coping with corruption in trading with china

University of the Philippines Los BañosDepartment of Agribusiness Management and Entrepreneurship (DAME)

Coping with Corruption in Trading with ChinaCase No. 2

Submitted by:Arreza, Deacart Don

Castro, Louie Beau

Tarasina, Jhona

Submitted to:Prof. Loida E. Mojica

BM 255; 1st semester 2015-2016

September 19, 2015

Classified - Highly Restricted

Coping with Corruption in Trading with China

I.Case Background/Issues

Poorly equipped schools, counterfeit medicine and elections decided by money are just some of the consequences of public sector corruption. Bribes and backroom deals don’t just steal resources from the most vulnerable – they undermine justice and economic development, and destroy public trust in government and leaders.

a. Corruption Perception Index

The Corruption Perceptions Index ranks countries and territories based on how corrupt their public sector is perceived to be. A country or territory’s score indicates the perceived level of public sector corruption on a scale of 0 (highly corrupt) to 100 (very clean). A country or territory's rank indicates its position relative to the other countries and territories in the index.The 2007 Corruption Perceptions Index looks at perceptions of public sector corruption in 180

countries and territories, and is a composite index that draws on 14 expert opinion surveys. It scores countries on a scale from zero to ten, with zero indicating high levels of perceived corruption and ten indicating low levels of perceived corruption.


b. Corruption situation in ChinaIn Corruption Threatens China’s Future, Pei paints a sobering picture of corruption in China, where roughly 10 percent of government spending, contracts, and transactions is estimated to be used as kickbacks and bribes, or simply stolen. He examines the root causes for China’s rampant corruption—partial economic reforms, lax enforcement efforts, and reluctance by the Communist Party to adopt political reforms—and the ensuing economic losses and jeopardized financial stability.

Key Findings:• Though the Chinese government has more than 1,200 laws, rules, and directives against corruption, implementation is spotty and ineffective. The odds of a corrupt official going to jail are less than three percent, making corruption a high-return, low-risk activity. Even low-level officials have the opportunity to amass an illicit fortune of tens of millions of yuan.• The amount of money stolen through corruption scandals has risen exponentially since the 1980s. Corruption in China is concentrated in sectors with extensive state involvement, such as infrastructure projects, real estate, government procurement, and financial services. The absence of competitive political process and free press make these high-risk sectors susceptible to fraud, theft, kickbacks, and bribery. The direct costs of corruption could be as much as $86 billion each year.• The indirect costs of corruption (efficiency losses; waste; and damage to the environment, public health, education, credibility and morale) are incalculable. Corruption both undermines social stability (sparking tens of thousands of protests each year), and contributes to China’s environmental degradation, deterioration of social services, and the rising cost of health care, housing, and education.• China’s corruption also harms Western economic interests, particularly foreign investors who risk environmental, human rights, and financial liabilities, and must compete against rivals who engage in illegal practices to win business in China. • The U.S. government should devote resources to tracking reported cases of corruption in China, increase legal cooperation with China (to prevent illegal immigration by corrupt officials and money laundering), and insist on reforms to China’s law-enforcement practices and legal procedures before tracking Chinese fugitives in the United States and recovering assets they have looted.“Corruption has not yet derailed China’s economic rise, sparked a social revolution, or deterred Western investors. But it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption,” writes Pei. “Eventually, growth will falter.”

c. Common economic crimes/corruption

d.Foreign Corrupt Practices Act(FCPA)-was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.Specifically, the anti bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer,payment, promise to pay, or authorization of the payment of


money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to,any person.

Corruption Perception Index(CPI)- measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries.

People’s Republic of China(PRC)-

Communist Party of China- is a great Marxist political party. It is the vanguard of the Chinese working class, and the leading core of the Chinese people of all nationalities.Since its founding in 1921, the CPC has traveled a glorious path of struggle for the liberation of China and the happiness of the people, as well as the progressive cause of mankind.

“Criminal Law of the PRC”- known as common bribery, applies to the bribery of state officials and employees of state-owned enterprises. Anyone who demands or accepts money or property in return for benefits is guilty of bribery.

“Law against Unfair Competition of the PRC”- known as commercial bribery. It prohibits businesses from giving money or property to customers to sell or purchase products.


II.Questions

1. List all the different types of bribes,payments, or favors represented in this case under (a) FCPA, (b) Criminal law of PRC, and (c) Law against unfair competition of the PRC. Why is each either legal or illegal?


