Washington Post Foreign Service reporter Peter S. Goodman provides a couple of interesting perspectives on doing business in China. In “Common in China, Kickbacks Create Trouble for U.S. Companies at Home,” he profiles the quandary both American companies and their Chinese managers find themselves in when faced with the prospect of having to bribe Chinese officials to secure sales. These typically come in the form of “extravagant entertainment and travel expenses” and get doled out to “purchasing agents at government offices and state-owned businesses” through distribution companies or public relations firms. Hiding the nature of the kickbacks is important, because bribery is against the law in the US and, if a public company is involved, against the regulations of the SEC.
The article profiles a few of the cases in which companies have been forced to surrender profits and pay penalties related to Chinese business deals. Among the stories, one about the former Alltel Information Services, a service provider since acquired by Fidelity Information Services. According to a lawsuit field in Monterey County, CA, the head of a state-owned bank in China took $1 million in bribes, disguised as consulting fees from Alltel, in exchange for providing them with $176 million in contracts. (That’s quite a return on investment!) The suit was filed by a competitive Chinese company that says a contract was breached because of the bribes. According to the story, a former executive with Alltel denies the allegations.
In a second article, Mr. Goodman profiles a related predicament. “China Deals Can Pose Accounting Conflicts”: how far companies will go to be able to report “record” earnings from their China investments. In this case, Radvision Ltd, an Israeli company listed on the Nasdaq, with a sole distributor in China — Beijing Control Tech — pressured the Chinese firm to buy additional products to pump up earnings even though equipment was gathering dust in the Chinese firm’s warehouse. If Control Tech didn’t buy to the levels Radvision mandated, it would lose its exclusive relationship. In fact, according to the report, with no notice, Radvision canceled its distribution contract with Control Tech.
Although the US companies end up paying monetarily, nothing is said about personal punishment for the US or other executives behind these shenanigans. Also unstated is what punishments are meted out to the Chinese perpetrators. My guess is, the Chinese people involved in these activities lose more than just a job or money.
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