Kickbacks. Gotta love ’em.

True story:

I used to have a foreign client known as “Mr. 10%.” This guy was responsible for provisioning and repairing and operating tens of vessels and word was he skimmed ten percent from all of this. He would complain loud and often about his nickname, but once, in an unguarded moment, he said, “5% sometimes yes, but 10%, no way.” I don’t know if he was kidding that one time, but I tend to think not.

I have clients now who tell me that if their companies are “getting skimmed” out of 10% in China, they just don’t care. They believe it is impossible to stop this sort of thing and they prefer to focus on the bottom line, not how they get to that line.

I have another client who hires only women, believing them to be less susceptible to this sort of thing and certainly less susceptible to having the company pay more to resolve a honey trap situation. This guy is a true international commerce veteran and I think he may be on to something here.

We had a client in China who learned that its Chinese manager had skimmed approximately $30 million dollars over the last five years and had the condos and cars in Hong Kong and Macau to prove it.

I thought of all this today when I read Renaud Anjoran’s blog post, “Avoiding kickbacks in China,” which is itself based on a podcast by Bill Dodson of the This is China Blog.

According to Anjoran/Dodson, foreign companies face the following two difficulties relating to kickbacks in China:

Making sure the employees who approve the choice of suppliers and service providers do not use their position to get kickbacks. It is very widespread and difficult to prove.

Communicating to all related parties that no gift is allowed, explaining the reasons behind it, and respecting that line no matter what.

These two things are difficult for the following two reasons:

China, and South-East Asia in general, has a gift-giving culture. It is impolite to refuse a gift. But where does the difference between a gift and a kickback start?

Purchasers can multiply their income by many multiples without substantial risks, and in many companies it is an established system.

Anjoran goes on to talk about how the same issues are at play in the quality inspection business where QC people take kickbacks (is this technically a kickback?) to accept defective product.

So what can you do?  Just say no.

Now I know it is not really that easy, but that really is where you need to start and as this post, “Say No to Corruption and Make It Your Market Advantage,” you can use your strong ethics to your advantage:

Even in corrupt markets, not all business people are corrupt, and even fewer like it that way. It’s incredible how many business people are looking for a way out of the muck — and that translates into an emotional need that the local competitors aren’t meeting. In my experience, if you take a hard and clear stand against playing the corruption game, while you may lose some short term opportunities as you use them to demonstrate the steadfastness of your commitment, in the long run you will begin to attract the cream of the crop of customers and business partners. The people who have been aching for someone to give them an opportunity to elevate their business game where it’s what they do and not who they pay off that matters.

Of course there will always be others who sneer and wonder where you get off being Mr. Clean, but they are probably the same people that you went into the market wondering how to avoid getting ensnared with in the first place. A simple strategy calculated to sort out the good customers from the bad customers through a process of self selection– and you probably thought that might be difficult in a new foreign market.

So true.

What do you think?

UPDATE:  A loyal reader sent me a link to an excellent China Brief article by Peter Humphrey, entitled, “Keeping Your Firm Incorruptible.”  The article focuses mostly on bribery and Corrupt Practices Acts, but it also provides a very good list of “Tips for Best Business Practices.”

  • jael

    Was in Viet Nam but our solution was somewhat different. Was working for a government microcredit bank (so again – different). It took 5 years to get completely fixed into the organisational culture (some of which I was there, some after my time), but there was instituted a policy that everything – everything – you are given is recorded, it goes on the books. Everything. Now, being a bank for poor people dealing with government officers it’s a different scale and pressure. In kind was the currency of choice.
    But it worked, though with much effort. “No” wasn’t an option – this wasn’t a western company that could be told to just say no. Today, staff report even food they have been given; bricks and cement for their houses, hotel rooms for conferences. Everything goes back into the bank and is used for *our* gift giving responsibilities or for project implementation. And the $ records are impeccable. 🙂 (excuse the smiley, it was hard earned).

  • hanmeng

    You’re very likely correct that “not all business people are corrupt”, but I imagine the many Mr. 10%’s sniggering at “even fewer [liking] it that way”.
    Still, I hope I’m wrong.

