It has been about a month since China’s police accused GlaxoSmithKline’s former head of China operations of making illegal payments to Chinese doctors to boost GSK drug sales. Last fall witnessed the high-profile trial, conviction, and life sentence of Bo Xilai, the former head of the Chongqing Communist Party, on bribery charges. These two cases send a clear warning: Beijing is cracking down on corruption. Hard.
The GSK case shows that China will not tolerate corrupt activities by foreigners in sensitive industries, especially when such activities result in higher consumer prices. Beijing going after a foreign company for allegedly increasing health care prices is a smart political move, especially since the Chinese web is rife with complaints about exactly that.
But at the same time, it has become clear that Beijing is serious about rooting out corruption. The Party leaders in Beijing know that widespread corruption weakens their legitimacy and they are looking for ways to combat it. The important link between the Bo Xilai and the GSK cases is that they both involve defendants — a political elite and a foreign entity — whose arrests have engendered widespread discussion and sent a strong signal that no one in China is safe from prosecution. While Westerners are mostly complaining about the GSK arrests (multiple GSK employees have been arrested in addition to its former head of China operations), the Chinese internet is mostly loving it.
As a foreign company doing business in China, how should you react to the recent corruption crackdown?
First, resist the temptation to assume that China’s corruption crackdown is a bad thing for your business. China absolutely does engage in selective enforcement of its laws and foreigners absolutely will bear the brunt of that selective enforcement. But having said this, we are not aware of a single instance where the Chinese government has imprisoned an innocent foreigner or shut down a foreign business that fully complied with Chinese laws. In other words, if you scrupulously abide by Chinese law, you should be just fine, and stricter enforcement of China’s own anti-corruption laws should actually level the playing field between those who operate legally and those who do not.
Second, do not waste your time complaining about Chinese rules and regulations. The laws are what they are and your job as a foreign company doing business in China is to comply with them. American and British companies are already required to obey their own countries’ anti-corruption laws — the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act — that prohibit corruption globally, including in China, and so you really have no excuse for not already having an anti-corruption compliance program. However, you also should know that China’s anti-corruption laws are in at least some ways stricter than U.S. and British anti-corruption laws, so you cannot just assume that you are in compliance with China’s laws simply because you are complying with your home country laws. You must familiarize yourself with China’s anti-corruption laws and follow them as well.
Third, and most importantly, if your company has commercially benefited from actively or passively engaging in corrupt activities related to China, you need to immediately switch to operating a legally compliant business or you leave China.
You need to review what your China operation is actually doing (not what you sitting in New York or Los Angeles would like to believe it is doing) to ensure that your company is truly complying with Chinese law. I love telling of how a Beijing consultant I know listened to his client bragging on the phone of how his China operations were “100% corruption free” and then a few hours later (while sitting in the reception area waiting for his client to come out for lunch) heard one of that client’s employees engage in a bribery transaction.
And do not bother trying to justify violations by arguing that China’s laws are vague or that because other companies in your industry have gotten away with proscribed activities, you can too. Though both arguments may once have been true, in today’s China, any commercial gains from corruption are now outweighed by the legal and business risks. China has issued a clear directive that foreign companies bear the responsibility for ascertaining, understanding, and complying with applicable legal requirements and it is your job to heed that call.
All of this means that comprehensive compliance procedures are the new business norm in China. Note the word comprehensive; doing an internet search on your China employees and the Chinese companies with whom you conduct business is barely even a first step. You must know your employees and your Chinese counterparties thoroughly and that could mean months of due diligence investigations and document review. You then need to stay current with your knowledge through regular reviews.
China has made clear the risks of not complying with its laws. Your job now is not to complain, but to comply.