Tigers and Flies

National Security
China, red envelope, hongbao, lai see, bribe

​​​​​​​​Illustration by Egle Pl​ytnikaite​​

Corruption and Cultural Differences
 

​In 2013, China’s then-president-in-waiting Xi Jinping vowed to crack down on corruption, promising to pursue both “tigers” and “flies”—powerful leaders, lowly bureaucrats, domestic and international businesses. The announcement was not an empty promise for President Xi. 

Later that same year, pharmaceutical company GlaxoSmithKline (GSK) offices were raided throughout China, kicking off a 10-month investigation into bribery of nongovernment personnel. The Public Security Ministry accused the company of bribing doctors to prescribe their drugs and concocting a scheme to raise drug prices. Chinese officials said GSK executives admitted to using bribes, kickbacks, and other fraudulent measures to boost sales in China. In 2014, GSK agreed to pay a fine of $500 million, and the head of its Chinese operations was deported. 

During the five years following Xi’s speech, China punished more than 1.5 million officials and investigated 440 senior officials, according to a statement from the Communist Party of China. In 2018, China established an anticorruption body called the National Supervision Commission and adopted a Supervision Law. 

“The Chinese authorities are tak­ing [anticorruption] incredibly seriously,” says Kent Kedl, senior partner at Control Risks, who has been working in or around China for decades. “Before this, foreign companies and particularly American companies were primarily concerned with the anticorruption laws that had some sort of extraterritoriality to them. But now, they also have to be concerned about the Chinese antibribery initiatives. The environment for scrutiny by a number of regulatory bodies has certainly increased in China, and it is ramping up the nervousness for Chinese and foreign companies and individuals.” 

Up until 2013, GSK had been experiencing radical growth in the country, but after the investigation, it lost 60 to 80 percent of its business in China, Kedl says. The company’s growth of 30 to 40 percent a year was exciting but unsustainable, because GSK “didn’t shore up that growth with a big focus on behavior in the market. It’s essential to take a hard look—is your growth sustainable and resilient? Will it hold up to scrutiny? You need to have an accurate view of the pressures your people, distributors, and agents are facing.”

As businesses adjust to the new regulatory environment, China’s inconsistent enforcement has made it difficult for organizations to decide on a clear path forward. 

“It’s very challenging now to operate in China because of the inconsistent way that laws are enforced,” says Pamela Passman, president and CEO for the Center for Responsible Enterprise and Trade (CREATe). “It’s also an environment where the economy is going through changes. There’s a very significant focus on the growth of state-owned enterprises and their global reach, and so I think it’s one the of the most challenging times to do business in China.” 

According to Transparency International’s Corruption Perceptions Index 2018, the average global score for corruption is just 43 out of 100, with only 20 countries making significant progress in their ethical standards in recent years. For comparison, Denmark is the top-scoring country at 88; Somalia is the lowest-scoring country at 10. The United States has a score of 71. China scores 39. 

According to Gillian Dell, head of the conventions unit for Transparency International and coauthor of the report Exporting Corruption—Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention, navigating ethical compliance in certain regions is a prisoner’s dilemma for competing organizations. That is especially true when there is a perception that other companies are flouting the rules because their home country lacks the political will to punish corruption performed abroad or because low-level bribery appears to be par for the course in that region. 

Despite the country’s efforts to clean up corruption within its borders, “the state of international corruption management in China is miserable,” Dell says. She cites a 2018 case where three Chinese nationals were charged in Kenya for paying a bribe of approximately $5,000 to influence the outcome of a fraud investigation into a railway project. Multiple Chinese companies have been the subject of publicly reported corruption investigations in numerous countries, including the United States, Ethiopia, Sri Lanka, and Bangladesh. 

According to publicly available information, however, no investigations or charges were ever opened in China against its companies, citizens, or residents for foreign corrupt practices, Dell says. The lack of enforcement or deterrents that China imposes on its citizens working abroad leaves gaps for corruption to be exported internationally, resulting in an uneven playing field for other businesses.

