The Telecom Company that Didn't Play by the Rules
By Stanley Lubman, The Wall Street Journal, China Real Time Report
Stanley Lubman, a long-time specialist on Chinese law, looks at a recent bribery case that highlights the pitfalls of falling on the wrong side of U.S. law when doing business in China. Mr. Lubman teaches at the University of California, Berkeley, School of Law and is the author of “Bird in a Cage: Legal Reform in China After Mao,” (Stanford University Press, 1999).
Foreign businesses in China are often presented with conflicts between ethical behavior and the temptation to bend or violate the rules that govern their activities. Such problems reflect both cultural differences and the uncertainties of China’s ongoing transition from a planned economy, via state-led capitalism — toward a goal that remains undefined. These problems, and the consequences of violating U.S. law in failing to play by its rules while grappling with Chinese conditions, have just been dramatically illustrated.
On Dec. 31, the U.S. Department of Justice and the Securities and Exchange Commission charged UTStarcom, a U.S. company based in Alameda, California, with violating the Foreign Corrupt Practices Act (FCPA) by using its Chinese subsidiary to make payments of $7 million over a five-year period for “lavish gifts and hundreds of overseas trips by employees of Chinese government-controlled telecommunications companies that were customers of UTStarcom.” The travel was falsely recorded as “training” expenses, but the “true purpose” of the trips was to “obtain and retain lucrative telecommunications contracts,” according to the Department of Justice. In addition, UTStarcom had also ”hired individuals affiliated with foreign government customers to work in the U.S. and provided them with work visas, when in reality the individuals didn’t work for UTStarcom.”
In my last blog post here several weeks ago, two hypothetical cases were posed: Suppose a Chinese official asks a foreign company doing business in China to hire his son? Or suppose your Chinese partner in a joint venture proposes to send some of the venture’s engineers to the U.S. for tourism and gambling that you would be expected to report as business expenses? Both of these questions present potential violations not only of the anti-bribery provisions of the FCPA, which is being energetically enforced these days, but also are violations of Chinese law.
Although there are factors that a company might weigh in determining how to handle these requests and the risks that they present, it seems wiser to urge foreign businesses to stick to their own basic values and avoid becoming involved in activities that might be, or might even be construed as, corrupt practices.
One reader commented that foreign businesses in China selling in the Chinese domestic market more frequently face issues other than bribery of Chinese government officials. The writer stated that domestic competitors of foreign MNCs can violate laws to minimize costs in ways that foreign MNCs would not contemplate or accept because they are more closely regulated. For example, local businesses can have local staff submit false receipts for “business expenses,” which increase off-the-books wages without being taxed for them. They thereby remove the payments for such amounts that the enterprise would otherwise have to deposit into social insurance funds, while also permitting the enterprise to claim the phony “business expenses” as business-related.
This comment on current business practices is a welcome reminder that considerable flux continues to mark the Chinese business environment, with possible implications for business practices. Notably, in recent years, the state sector, which appeared to be shrinking in size compared to the non-state sector, has been strengthened. A recent article in Time stated that “the pendulum has begun to swing the other way” by the growth of many SOEs (state-owned enterprises), which have grown faster than young private companies), creating distortions in the Chinese economy that may persist for a long time. This ought to prompt speculation that the resulting uncertainties may prompt an intensification of corruption involving the SOEs already known for it. A recent report reinforces this view.
More generally, some knowledgeable China-watchers have been concerned about a general rise in corruption. MIT Professor Huang Yasheng, in his authoritative study of Chinese economic reforms, has commented that ”the general consensus is that corruption intensified massively in the 1990s.” Furthermore, he quotes Minxin Pei’s observation that “corrupt officials in China have become younger.” (Yasheng Huang, Capitalism with Chinese Characteristics, 2008, at 284-85).
These are not just the views of outside observers: A Pew Research Center poll in China reported that of the persons polled on their views of the Chinese economy, 78 percent believed that corrupt officials were a “very big” problem, and 61 percent expressed the same view about “corrupt business people.” More recently, government auditors discovered that 234.7 billion yuan ($34.3 billion) “disappeared from public funds during the first 11 months of last year.
One contrary view, in an article on Forbes.com last year, asserted that “the good news is that commercial corruption is decreasing. Executives are starting to see that that can make more money conducting business honestly……Now that the laws are more pro-business, corruption is nothing more than a danger. That’s why the central government is clamping down hard.” Given the kind of evidence cited here and the weight of more pessimistic opinions, this optimistic view seems doubtful. Business-friendly laws don’t necessarily mean consistent enforcement or changed business ethics.
Will values and attitudes among Chinese businesses and officials that might deter corrupt conduct evolve further, and if so, how long might the process take? In the midst of this uncertainty, American businesses will have to choose whether to follow the formal rules or practices that depart from them. UTStarcom suggest the possible consequences if they make the wrong choice.