2. For those practices that you listed as illegal, classify each as lubrication, extortion, or subornation,and explain your reasoning.

3. Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA)?

The US Foreign Corrupt Practices Act (FCPA) of 1977 is the most widely enforced anti-corruption law. It is the first to introduce corporate liability, responsibility for third parties and


extraterritoriality for corruption offenses, meaning companies and persons can be held criminally and civilly responsible for corruption offenses committed abroad. (“Business-Anti-Corruption”)

The FCPA makes it illegal for companies to pay bribes to foreign officials, candidates, or political parties. Stiff penalties can be assessed against company officials, directors, employees, or agents found guilty or paying a bribe or of knowingly participating in or authorizing the payment of a bribe (Cateora 206).

The FCPA provides a narrow exception for facilitation payments. The exception applies only to payments made to foreign officials with the purpose to “facilitate or expedite routine governmental action”. The exception focuses on the purpose of the payment rather than on its value. (“Business-Anti-Corruption”)

4. Assuming that the FCPA did not exist, what is the ethical response to each of the payments, favors, or bribes you have identified? Read the section titled Ethical and Socially Responsible Decision in Chapter 5 as a guide to assist you in your decision.


5. In your view, which of the expenses detailed in the lawsuit could be in violation of the FCPA, and which could be legitimate business expenses as the American Company contends?.Discuss.

Expenses that could be in violation:a) Sony Camerasb) Luxury outfits c) Vacations unrelated to businessd) Funding of daughter’s European trip or son’s tennis & golf membership

The Expenses listed above are unjustifiable and unrelated to any business activities.

Legitimate business expenses:a) Corporate jet (for business trips)b) Apartment in Shanghai for business purposes (perhaps company member

need to stay in the city or can be used as a place to entertain foreign officials)

6. Discuss the legal/ethical issues raised by the comments by the retired Foreign Service Agent and the consultant.

The retired Foreign Service Agent brings up how he could intentionally subvert the intent of the FCPA so U.S. investors and exporters would not lose out unfairly to companies and agencies from other foreign countries. This is reaffirmed by the consultant, who explains that corruption is huge and systemic. The obvious legal/ethical issue here is that the service agent intentionally broke the law. However, the ethical dilemma is that he committed this crime with good intentions. Despite the moral code the FCPA attempts to uphold, other countries are not subjected to its rules. Thus, American companies may lose out on certain contracts due to the FCPA. The best option in this situation is to bow out of the contract. Many other companies have done it before and have still been successful companies. The other lesson in this is to regularly train Chinese employees on American policy. Simply translating company policy from English to Mandarin/Cantonese/etc. is not enough. It has to be ingrained in every single employee.

7. List alternatives to paying bribes in international markets and discuss the plusses and minuses of each.

Company can bow out of the contract/companya) Pros- can avoid litigation due to bribery/corruptionb) Cons- can lose out on potential profits and consumers

Use “personality” to convince officials in a way that one can competea)Pros: completely legal under any of the actsb) Cons: Most likely will not work. If it will work, it will most likely take a long time

to complete


Entertain officials with official company eventsa) Pros: can still entertain officials with gifts and favorsb) Cons: This process still may bring up issues with governments

References:Transparency International (2007),” CORRUPTION PERCEPTIONS INDEX 2007”, Retrieved from http://www.transparency.org/research/cpi/cpi_2007/0/

The United States: Department of Justice (June 2015), “FOREIGN CORRUPT PRACTICES ACT”, Retrieved from http://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

China Internet Information Center,”AN ILLUSTRATED HISTORY OF COMMUNIST PARTY OF CHINA”, Retrieved from http://www.china.org.cn/english/features/45963.htm

Carnegie Endowment (Mixin Pei) “CORRUPTION THREATENS CHINA’S FUTURE”, Retrieved from http://carnegieendowment.org/2007/10/09/corruption-threatens-china-s-future, October 2007

Business Anti-Corruption Portal (2015), “US Foreign Corrupt Practices Act”, Retrieved fromhttp://www.business-anti-corruption.com/about/about-corruption/foreign-corrupt-practices-act-(fcpa).aspx,

Cateora, P., Gilly, M., & Grahan, J. (2009), International Marketing 14th edition, p. 206


coping with corruption in trading with china

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