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What Zhou Yongkang and a Disgruntled Cab Driver Illustrate About China’s Anti-Corruption Campaign

Today’s post is from Russell Menyhart (Taft Stettinius & Hollister).  Prior to joining Taft, Menyhart served nine years as a diplomat with the U.S. State Department.  He was Political Unit Chief at the U.S. Consulate in Shanghai from 2011-2014, and also served in Beijing, Buenos Aires, and Washington DC.


What Zhou Yongkang and a Disgruntled Cab Driver Illustrate About China’s Anti-Corruption Campaign

By Russell Menyhart

China’s anti-corruption campaign is back in the headlines with the announcement that former Politburo Standing Committee member and Communist Party strongman Zhou Yongkang is under investigation for corruption.  Traditionally, Party elders are considered untouchable, but in this case I doubt any of the Communist Party’s 86 million members were surprised by the announcement.  Rumors have flown about Zhou being a target since General Secretary Xi Jinping started the campaign in late 2012.

One view is that China’s anti-corruption campaign is simply a means for Xi to pursue political vendettas, as previous anti-corruption campaigns have been used in this way. But during the last three years I spent talking to people in East China, I became convinced that the new Communist Party leadership—especially Xi and Politburo Standing Committee member Wang Qishan—realized that corruption undermined their claim to legitimacy and had become an existential threat to the Communist Party.

I first believed the anti-corruption campaign was more than just politics not when a Vice Governor or PLA general was taken down, but when a cab driver in Hangzhou, a prosperous provincial capital, complained to me about the campaign in January 2013.  He explained that January was usually his most profitable month, as he was kept busy delivering expensive Chinese New Year gifts from hotels and restaurants to government offices all across town.  “But now they aren’t sending gifts anymore, so I don’t have any work!” he complained.  An entire industry of corruption was being undercut by the campaign.  Shortly thereafter a contact told me a tourism bureau official complained that he hadn’t been taken out to dinner for months, and Communist Party members told me of officials being forced to reach into their own pockets to pick up the tab at a sumptuous banquet after a warning phone call from Beijing.

This campaign absolutely should not be mistaken for an inclination towards real rule of law in China.  It is a political move to tighten the Party’s internal controls and consolidate power (and sadly has been accompanied by a brutal anti-rule of law crackdown on political activists).  But it appears to be a long-term change attempting to solidify Communist Party control, not just a short-term wiping out of select opponents.  In the long run it should benefit U.S. companies, who already have strong internal anti-corruption controls due to the need to adhere to the FCPA.  In fact, in some ways it validates the views of those who argued for passage of the FCPA 37 years ago on grounds that it would actually increase U.S. competitiveness abroad.  If you are feeling the need to reinforce or double-check your company’s anti-corruption policies, imagine how much your counterpart at a Chinese state-owned enterprise is scrambling to get up to the same standard!

One hot topic for discussion has been whether China’s anti-corruption campaign is targeting foreign companies.  The main state-run English language paper in Shanghai published an article in April entitled “Anti-corruption net has no holes for foreigners.” Domestic media cannot publish anything without Communist Party approval, and publishing such an article in the English-language paper showed intent to warn foreign companies.  But my contacts maintain that the intent is to pursue prominent entities—foreign or domestic—to send the message that no one is immune.  Major state-owned enterprises and powerful Chinese businesspeople have also been pursued.  That said, investigating a foreign company with wide-spread brand recognition is a powerful symbol to other businesses—just as investigating a former top leader like Zhou Yongkang sends the message within the Communist Party ranks.  So foreign companies are well-advised to tighten their own internal controls—and keep checking the screws at regular intervals.

U.S. companies should also anticipate how to handle the requirements of both Chinese law and the FCPA, particularly if they have operations outside of the main cities.  Lawyers who feel comfortable dealing with an investigation by officials in Beijing or Shanghai blanch at handling the same case in Lanzhou or Bengbu, because local Administration for Industry and Commerce (AIC) officials are said to sometimes allege violations of anti-bribery and other laws (such as false advertising) without always stating clearly the legal and factual basis.  Chinese lawyers have told me local AIC officials are used to Chinese companies negotiating reduced fines as a quick way to resolve such cases.  But foreign companies must be careful to avoid payments that could be seen as bribing local officials to close an investigation, and thereby possibly violating the FCPA.

Companies with operations in China should also increase due diligence of local partners and localized training on domestic Chinese law.  FCPA compliance is not enough.  Chinese law has criminal and administrative penalties for commercial bribery, so dealings with private entities need to be examined as carefully as those with state officials.  Ideally a compliance program will not complicated things for local staff by asking them to determine if they are dealing with a state official—just focus on making them aware of what actions are defined as bribery and are therefore illegal.  Have rules that make it easy for your employees.  For example, some companies have completely banned the use of gift cards—whether to suppliers, customers, or inside the company—because they are such a common form of bribery in China.

Xi may be using China’s anti-corruption campaign to consolidate power and eliminate other factions in the Communist Party (which he appears to be doing very effectively), but the campaign is broader than that.  While unfortunately it does not appear to indicate an interest in adopting the rule of law, it ultimately should result in a cleaner business environment.  That will benefit U.S. companies that already have strong FCPA compliance schemes.

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