Just had a discussion with one of my law firm’s international lawyers on what can go wrong by “cutting legal corners” in China. I frequently have this discussion with clients who want us to take a shortcut (usually one advised by someone who financially benefits from it) to speed things up or reduce costs.
The problem with the typical China shortcut is that it involves doing something not completely legal, but with assurances it will work because “someone knows someone” in some Chinese government agency and that someone will make sure it goes through without a hitch. Before I talk about the more mundane ways this sort of “guanxi” can end badly, I will talk about two rather graphic examples where the reliability of such connections ended up being detrimental:
- Many years ago, my law firm hired a paralegal whose father was a very powerful vice-governor in a remote Russian province. For years, our clients got unnervingly quick approvals of just about anything they sought to do in this province. Then one day, someone murdered this vice-governor. Word was he had simply gotten too powerful. In any event, the new vice-governor was from a different faction and one of the first things he did was go after anyone associated with the previous regime. He did not shut down those companies that had followed the law, but he did shut down those companies that had not. Our law firm’s quick approvals slowed to a normal speed.
- Many years ago, we had a client who had struck a deal to supply all of a product for a particular Asian country’s military. The deal was through the son of a prominent, high level government official. A few days into it, the son was arrested for corruption and the deal immediately cratered.
The more mundane and certainly more common examples of good guanxi causing problems are the following:
- Your “connection” manages to secure you government approval to which you would not ordinarily be entitled. A few months later, your connection comes back to you saying he is getting pressure from above and he is going to need money to keep them at bay. Your connection will probably keep coming back to you.
- Your “connection” gets fired, promoted, or quits and their replacement sees your improper approval and does something about it. This is incredibly common. Once or twice a year we get calls from companies whose China WFOE is getting shut down under these circumstances.
- Someone higher up than your “connection” sees your improper approval and does something about it. This higher-up could be in the same agency in the same city or might be in a regional center or even Beijing. It is incredibly common for something to be approved in one part of China and for Beijing to remove the approval 6-12 months later.
Having good connections is a good thing, but you should always be mindful of the risks inherent in sidestepping the law and you should always beware of how doing so can come back to bite you.