Matthias Schroeder, former head of Beiten Burkhardt’s Asia desk in Munich, explains the concept of “guanxi” and how to stay the right side of the PRC’s increasingly stringent corruption laws when conducting business there
People doing business in the People’s Republic of China (PRC) often hear the term “guanxi”, which is commonly used to describe a way of conducting business there. Literally, it means relationship, and it is often equated at least partly with corruption or other legally questionable practices. When establishing a corporate compliance scheme, understanding socio-economic factors as well as legal issues is crucial to appreciating the line between corrupt behaviour and acceptable business practices.
Appraisal
On the Corruption Perception Index of Transparency International, the PRC (excluding Hong Kong and Macau) occupies position No. 78 alongside countries like Colombia, Serbia and Thailand. This represents a drop of six places since 2008. According to Chinese press reports, the amount of missing capital taken by government officials is on the rise and the average age of persons charged with corruption is decreasing.
According to the “fraud triangle” used by the famous criminologist Donald R. Cressey, corruption is encouraged by pressure, opportunity and rationalisation. The transition of the PRC from communism to a more market-oriented economic system placed many people in a newly competitive environment. This, combined with a growing income gap, has raised the pressure for individual success. The widespread tradition of gift-giving and guanxi serves as a rationalisation. In addition, the complexity of sourcing and delivery chains in China’s modern economy as well as its vast territory provide plenty of opportunity. For foreign businesspeople operating in China, language and cultural barriers, as well as distance between headquarters and local operating entities, increase the need for agents or other facilitators, yet also increase vulnerability to corruption.
The central government has, however, made efforts to fight corruption in the public sector. The National Audit Office, a central institution under the supervision of the Chinese State Council, has engaged 80,000 inspectors at different levels to review the books of more than 120,000 projects. In 2008, it retrieved RMB 86 billion of misappropriated money. Hu Jintao, President and head of the Chinese Communist Party (CCP), delivered a speech to the CCP Discipline Commission underlining that the Party should install an effective, strict and comprehensive system of fighting corruption and other malpractice. In February 2010, the CCP revised its ethical code with the primary aim of combating corruption. The new rules, for instance, prohibit Party members from excessive spending when organising weddings and funerals and from engaging in real estate speculation.
The most visible aspect of the fight against corruption by the Chinese government and CCP is the increased prosecution of senior government officials on corruption-related charges. In 2009, more than 41,000 officials in 32,439 cases of alleged embezzlement, bribery, dereliction of duty and other work-related crimes were investigated.
Legal framework
The main regulatory basis for handling corruption is the Criminal Law and the Anti-Unfair Competition Law, with provisions regarding corruption and bribery in other laws playing only a marginal role.
 Criminal Law Articles 382 to 396 of the Criminal Law cover issues such as embezzlement of state assets, bribes and graft. According to Article 389, giving state functionaries articles of property to seek illegitimate gain constitutes an illegal bribe. The term “articles of property” includes not only money and property in kind, but also property benefits, the value of which may be calculated in money, such as the provision of home renovation and travel expenses. However, an invitation to eat out or buy a meal is, according to the Chinese interpretation, not subsumed under the term “articles of property” if the meal is consumed immediately. In economic activities, the crime of offering a bribe is defined as giving articles of property to state functionaries in violation of state provisions when the amount offered is fairly large or serves as a kickback or type of service charge in violation of state provisions. The Criteria for Accusation of Bribery Crimes issued by the PRC Supreme People’s Court contain value thresholds for the crime of bribery. Different thresholds apply to natural persons and entities/companies. For a natural person the value limit is RMB 10,000. Cases not reaching that threshold are only considered bribery if: For units or companies the value limit is RMB 100,000 in cases where the above criteria do not apply. Penalties for government officials depend on the amount involved and include a minimum ten-year sentence if the official accepted bribes worth more than RMB 100,000. In exceptional cases, capital punishment may be imposed. Anti-Unfair Competition Law Understanding the need of Chinese business culture to build guanxi through the exchange of gifts, meals, travel and other business courtesies, and at the same time knowing the legal framework, is the first step to protecting an organisation. Such a scheme may acknowledge that building a personal network and guanxi is one way to deal with business partners, but at the same time it must set clear and strict parameters. Publishing a code of ethics on a company website, offering employees training in applying the code when engaging in business activities and maintaining appropriate employee monitoring systems will help foreign companies to assess risk and promote acceptable business behaviour. To download the Asian-Counsel Article Click here |
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