The impact of China’s anti-corruption drive on Western businesses

You’d be forgiven for thinking that fraud and corruption is an accepted part of China’s business culture. But the number of large multinational companies that are falling foul of the Chinese government’s anti-corruption drive demonstrates just how much they want to change the perception that foreign companies can enter their market and commit fraud.

At a recent event we hosted, Violet Ho of Kroll likened the situation to that of the previously well behaved foster child who begins to pick up the naughty habits of his foster siblings. It’s often not about what you do, it’s about who you are and who you do it to. The same rules don’t always apply and the chances are that the foster child will be the one who is punished.

It used to be simple to do business in a foreign jurisdiction. The company simply needed to abide by the foreign country’s laws. There were very few instances of extra territoriality, where the law of another country could apply. This concept has, however, widened to tackle the global nature of business crime. Multinational businesses must now heed the laws of their home country as well as those in which they operate.

This is compounded by the development of dual responsibility, whereby companies are now judged on how well they police themselves. They must give serious consideration to the business they are doing and who they are doing it with, whilst embracing self-investigation and self-reporting, or risk liability for not preventing a crime. The check box approach to a compliance programme doesn’t work in China, meaning real, robust, preventative measures are the only protection. If the Chinese authorities are at your door, it is already too late. Assume from the outset that you will be guilty until proven innocent and build your defence to ensure a crime cannot be committed or cannot be attributed to your business operations.

Here is a simple compliance checklist as food for thought:

1. Create a ‘proper’ compliance policy the policy must be designed to mitigate the specific risks the company faces. A standard policy is unlikely to be sufficient and is likely to leave the door open to fraud and a subsequent prosecution.

2. Cascade the policy right the way through the organisation – and give constant reminders.

3. Embed the policy into your business operations weave it into everything you do and ensure it is in the terms and conditions of every agreement.

4. Ensure sanctions are in place to deal with breaches – create a strategy covering when to terminate and when fines will apply etc.

5. Have an effective alert mechanism – consider how you will know if something is amiss. Put in place a formal procedure but also build in an informal release valve such as a whistle blower policy.

6. Create policies and procedures for carrying out internal investigations and self-reporting – the requirement to self-report is significant. When someone from law enforcement is involved, it is often too late.

Due diligence and creativity are key to internal investigations. Data protection doesn’t exist at the same level as it does in the EU, but then neither do the records. An investigator must try to find the information you need where it is available through meticulous research and speaking to the right people.

Whilst the Chinese business arena has witnessed much change, more is afoot. These changes demand that you understand the risks and how you will mitigate them.