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China Compliance: Don’t Rely on Your China Staff, Part III

Posted in Legal News

In Part 1 of this series, I discussed how Chinese staff of foreign companies operating in China typically view China compliance very differently than the foreign company itself. In Part 2, I talked about how the views of Chinese staff can negatively impact the foreign company’s China compliance efforts.

In this post, I am going to discuss one aspect of what often happens with the local Chinese staff when the foreign company starts to enact real changes in its operations.

Typically when a foreign company begins establishing strong anti-corruption and compliance polices for its China operations, it will encounter strong resistance from some or all of its Chinese staff. There are multiple reasons for this and the one usually given by staff is the fear that acting within the law will hurt company competitiveness. But there is also usually another reason for resistance — this one unstated — and that is the fear by staff that their kickback gravy train will be ending or, even worse, that their previous kickbacks will be revealed and they will be fired.

It is not uncommon for Chinese employees to view their job as a platform for more than just a salary; it is also a platform for leveraging additional income through kickbacks. This view is even more prevalent among employees of foreign companies, which are viewed as easy marks.

When a foreign company initiates or toughens its China compliance and anti-corruption programs, the local employees cut off from their (usually substantial) additional income stream, commonly get quite angry about this. Usually, they start out by trying to convince the foreign company that it is making a big mistake and that its actions will prevent it from being competitive in China. They also will oftentimes accuse the foreign law firm for not having “any clue about how business is done in China” and demand that it be fired. My firm’s China lawyers have many times faced this.

It is when the above fails to work that things get really tricky. The disgruntled employee oftentimes starts listing the illegal activities the foreign company has engaged in and then says, “You can’t fire me, because if you do I will report you for ten years of non-compliance.” Half the time, it is this very employee who (deliberately) set you up so as not to comply and then always assured you that you were in full compliance or that your non-compliance would never matter. Much of the time, your non-compliance actually benefitted this employee, like for example if you paid salary off the grid.

How do you handle this situation? The pat answer is by preventing it from happening in the first place. If you have a strong compliance program in place from day one and if you comply with the laws, these threats should have no impact. But that’s the pat answer. The real answer is that it depends. It depends on what your violations are and whether they can be remedied and at what cost and it also depends on what your employee really wants. Almost always the employee wants a top-tier severance package and oftentimes just giving him or her that will be enough to keep them quiet, especially since their going to the government may put them at risk as well.