Great article by China law guru Stanley Lubman on the WSJ Real Time blog. The topic came up several times during my FDI law class, and of course it comes up on a regular basis when talking to clients that are unfamiliar with the China market.

Here’s some of what Lubman covers in the article:

Suppose, for example, that the general manager of the joint venture in which you have invested is asked to find a job at the venture for the son of a provincial official who has some regulatory powers over it. Or suppose your Chinese partner suggests that a group of engineers ought to be sent to the U.S for training, but proposes an itinerary that indicates the group will spend more time in Las Vegas than anywhere else? Chinese laws and regulations, as well as Communist Party rules, prohibit officials from using their positions to extract benefits, including, for example, tourism. The U.S. Foreign Corrupt Practices Act prohibits giving “anything of value” to a “foreign official” with the “corrupt purpose” of obtaining business. It also permits, however, “reasonable and bona fide expenditures, such as travel and lodging expenses…of a foreign official…directly related” to promotion of products or “the execution or performance of a contract.”

Of the two examples, the travel expenses one is something with which I’ve had direct experience a number of times. Usually this means paying an official to attend an international conference of some kind. For lawyers, this means having an official from, for example, the Ministry of Commerce or the Patent Office, attending a meeting as the guest of a law firm.

This kind of thing has gone on for a long time and continues to happen regularly, although some government policies have placed serious restrictions on permitted overseas travel.

I have certainly seen instances when these trips get out of hand as well. Usually the government folks will ask for: 1) bringing several non-essential staff with them along on the trip; and 2) detours to places like Las Vegas, New York City, or Washington, D.C. Always seemed to me that once you are put in the position of paying for a government official to have a holiday in Vegas, you should really start worrying about FCPA violations.

With respect to hiring friends or family members of government officials, I’m not sure what the problem is unless these people simply never show up and it becomes an indirect monthly payment to the official himself. Moreover, if the official in question is directly involved with a bidding decision or a regulatory investigation, if the staff member is wholly unqualified, etc. — well, you can see which types of situations might be problematic.

Otherwise, let’s face it, the practice of hiring “recommended” people is a standard practice all over the world, including with great frequency in the U.S.

Lubman includes some helpful tips for companies dealing with these issues:

First, it is a cliché, for good reason, that foreigners must be aware that personal relationships seem even more important in business in China than in the West. This includes relationships between businesses and the officials who regulate them. It does not mean, however, that foreign businesses should bribe, attempt to bribe, or otherwise engage in obviously corrupt relationships.

Agreed. Companies that either ignore guanxi or hype its importance to the extent that they feel justified in doing a lot of very questionable things, are both looking for trouble. There are lots of ways to get to know government officials that do not include breaking the law.

But the line between what is appropriate and what isn’t is often blurred, and companies and their employees must constantly assess the propriety of their actions.

Definitely. When I talk about FCPA with clients, and when I’m asked to assist with the formulation of in-house ethics policies, the main underpinning is always to get the staff to communicate with management whenever any questionable transaction is even contemplated. The trick is getting staff to spot those transactions, and then to come out and tell management about it before it takes place. You simply don’t always know whether something is permitted or not, so prior discussion is key.

Second, although the concept of guanxi, or relationships, is important in Chinese culture, it is entirely personal to the persons in that relationship, whether it be social or business-related. Because it is personal, businesses should not become dependent on a relationship with a single person to assist them, who may be suddenly removed from his position or prove to be unreliable.

Absolutely true. When questioning a client’s guanxi at a particular government agency, one of the first things I ask is how old that top, well-connected, experienced official is, and how long they think he will continue in that capacity. That usually makes ‘em nervous when they realize the guy will probably be retired in two years.

Third, it is crucial to recall that there is not one China, but many.

I’ve covered this issue many, many times on this blog. The concept of the totalitarian State, as believed by many foreigners, is one of the top misconceptions about China. Not understanding key federalism issues and the relationship between local and State-level officials can lead to a lot of trouble.

Lubman’s best piece of advice, you can take it as a summary, is the following:

[E]ven as they must adapt to the local environment, foreign businesses must retain their own values.

That is a great line, and good advice for more than just the area of anti-corruption. Companies that ignore their own values, industry knowledge, years of experience — in a sense, what has made them successful, usually make serious mistakes over here. Those that marry their experience with a respect for, and adaptation to, this market, do well.

I suppose the one thing missing from this discussion is the proper response to the dreaded question/statement I’ve received several times from clients (usually SMEs): “If I don’t pay off a government official or private party, I will not be able to compete in China.”

My answer as a lawyer is to tell them what the law is (i.e. what they should not do) and what the possible penalties are for breaking it. What they do with that advice is another issue.

However, for clients with which I have a good relationship, I usually also offer a non-lawyer answer to that question, which simply is that if the company has to break the law to stay in business, then the owner/shareholders should seriously consider whether expanding into this market is ultimately a good idea. My suggestion obviously is that it might not be worth it in the long run.

That advice doesn’t work for everyone, but on one or two occasions, I think my client actually took a step back to look at the company’s overall business strategy and what it would mean to start engaging in questionable practices.