Mark O'Neill
One major problem China faces in its march towards capitalism is rampant corruption. It has had limited success in fighting the disease but has been getting help from an unusual source - the United States' Foreign Corrupt Practices Act (FCPA).
This act, which prohibits American firms and individuals from bribing foreign government officials to obtain business, may help China build a cleaner marketplace and force Beijing's hand in its politically sensitive battle against corruption. But American firms are not happy with what they perceive as overly restrictive clauses in the act.
Over the past year, two FCPA cases brought against US firms with respect to their China businesses have brought down top executives at Lucent Technologies and the chairman of China Construction Bank (CCB).
The first salvo came in April last year, when Lucent announced it had fired four executives at its China operations, including the president and chief operating officer, for FCPA violations. It uncovered the offences during an investigation of its operations in 23 countries, arising from an unrelated bribery scandal in Saudi Arabia.
The stakes are high for Lucent in China, which accounted for 11 per cent of its revenue in the company's 2003 fiscal year.
Next came a bigger catch - CCB chairman Zhang Enzhao, who allegedly agreed to accept a US$1 million bribe on the links at California's famous Pebble Beach golf course.
The CCB case came at an awkward time for Beijing, which wants the bank to list overseas. Left to its own devices, Beijing would have waited longer and struck deals with political factions before sacking Mr Zhang. And if he had had strong enough backers, he would not have been touched at all.
But a case in a US court upset the usual political dance and Mr Zhang was forced to resign.
The Lucent and CCB cases are the first known China-related FCPA violations. Historically, there have been few prosecutions and convictions for offences committed abroad because it is hard to conduct investigations overseas and obtain evidence in foreign jurisdictions.
American authorities can more easily track offences committed in the US, which is how Mr Zhang was caught.
The FCPA, which imposes severe civil and criminal penalties on US companies and individuals found guilty, has been in force since 1977. But it has been used more frequently because of growing pressure to improve corporate governance after a string of high-profile corporate scandals and passage of the Sarbanes-Oxley Act.
According to Patrick Norton, managing partner of O'Melveny & Myers in Beijing, many US companies feel the FCPA bars them from engaging in activities necessary to obtain business, while their competitors from Europe, Japan and elsewhere appear to act with impunity.
In a research report published in December last year, Mr Norton wrote that FCPA compliance was particularly difficult for US companies in China, where so many major firms are owned by the state and their directors therefore are considered 'foreign government officials'.
'Many business relationships that would be considered wholly private elsewhere are public in China and bring the FCPA into play,' he said. 'Chinese parties, particularly government entities, often resist accepting FCPA clauses of any sort in their contracts as a matter of principle because they find the extra-territorial application of a US law objectionable.'
The FCPA allows promotional and entertainment expenditure to the extent permitted by China's 'written laws and regulations'. They include the registration of gifts worth more than 100 yuan, surrendering of those worth more than 200 yuan, and a total in one year of no more than 600 yuan. These limits are laughable and to give a manager of a state-owned enterprise a gift of less than 100 yuan would be to insult him.
With such restrictive clauses, how do you do business in a country where kickbacks and pay-offs are a way of life? While companies in the developed world face increasing public and official scrutiny for their corporate governance, bribery remains widespread and tolerated in China, one of their most important markets.
Corruption extends from cartons of high-quality cigarettes and liquor to million-dollar bribes in exchange for licence approvals or lucrative contracts.
At the higher end, companies often make payments in Hong Kong or abroad where they are less likely to be traced by the authorities at home. Paying college fees in the United States or Europe for the children of favoured officials is also a common practice.
In its corruption perceptions index for last year, Transparency International rated China 71st out of 145 nations, just ahead of Belarus, Gabon and Jamaica but behind Peru and Sri Lanka.
According to Peter Humphrey, founder of risk consultancy ChinaWhys, despite recent high-profile prosecutions Chinese business culture remains very corrupt. 'We are not going to see any significant change in corruption in China in years to come,' he said. 'It affects not just senior managers but the whole of society, even implicating junior staff. It has become a way of life.'
