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Foreign Company Corruption In China. If You Have To Ask…

Posted in Basics of China Business Law, Legal News, Recommended Reading

Just read a fascinating/spooky article by Reuters Shanghai reporter, Adam Jourdan, entitled, Spooked by probes, pharma executives ask: should I leave China? Here’s our easy answer: if you are worried about getting arrested in China for something that your company has done, you should leave. Now.

The article starts out talking of how China’s recent and ongoing “crackdown on corruption in the pharmaceutical sector has frightened foreign executives so much that some fear they could be jailed and have asked their lawyers if they should leave the country for six months. Others are thinking of going for good.”

We keep hearing (from a wealth of sources who tend to know about such things) that corruption among the foreign (and the domestic) big pharma companies is rampant in China and has been for some time. Yes, pharma executive, you can argue all that you want that you had nothing to do with it, but if your company sales in China have increased 250% in the last five years and think that just maybe some of the people in your company might have been making payoffs, you are a risk in staying in China. But I am guessing that you already knew that.

Our China lawyers are often asked by our clients who allegedly owe money to a Chinese company about  ”the risk” of their going to China or as to the “percentage likelihood” of their having a problem if I go.”

When I am asked these questions, I typically answer with something like the following:

I cannot access the risk of your going to China and I certainly cannot put a percentage on the likelihood of your getting taken hostage. But I can tell you that your going there does involve risk and I can also tell you that our China lawyers have handled a shocking number of hostage situations for people held for not paying company debts, most of which were not even really owed. And I have a friend who works for a leading risk management company in Shanghai and he tells me that office deals five to six times a month with foreign hostages held in China over debts — and that is just in the Shanghai area!

So your going to China absolutely does create a real risk. But will you have a problem on this particular trip? I have no idea.

I can tell you that your risk will be lower if you just go to Shanghai or Beijing and that your risk will be considerably higher if you go meet with this company (to whom you owe the debt) on their home turf, in their small city where they probably have a tight relationship with the local police.

But what it really comes down to is that if it were me, I would not be going to China right now. I just value my freedom too much to take on a risk like this. The consequences are just too high and I would not go. But in the end, it really is up to you.

For more on hostage taking in China, check out the following:

Our advice to those whose companies have done something illegal in China is similar.

We have gotten many a call from Americans working in China concerned about how their company “may be” engaging in illegal activities. Our advice is usually something like the following:

You can pay us a lot of money for us to investigate exactly what it is that your company is doing and what your risk is as the _______ at the company and then research the law surrounding such actions and the history of people in similar situations.

But oftentimes, this research is inconclusive because what is happening in Shanghai might not be happening in Beijing, and vice-versa. And what has happened in the last three years might not be a good predictor of what will happen in the next three months. So really, in the end, it may all be up to you. You are best positioned to know what your company is doing and if you need help on the law side, we can and should provide you with that. Are you comfortable staying? Are you confident that if the police were to knock on your door you could avoid criminal charges because you are completely innocent of having done anything wrong?

I like to conclude with the following kicker:

Here’s something that should comfort you. Though we [our China attorneys] have seen quite a few companies and quite a few people get in trouble for not complying with China laws, we have yet to see any company get shut down or anyone go to jail if they did not violate Chinese law. So if both you and your company have done nothing wrong, the odds are good that you will be fine. But of course there are no guarantees in China, or anywhere else for that matter.

In the end, YOU are the one who knows what you and your company have done in China and if your gut is telling you that there is a problem, there probably is. What I can tell you is that there is usually a lot of “chatter” about foreigners who get arrested in China before they get arrested. Usually that chatter involves expats agreeing that what so and so is doing is illegal, but one side usually argues that China does not care and will never care and the other side considerably more dubious. My favorite line is a Yogi Berra-ish “China doesn’t care, until it does, and none of us have any clue as to when that shift will occur.”

The way big pharma operates in China has long been the topic of discussion, some public:

Even before then, executives were getting worried about a wave of visits from police and regulators to their offices as well as articles in Chinese media alleging corrupt practices against many global drugmakers.

Needless to say, all of this has “prompted some senior executives to look at all contingencies”:

“Many of our clients are asking about personal liabilities and insurance, with executives asking if they are put in jail what will happen to their families and how the company will provide protection for them,” said John Huang, Shanghai-based co-founder and managing partner at law firm MWE China.

*   *   *   *

Huang and two pharmaceutical executives said some managers were reconsidering the legal risks involved in holding any position where they were responsible for some of the thousands of marketing and sales staff that global firms employ across China.

Lawyers said some executives and in-house counsel had sought legal advice about leaving China to avoid getting caught up in any future probes. Some top managers were actively pursuing career options outside China, said one source.

Others were contemplating a more temporary escape until the worst blew over.

“They are thinking about leaving China short-term, staying out of the country on a three or six-month rotation,” said another Shanghai-based lawyer, who asked not to be identified because of the sensitivity of the subject.

By moving abroad, executives would avoid being arrested should there be any formal investigation into their firms, lawyers said. Executives had sought advice on relocating to Singapore, Hong Kong and other destinations, they added.

Some international firms were also finding it harder to attract staff to China, said the two pharmaceutical executives at separate global drugmakers, who declined to be identified because they were not authorized to speak to the media.

