China bribery. Don't. Just Don't.

I’ve become obsessed with the college cheating scandal that has so far implicated Hollywood celebrities, a high-end lawyer from a Wall Street Law Firm, a “slew of CEOs,”  among others.

I am sorely tempted to use this scandal as a teaching moment on how we Americans need to look more deeply at the rising inequality and unfairness in our country, instead of falling back on comfortable tropes like how we are the land of opportunity. But I recognize this is probably not the place for that.

So I will instead use it as a teaching moment on why bribery is dangerous and even pointless.

Back in 2017, we did a post, China Bribery. Not Smart and Not Necessary. In that post I started out talking about how it is wrong to contend that contracts are not needed in China because of court corruption. I then talked of how most Americans don’t understand how court corruption usually works in breach of contract cases, using a Russian litigation matter my firm had handled as an example. The point of that post and this one was that paying bribes is never wise:

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our firm’s China lawyers would ever make that claim.

I then wrote about how after a talk I gave in Cleveland that touched on bribery and corruption I discussed China bribery with “an audience member, Kimberly Kirkendall, who had commented to the audience that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so.” I mentioned to Ms. Kirkendall “how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.”

In that post I quoted extensively from something Ms. Kirkendall had written on bribery that I very much liked:

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to our China team for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

I agree.

I cannot resist shamelessly plugging my alma mater, Grinnell College, from where my wife also graduated and from where my youngest daughter will in two months be graduating. I am plugging Grinnell College because it is one of a small number of U.S. colleges and universities that truly has a “need blind” admissions policy and will meet the financial needs of all its American students. Wikipedia defines need-blind admissions as a “policy in which the admitting institution does not consider an applicant’s financial situation when deciding admission. Generally, an increase in students admitted under a need-blind policy and needing financial aid requires the institution to back the policy with an ample endowment or source of funding.” In other words, schools that are not pay to play.

If you are not only troubled by parents paying bribes to get their kids into a school, but also troubled by the daughters and sons of the wealthy being more likely to get admitted or being able to fund their education, you should consider one of the following schools that are both need-blind and meet the full demonstrated financial needs of their students (per Wikipedia):

Your thoughts?