International Law

Avoiding Kickbacks In China. Just Say No.

By Dan

Kickbacks. Gotta love 'em.

True story:

I used to have a foreign client known as "Mr. 10%." This guy was responsible for provisioning and repairing and operating tens of vessels and word was he skimmed ten percent from all of this. He would complain loud and often about his nickname, but once, in an unguarded moment, he said, "5% sometimes yes, but 10%, no way." I don't know if he was kidding that one time, but I tend to think not.

I have clients now who tell me that if their companies are "getting skimmed" out of 10% in China, they just don't care. They believe it is impossible to stop this sort of thing and they prefer to focus on the bottom line, not how they get to that line.  

I have another client who hires only women, believing them to be less susceptible to this sort of thing and certainly less susceptible to having the company pay more to resolve a honey trap situation. This guy is a true international commerce veteran and I think he may be on to something here.  

We had a client in China who learned that its Chinese manager had skimmed approximately $30 million dollars over the last five years and had the condos and cars in Hong Kong and Macau to prove it.  

I thought of all this today when I read Renaud Anjoran's blog post, "Avoiding kickbacks in China," which is itself based on a podcast by Bill Dodson of the This is China Blog. 

According to Anjoran/Dodson, foreign companies face the following two difficulties relating to kickbacks in China:  

Making sure the employees who approve the choice of suppliers and service providers do not use their position to get kickbacks. It is very widespread and difficult to prove.

Communicating to all related parties that no gift is allowed, explaining the reasons behind it, and respecting that line no matter what.

These two things are difficult for the following two reasons:   

China, and South-East Asia in general, has a gift-giving culture. It is impolite to refuse a gift. But where does the difference between a gift and a kickback start?

Purchasers can multiply their income by many multiples without substantial risks, and in many companies it is an established system.

Anjoran goes on to talk about how the same issues are at play in the quality inspection business where QC people take kickbacks (is this technically a kickback?) to accept defective product.  

So what can you do?  Just say no.  

Now I know it is not really that easy, but that really is where you need to start and as this post, "Say No to Corruption and Make It Your Market Advantage," you can use your strong ethics to your advantage:

Even in corrupt markets, not all business people are corrupt, and even fewer like it that way. It's incredible how many business people are looking for a way out of the muck -- and that translates into an emotional need that the local competitors aren't meeting. In my experience, if you take a hard and clear stand against playing the corruption game, while you may lose some short term opportunities as you use them to demonstrate the steadfastness of your commitment, in the long run you will begin to attract the cream of the crop of customers and business partners. The people who have been aching for someone to give them an opportunity to elevate their business game where it's what they do and not who they pay off that matters.

Of course there will always be others who sneer and wonder where you get off being Mr. Clean, but they are probably the same people that you went into the market wondering how to avoid getting ensnared with in the first place. A simple strategy calculated to sort out the good customers from the bad customers through a process of self selection-- and you probably thought that might be difficult in a new foreign market.

So true. 

What do you think?

Full post as published by China Law Blog on June 14, 2010 (boomark / email).