

Of course, most foreign companies do not handle getting caught very well. First reaction is to go, hat in hand, to their home country government for some political help. A sympathetic media is also a good place to lodge complaints. This helps to establish the “poor foreign company victim” story, which has two parts: A) we do not engage in bribery, and the investigation is a protectionist witch-hunt against a foreigner; and B) notwithstanding the first part, this industry is rife with corruption, so basically China has forced companies like us to engage in this activity — then it punished us for doing so!

Boo hoo. Poor little corporation. Someone put a gun to your head and forced you to pay off officials? No, you chose to do this. If you otherwise couldn’t do business in that industry, then go complain to the government, any government — that is the responsible play here. And if that accomplishes nothing, then move on with your life.

A couple of final points:

• Rich at All Roads also has a post on Rio Tinto that is a good read.
• I have not addressed the issue of transparency as it relates to this case. Slightly complicated, but worthy of a separate post.
• On whether corrupt industries in China represent technical barriers to trade (because foreign companies are more at risk than local companies), my answer is maybe. Impossible to prove, however, and since Beijing is cracking down — who you going to complain to and how feasible is immediate cessation of this activity?
• Is corruption endemic in China/Chinese culture? I will leave that discussion to others. My opinion is that very little is “endemic” in a culture, just customary. I believe corruption can end here and have seen signs of this in the judicial area specifically. But again, I’m no culture expert.
• Why pick on China? Good question. There is no doubt that corruption takes place in certain industries all over the world. In the US, you can also look at amazing levels of corruption in real estate, aerospace, and financial services. In many cases, however, the political system allows for a lot of this activity, making it technically legal. But the short answer is no, corruption is not just a China problem. (Note that I am not making a comparison here as to which country is more corrupt! That’s impossible and depends on how you define “corruption.”)