  • We had a client who we were bidding for more work from. The decision was left to the Chinese manager – even though we were good personal friends with the foreign CEO and the foreign founders.
    This was due to the CEO’s need to give responsibility to the people below him. Good move IMHO.
    In any case the Chinese manager cared not for our brief, our info and only begrudgingly attended a tour of our facilities because the one foreigner in the management team below the CEO wanted to ensure that the bidding process was done properly and all quotes and options and eventualities were explored.
    In any event we knew we were better. On the surface it could be argued “ban jin ba liang”. However the Chinese managers insistence and closed mind to anything else to me – compelled me to have to inform the CEO directly that a kick back may be in the play here.
    Now I have no proof and from my position as an ordinary supplier it could be seen to be sour grapes or another string to our tender process. When in fact, it was person to person, from my experience, heads up, fyi, this “could” be going on.
    Since it is not my business I didn’t dig into what was uncovered or not. And given the desire to bestow responsibility and a rightful sense of operational owenership on their Chinese CTO – intervention and over ruling (ie cuckolding) is not an option.
    We never did get the contract and they did end up having some issues with the other provider ultimately. However it is just hard to prove what goes on between two people when by themselves.
    Even my Chinese staff said to me that they think a kick back is in play because this Chinese managers behaviour was so weird and bordered on advertising as such.

  • Eric Wheldon

    It’s really hard to stop in China I think. I have a Chinese friend who worked for a company that specialized in investigating kickback situations in MNC’s in China. She even told me that it was all a case of trying to limit the level of kickbacks to a minimal amount of 2% to 3%, rather than the 20% that so many of the perpetrators were taking. She said it was partly cultural, but more and more it was desperation on the part of people trying to top up their income. People were desperate to have money to buy houses, cars, and lifestyle that they could see other corrupt people and government officials enjoying. It’s becoming worse if anything because of the widening income gap.

  • Ming Trang

    As senior executive in transporation equipment. Southeast Asia regarding ASEAN free market.
    Corrupt since only I approve contracts the distrubition. And financial accept the reward lucky not
    get caught. Laos has mineral commodites Korea,Japan,Australia,Mainland China and Taiwan.
    Seek so many concession: unfortunately rampid. Corrpution we only suspend license of operation. Very seldom currently, Laos justice the accust. Incarcerated as Vietnam, traditional middle men. Whom know customs and banking decide the give. My concern what can you do in
    Asia majority. The business elite inspire to be affluent rich! And prefer stocks or finance in externals. China and EU the prize before economy crash! Japan I’m expert on Japanese banking this why they. Succeed in Transportation,Construction,Mining and Health care ASEAN.
    Countries Japan pays the most in kickbacks so. Article saying China should stop corruption there well. Integrated in society most are exclusive elite banking,trade and lawyers. So if you can
    stop in China possible ASEAN nations. Shall pass laws …go luck okay!

  • Shway

    Minister of trades in Asia yes no the corruption. See when invite foreign fiancial and corporations. To bid, usually there networking before. The agreement my job entails contracts.
    Concur with net worth financial agreements see. Disginated contracts which western concept
    only for taxes. Is the standard for us in Socialist Burman basically. Still and state owned society
    to address the dishonesty. Since we do have Lawyers as Thailand, the managers. Know the
    market and stock rate the bribe either real estate for at least. Dozen manager if large contract
    for, exampe. Railroads,Highway,Dams,Shipping and Finance. All kickbacks the usual giving
    gifts with fictious names in foreign Asia accounts. As real estate in top Asian markets trust funds
    see. These seldom get caught in Burma this standard in South East Asia. Famous give managers 10% of profits if financial institution is successful. For us Burman stocks in Chinese
    or Korean firms. Cash them out with fake company yes. Fully aware many of desire to economically sound. Burman stlll Singapore,Japan,PRC,Taiwain, and South Korea. Provide the
    temptation of being dishonest: yes we have laws to combat. Corruption still Burma focus is
    industrialization and financial investment. Since the net income is …dismal you expect. Dishonesty prestiage is accout my daughter studying in China. To be nurse this honor: yes without presents from companies. It would not be possible: I do support regulations. But the west needs to define ‘ Kickback? America is concern EU and Russia along Italy do what. Ever
    to get large Asian contracts rule of game do well. You continue to do business my only anger.
    Same officials pressure government polices to enrich themselves. Yes contradiction this Asian
    way Burman gotten loans from ASEAN free market. For highways and port expansion yes contracts which from are budget. Chinese, Japanese and Koreans influence minister of trade
    yes. This were the kick backs evolve before little guys get involved. China is not alone Asian way is silence. Make sure you never get caught. America continues to enshew prefect candor good luck. Regulations only on paper human element does other wise. Once thank you for the blog.