One Billion Customers - James McGregor [65]
Now the bad. Once you get below the level of big multinationals doing large deals, China becomes a swamp. If you are selling your product or services to the Chinese government and state-owned enterprises, you often have to decide how much of your soul you also want to sell. The procurement process in China is usually corrupt at every level. Whether it is factories purchasing equipment, retail outlets agreeing to purchase and display your product, or companies seeking professional services, kickbacks are often required.
American companies and executives are forbidden from engaging in any form of bribery by the Foreign Corrupt Practices Act. Europeans generally face similar but looser restrictions. Companies from elsewhere in Asia often consider such fees a normal and accepted part of doing business. The solution chosen by many companies is to engage Chinese consulting firms or agents who act as middlemen in such transactions. The Chinese entity will often introduce an agent or consulting company to the foreign company to advise them on the deal. This is the foreigner’s version of “don’t ask, don’t tell.” Kickbacks or payoffs are never discussed or acknowledged because the foreign executives can’t “knowingly” be engaged in bribery. It is simply acknowledged that certain agents and consultants can be helpful in creating business opportunities. What happens after that, nobody wants to know. American attorneys hate this practice, but many of them help multinationals draft contracts that do what they call “papering over” the FCPA. In general, the process involves paperwork that demonstrates that you have done your due diligence, that there is a business reason for using this agent or consultant, that the entity wasn’t created for this specific transaction, and that the operators and shareholders of the contracted entity can’t be traced back to a decision maker or government official. You also have to be able to make the case that you aren’t overpaying for the service. “But once you go through that process, you want as little information as possible,” said a veteran China attorney. One European company I know has a unique twist on this. Its contracts with middlemen are restricted to only one copy and that is printed in black ink on red paper, thereby making it impossible to photocopy. The company’s China boss keeps that one copy in his office safe so that if internal auditors begin an inquiry, he can destroy the contract quickly.
In recent years, as the global economy cooled and China became the hot spot, the headquarters of multinationals sometimes pressured their China operations to make up for the lack of growth elsewhere in the world. Faced with rocketing revenue expectations, these China bosses had a tough choice to make: embark on career suicide by keeping their business clean and revenue low, or engage in aggressive kickback practices to meet their numbers. To preserve their sanity, some foreign executives go out of their way to not know what goes on inside their sales departments. I have several American executive friends who couldn’t wait to escape from their China assignments because selling their soul or wrecking their career was an unspoken daily dilemma.
Another not infrequent step to the south side of the ethical line is the quiet funding of college education and living expenses for the sons and daughters of Chinese officials and state-enterprise bureaucrats. In some cases this is handled through foundations and similar entities so that the fingerprints of the company are not evident. In other cases, it is as blatant as depositing money in an overseas bank account in the student’s name and giving that bankbook to the official who is involved. This is a routine practice for some Taiwanese and Hong Kong companies.
Finally,