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Make More Money By Ending China Kickbacks

Getting paid by Chinese companies

Would that it were so easy.

Kickback schemes are rampant in China.  If you have Chinese employees and you buy or sell product in China, there is a good chance you are losing money from kickbacks and likely also violating Chinese and U.S. (or European laws).

American Public Media’s Marketplace just did a brief radio story on kickbacks in China, entitled, Playing straight sometimes misses bottom line: In most countries, scandal is bad for business. But in China, being on the up and up can mean lost business.

The story starts out talking about the currently pending investigation involving bribery charges against “seven multinational companies, including McDonald’s and Whirlpool”:

Twenty-two people have been detained. Suspicion is they took half a million dollars in kickbacks from computer equipment suppliers. In most countries scandal’s bad for business. But Jocelyn Ford reports sometimes, being on the up and up means lost business.

The radio story takes place on a bus chartered by That’s Beijing magazine, to take a group of advertisers “on an all-expenses-paid trip to the ski slopes.” That’s Beijing’s Manager talks about how he does not allow his ad sales staff “to lure customers with kickbacks,” even “though that’s common practice in the magazine industry”:

WESTER: You know one time, when we first started out, this guy pulled us aside from a real estate company and he said, “You guys are fools. Look at this sales kit.”

Corporations like McDonalds and Japan’s Fuji Xerox might be embarrassed by the investigation. But Humphrey says it’s good news the police are starting to enforce the law against kickbacks.

How can you stop your China employees from taking or paying kickbacks?  There are no easy answers and oftentimes the best you can hope for is minimization, rather than elimination.  I had a client who hired a private investigator to determine whether any of his seven Chinese employees were getting kickbacks and he learned they all were. He fired three of them and warned the other four. The problem is that both China and the United States (usually under the FCPA) are cracking down on China corruption and these investigations often go to the top.

  • Make clear, in writing, in both English and Chinese, that kickbacks are not allowed, will not be tolerated, and automatically lead to firing and reporting of the incident to the appropriate authorities. Provide examples of what is allowed and what is not. Set up an ethics or kickback line, direct to you or to someone you trust, so doubts can be quickly resolved.
  • Retain skilled professionals to investigate who at your company is involved in kickback schemes. A private investigation firm can set up a “company” and periodically test your employees.
  • Conduct thorough background checks on those you are planning to hire.
  • Provide your entire staff with regular and monitored China anti-corruption training/FCPA compliance training. Make sure that attendance is recorded.  This training should be led by an outside entity (typically by China lawyers who know both China law and applicable foreign law) who are fluent in both Chinese and in English.
  • Stay on top of your China office. Know who is doing business with whom and know the numbers. Ask questions.

10 responses to “Make More Money By Ending China Kickbacks”

  1. With regard to your first point, we have put written policies in both languages and make suppliers sign them as well as employees making it clear that we don’t want to do business this way and that they will automatically lose a contract if we discover that they have paid or even offered a kickback.
    With regard to the ‘kickback line’ – this touches on a much more tricky point where we have encountered problems again and again.
    The problem is that a number of the employees automatically assume that other employees are receiving kickbacks. Much of what comes to me is complete nonsense (i.e. that I know it to be untrue or that the story I hear just doesn’t add up) or it’s largely unprovable (i.e. we know we’re paying market rate for the product and if there’s any kickback going on it would cost us a significant amount to investigate because any wrongdoing is outside of our books).
    Because we aren’t (we believe) suffering financially (because we regularly check prices with multiple suppliers and cross-check with other countries in which we operate) the biggest problem becomes the impact on staff effectiveness because of the rumours and suspicions that can float around. I’m also reasonably certain that whenever I’ve tried telling people that I know so-and-so isn’t doing what you suggest or that the story can’t be true because it simply doesn’t make sense, I think some people just automatically assume that this means a cover-up by senior management is taking place and that we know and condone the actions.
    Trying to investigate the allegations or “testing” your employees is clearly dangerous if they are not taking kickbacks as they may well resent the fact that you have done so (assuming there is a chance of them finding out ) and that could destroy your working relationship with them.

  2. Ambling Sheep (Crouching Tiger) —
    Thanks for checking in. I know. I have clients who say that so long as the numbers look good, there’s no point in worrying.
    I like your story on how there is always the belief that others are doing it.
    I attended a seminar on Russian law a few years ago at which the Russian lawyer claimed that 99% of perceived court corruption in Russia was “false corruption,” where a Russian lawyer led his or her client to believe corruption was present so he or she could charge more. This lawyer did not like it when I asked him if this itself was a form of corruption.
    My story is that I took on a case for a Russian client/friend many years ago. Our job was to help him recover Russian helicopters and their required documentation from various places around the world. We secured three helicopters here in the US, but could not get the documents on one of them. To make a long story short, the police ended up with them and we figured the only way we would be able to get them back would be to pursue litigation. I felt bad about my client not being able to use one of the helicopters because the documents were lacking so I proposed to handle the litigation for a flat fee. My client paid the fee, we began preparing for the litigation. Six months passed since the police had taken control of the documents due to the dispute and nobody had yet filed any court papers. I put on my best suit, went to the police station, and just as friendly as could be, asked for the documents, as the attorney for the documents’ owner. The police happily gave me the documents and I immediately shipped them to my client in Russia and never heard anything more on that case. To this day, I know my client thinks I paid off the police. I DIDN’T, but my client just smiles when I insist on this. I guess he thinks that is why I asked for a flat fee.

  3. One of the things we do is run a “preferred suppliers list”. All the vendors on the list have been vetted by senior management and we regularly re-test the market to make sure our suppliers are the most competitive on quality, on-time-delivery, and price. When we need a product or service not currently covered by the list, we call for three tenders who then have to be vetted by senior management. Despite these efforts, however, we are constantly amazed by attempts by staff to find ways around using the vendors on the list. We have a zero tolerance policy and those staff quickly find themselves cleaning their desks if they break the rules.

  4. Max —
    Thanks for checking in and for sharing this valuable info. What you do makes sense. Are conditions getting better over time as your employees realize you are serious about this?

  5. Kickbacks always persist in the marketplace until and unless the level of corporate governance can be enhanced in China.

  6. March 19, 2007 Edition
    Welcome to the March 19, 2007 edition of Corporate Vigilance.
    Dan Harris presents Make More Money By Ending China Kickbacks posted at China Law Blog, saying, “Stopping kickbacks at your China company or office.”

  7. I’m interested in finding out as much as possible about commercial bribery and kickbacks in China, ie under-the-table payments to secure contracts etc (NOT payments to officials), especially comparing foreign businesses and local businesses.
    I know it is a very hard area to document and get anything other than anecdotal information about, does anyone have any ideas?

  8. We have had an employee in Shenzhen for 3 years we have just begun to reaize the extent to which she has been taking kickbacks. She recently quit and took numerous samples with her. Is there any legal action we can take against her? What steps would you recommend?
    Sincerely,
    Tara

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