Some Thoughts on the Rio Tinto Verdicts

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This is the top China story of the day, and since it also involves a legal topic, I sort of feel obligated to chime in. Despite the copious amount of press coverage, though, I don’t really think this case is all that important in the grand scheme of things. I can’t say that I agree wholeheartedly with any of the major narratives of the case that are floating around out there.

Anyway, here are the basics on the story and the verdicts:

Stern Hu, the Australian executive who led Rio Tinto Groupís China iron ore unit, was sentenced by a court in Shanghai to 10 years jail after being found guilty of taking bribes from steel mills and infringing commercial secrets.

His colleagues Liu Caikui, Wang Yong and Ge Minqiang were also found guilty and sentenced to between 7 and 14 years[.] (Businessweek)

Rio Tinto is a mining company that sells a huge amount of iron ore to China, which has a gigantic steel industry. The ore contracts are negotiated annually (longer periods would not capture price fluctuations), so a lot is riding on those discussions and the final price every year. This is a high-stakes game with big players.

A lot of money is therefore thrown around, which is also not uncommon with these large, State-owned steel companies. Frankly, I would have been shocked if there was not bribery involved in these deals, but perhaps I’m being unfair with that comment. In this instance, the Rio employees were charged with illegally obtaining commercial secrets and accepting bribes. As you can imagine, each side in these negotiations is looking for an edge in information.

The industry has reportedly been under scrutiny by Chinese officials for a while, and a broader investigation netted, among others, the Rio Tinto employees. This is only a huge deal of course because: 1) these are employees of a very large multinational; and 2) Stern Hu is an Australian citizen. The back and forth between China and Australia has been uncomfortable at times, to say the least.

Anyway, there are several narratives that have emerged from this incident. First, some have said that the arrests were made as retaliation for Rio’s tough bargaining with Chinese steel mills on price and the failed investment deal by State-owned Chinalco. This is possible, I suppose, but it is also entirely speculative, and I’ve seen no evidence to support this theory.

Second, the incident tells us something about Beijing’s current support of State-owned firms and, generally, its industrial policy. This idea builds off of #1 and suggests that the motivation for all of this lies in Beijing’s strengthening of key SOEs and industrial sectors.

Again, theory #1 is entirely speculation. But assuming that it actually happened that way, does that indeed tell us anything definitive about China’s industrial policy? It’s another data point, maybe, to go along with the strengthening of the State-owned sector (what some are calling “renationalization”). A whole lot of “ifs” here, though.

Third, the incident says something about Beijing’s current treatment of foreign companies and their employees. This view has gained some traction in the media, with some business consultants even advising MNCs on the personal risks faced by senior level executives posted in China.

Meh. Again, this case is one data point. Have the police been rounding up foreign nationals in great numbers lately? Not that I’ve seen. I’m not going to worry about it until they come for me specifically (I probably shouldn’t tempt fate like that) or we see some additional activity.

Fourth, the rule of law. This is a tricky one.† The main narrative here is that this case diminishes the rule of law because: there may have been selective prosecution, the system lacks transparency, the rights of criminal defendants are limited, the judicial process may have been influenced by government officials, and there may have been a violation of international law regarding the involvement of the Australian government.

Well, there are different interpretations of exactly what “Rule of Law” means. To me, it’s when a country has a strong judicial system that is independent of political influence and the public has faith in that independence. This also means that no one is above the law, including government officials, which excludes special treatment (positively or negatively).

So does this case harm the rule of law in China? Don’t be so quick to say “of course!” Some quick thoughts to wrap this up:

1. Public perception — the notion of rule of law is harmed most when the public loses faith in the system. Every time we hear of a person killed mysteriously in police custody, with the story bandied about incessantly online, it does serious damage to public perception of the penal system.

In this case, I’m not so sure that the public cares much about the case. Although the story is big today, I don’t think it’s really on the radar of a lot of people aside from foreigners, foreign companies, governments and maybe Chinese nationals that work for foreign invested enterprises.

Now, that isn’t to say that no harm is done if a bad case simply isn’t famous. Of course it can still poison the judicial system. But I do feel that public perception is a very key component of rule of law, and that may be missing here.

2. Political influence, selective prosecution, international treaty issues — these are arguably the most problematic legal items here since they involve law on the books that may not have been followed. In that sense, this is a direct affront to rule of law.

3. Limited rights of defendant, lack of transparency (i.e. process issues) — these are different. You simply can’t say that just because a legal system does not follow a certain principle (e.g. access to an attorney early in the process), that the lack of such protection for the defendant is somehow an affront to the rule of law.

I think that’s incorrect. One can say that certain things (e.g. no censorship) can directly lead to strengthening the rule of law, but a single case where a court or police follow existing law, I don’t see how that specific act damages the rule of law.

I got myself into a bit of trouble a week ago when I similarly argued with the Google case that while censorship may hurt the rule of law, the decision to not give special treatment to a large multinational like Google actually was a pro-rule of law position. (That didn’t go over too well with some people.) Anyway, I’m being consistent and sticking with that argument here with respect to the Rio Tinto case.

Finally, let’s also keep in mind that this was a criminal trial involving bribery and theft of commercial secrets. Even if you challenge the foundation of the case and the process, isn’t there some rule of law benefit to a successful prosecution in this area? Perhaps this benefit is completely overshadowed by this case’s flaws, but at least let’s not forget to add it to the mix.

OK, enough of this for now. I was planning on talking about some of the news coverage and providing links, but since everyone is covering this thoroughly, I won’t bother. Hit the Google machine.

4 responses on “Some Thoughts on the Rio Tinto Verdicts

  1. chuck

    “Even if you challenge the foundation of the case and the process, isnít there some rule of law benefit to a successful prosecution in this area? ”

    By this reasoning, can I assume that China has one of the best legal systems in the world with its 99% conviction rate in criminal cases. Thats a whole lot of successful prosecutions with a population of 1.3 billion.

  2. Tony

    I think you are right on in your analysis of the Google censorship case in that it is good for the rule of law. Not following the law (re censorship) would be bad for the rule of law. I’m not sure how people can disagree with you on that. Now, censorship might be a bad law, but that’s a completely different issue. It’s “rule of law,” not “rule of law, but only for laws that I/the West/[insert something here] agree with.”