Amazingly enough, some claim not to see increased risk:

Other executives believe the GSK case is a one-off event and are more focused on not falling foul of the U.S. Foreign Corrupt Practices Act (FCPA), which can apply to a wide variety of firms that have business ties to the United States.

I have yet to talk with anyone doing substantial business with China who is not convinced that China is serious about clamping down on corruption. There is dispute about how China chooses its anti-corruption targets, but there is no dispute that this anti-corruption drive is very real and will not be ending soon. The article reflects this latter view by stating noting that “[t]he crackdown, which shows no sign of abating, coincides with a wider campaign by President Xi Jinping against corporate and official graft.”

Or to cite CLB’s own Steve Dickinson quote in the article:

That would be a mistake [thinking GSK is a one-off event], said Steven Dickinson, partner at law firm Harris Moure in the Chinese port city of Qingdao.

“Every week I write an email saying you’re missing the point – you won’t have time to get hit by the U.S. law because you’ll be in jail in China,” Dickinson said.

If you are doing business in China or with China and you have any concerns about you or your company getting into trouble for corruption, you should read the following and you should institute a China corruption compliance program right now (our phone lines are open!). Actually, let me rephrase that, if you are doing business with or in China, you should institute a China corruption compliance program right now and you should read the following:

  • http://accede.com.au/blog/ rob herr

    I’m kinda sad for Chinese workers because the working environment and conditions are harsh for them. I think the Chinese government should protect it’s people because that is their resource aside from their natural resource.

  • MichaelW

    I have spoken to western pharma executives who have said that they did not believe what they were doing was corruption, but ‘the cost of doing business in China’. They saw themselves as the victims of corruption, not the perpetrators, because they were told by agents that the only way to get their product used in a hospital was to pay for doctors’ conference trips, dinners and ‘expenses’. They were told by local managers that ‘this is the way things are done here’ and that local companies were much more deeply involved in such practices. The other comment was ‘if you think it’s bad here, you should see what it’s like in XYZ … [name other SE Asian country]‘. You’ve also got to remember that the institutions asking for the kickbacks have been government controlled – and their managers are either part of local government or connected with them. They are often the same people running the local legal institutions and inspection/discipline departments. When western managers see these ‘commissions’ being approved – even demanded – by local authorities, it’s not surprising for them to think it is acceptable behaviour.

    • On the Corner

      exactly correct, hang the foreigners for listening to the local staff for doing business the “Chinese way”

  • allroads

    Anyone who believes that it is ok (on any level) to move 10s of millions of USD every year into the pockets of hospital administrators, government officials, and doctors deserves everything that is coming to them.

    They knew they were breaking the law, and ACTIVELY pursued this path. They aren’t the victims. The end users of their products, the patients, are the victims, and all you have to do is visit one of the major hospitals to see that.

    Perhaps someone will run that story. The one where the patient is the victim, and why these actions were needed. Actions that have not just put a few foreign executives away, but have resulted in arrests of a large number of Chinese middlemen, hospital administrators, and others at ministry of health.

    BTW – I’d be curious to know how hundreds of millions in travel expenses got past the auditors and global executives. No one thought to question it? Or.. no one wanted to know?

  • FOARP

    “Our China lawyers are often asked by our clients who allegedly owe money to a Chinese company about ”the risk” of their going to China or as to the “percentage likelihood” of their having a problem if I go.”

    In patenting I often come across people asking for, or offering, percentage likelihood estimates of this-or-that happening. I always turn them down, and I personally treat anyone offering a percentage-likelihood estimate of something happening as a charlatan.

    Why? Because it is simply not possible to estimate the likelihood of a given outcome so exactly. I was particularly amused to hear from a trademark attorney that the likelihood of success in a particular case was (no joke) 84.5%, when in reality the likelihood was closer to zero, since we lacked the necessary standing to bring the case.

  • r_s_g

    The locals all know to leave when the sh*t hits the fan–they absolutely will if they have the means. I’ve seen countless cases of missing Mainland Chinese or HK/Taiwan Chinese bosses/managers who have either absconded or gone off the grid to avoid enforcement, debts, etc. There are cases of HKers and Taiwanese absconding into the Mainland as well where they can fairly easily lie low.

  • Robert Walsh

    I agree that it’s a slippery slope to find yourself on, if all you’re being told is that what you’re doing is business as usual. MichaelW makes good points on the reinforcement that hospitals themselves lend to the process. Chinese hospitals regard the pharmacy as a profit center, for supporting the rest of the institution’s operating budget. 14 years ago I took over sales for a Nanjing-based biotech company. Profits on overseas sales were pretty good, but for domestic sales they were rather dismal. The reason why was that by the time our domestic sales force was done with all of the wining and dining and passing out red envelopes, maybe we had 2% margin.

  • NobleSpirit

    Its late but good wake up call for those stupid corporations looking for gold rush in China. While I believe most pharma-corps have corrupt executives in order to take some bold decisions. However China is way beyond any level of corruption. People who do business in China know that its almost impossible to expect Communist Chinese officials and their dogs will be fair. Every step of business requires bribery and more bribery. Those companies prioritize ethics and transparency stayed away from China to prevent eminent dangers of China. Now people are slowly realizing Investing China is suicide. China is a terrorist nation with zero integrity and honesty. China is number one supplier of Weapons of Mass Destruction. Supportes global terrorist organizations and orchestrates genocides