When operating in a country with frequent bribery or competing with companies that adhere to lower ethical standards, organizations face tough choices. In China, for example, it can be expected for salespeople to give a bribe (often presented in a red envelope called a hongbao or lai see) of up to 10 percent of the final invoice amount to seal a deal, Kedl says. However, hongbao are traditionally given as a show of respect or good fortune at holidays and special events between family members, friends, and business associates, creating an ethical quandary—when does a culture of gift-giving cross the line into bribery? 

Passman notes that organizations have two options: either establish a global anticorruption policy that remains strict about gift-giving regardless of local culture or employ a flexible policy that allows for nominal gifts at appropriate holidays, provided they are not used to facilitate a transaction. In either case, establishing clear guidance communicated from the top-down is essential. 

“There’s a culture of kickbacks you have to address. Foreign companies see [ethics] as a rules thing, but very often, your local employees can’t figure out how to obey the rules and do their jobs,” Kedl says. If a salesperson is trying to close a deal but refuses to give a bribe, he or she may easily lose that sale, and that’s challenging for someone trying to earn a commission.

In response, Kedl emphasizes resistance strategies—how to say “no” and still have a chance to make the deal. This could involve denoting respect to the client in other ethical ways. He implemented roleplay training with his staff so they could practice refusing bribery more positively. He also implemented a program mandating that if a salesperson could prove that he or she could not close a deal because of a bribe, Kedl would still honor 50 percent of the commission. 

Multiple organizations can also band together to improve the ethical landscape for a particular region or project, Dell says. For example, multiple engineering companies competing for the same contracts in East Africa can collectively agree that they will refuse to act illegally in pursuit of the deal. These “integrity pacts,” Dell says, help companies avoid having to resort to unethical conduct to compete. 

In addition, businesses can cite recent events such as when Uzbek telecommunications executive Gulnara Karimova was charged in March 2019 of conspiring to violate the U.S. Foreign Corrupt Practices Act (FCPA) with a money laundering scheme. Even if the fraud falls through, Dell says, companies run the risk of being charged with conspiracy or passive bribery (the act of soliciting a bribe). 

“So your response to a request for unethical behavior is no longer just ‘I could be punished’ but ‘I could be prosecuted, and so could you,’” she says. 

Developing a culture of integrity, ethics, and respect was the most important ethics and compliance objective companies cited in the 2018 Ethics & Compliance Third-Party Risk Management Benchmark Report​ from NAVEX Global, eclipsing past years’ leading objective—avoiding regulatory and enforcement matters. 

Managing ethical standards becomes more complicated when third parties are involved along an international supply chain. Forty-five percent of large organizations (with more than 5,000 employees) surveyed for the NAVEX report engage more than 5,000 third parties. The top challenge organizations cited was consistently monitoring third parties; while a majority of survey respondents follow some form of screening and monitoring, nearly 40 percent do not monitor their third parties, leaving them open to risk. 

Passman says that managing ethical risk is similar to managing cybersecurity risks. Corruption can happen in any country, and it only takes one person to expose the organization to risk. However, focusing on continuous improvement and regularly reevaluating the supply chain’s risks (which third parties are working with government officials or contracts, who owns each third-party partner) can improve compliance programs. 

Self-reporting also wins favor from prosecutors during investigations, Passman adds. In March 2018, the U.S. Department of Justice announced expanded use of the FCPA Enforcement Policy guidelines so companies that self-report FCPA violations and fully cooperate with the resulting investigation may be granted a 50 percent reduction off the minimum sentence, if they are criminally charged at all. 

The Justice Department looks at compliance programs at the time of violation as well as the time of sentencing, Passman says, so companies can demonstrate both the anticorruption measures they had in place and what they have done to address any loopholes or vulnerabilities that have been uncovered. 

“Ethics and compliance at large are something where leaders have to articulate this on an ongoing basis in business discussions with their own people, in their business discussions with third parties. It’s not something you hear just once a year or when you’re onboarded into a company,” she says. “Employees want to hear from their managers, then they are more likely to report matters when they see them.”