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- March 31, 2010 -

 

Global Supply Chain News: Conviction of Rio Tinto Employees Shows Risks of Doing Business in China

 

Four Employees may have been Taking Bribes, but Timing is Suspicious; 18 Other Australians Now Being Investigated for Economic Crimes; Staying Squeaky Clean

 
     
 


SCDigest Editorial Staff

SCDigest Says:
The Sydney Morning Herald noted, ‘While there's Australian commentary that Hu's 10 years is an outrageously stiff, there's Chinese opinion that he has escaped relatively lightly. He could have received the death penalty.”

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This week, a Chinese court handed out sentences of 7-14 years for four employees of Anglo-Australian mining giant Rio Tinto, an event that has many unsure what to think, while others say it highlights the risk of doing business with China.

 

The case was a strange one from the start, with the charges coming as they did after tough negotiations and disagreements between China and Rio over iron ore prices, after which Rio Tinto angered China by seeming to accept a $19.5 billion investment from Aluminum Corp. of China (Chinalco) and then backing out of the deal as criticism grew from shareholders, the Australian government and the public.

 

If was further complicated by the fact that the highest ranking executive charged, Stern Hu, was of Chinese origin but now an Australian citizen doing business in China.

 

Finally, the initial charges were said to be related to industrial espionage, but later swung to focus on corruption and bribe taking, which are the crimes for which the four ultimately were convicted.

 

There seems to be evidence that in fact there was some bribe taking going on. The company fired the found employees, and called their behavior “deplorable.”

 

Nevertheless, the length of the sentences left many Australians angry. But as the Sydney Morning Herald noted, ‘While there's Australian commentary that Hu's 10 years is an outrageously stiff, there's Chinese opinion that he has escaped relatively lightly. He could have received the death penalty.”

 

There’s something to keep you operating on the straight and narrow while doing business in China.

 

Other believe that the while they likely was some illegal activity going on, the decision to charge the four in the high profile cases was a form of response for the difficult relations between China and Rio Tinto.

 

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That case was bolstered today, when China announced it was pursuing 18 more Australians for various economic crimes.

 

Others suggest the strained relations made it easier for whoever went to authorities with information about the corruption to do so – and for officials to listen.

 

Overall, the case holds some lessons for Western companies, many say.

 

“Everyone doing business in China should be clear by now on the rules—there is no rule of law,” says Wall Street Journal blogger Hugo Restall. “Deals can be done on the basis of mutual trust, which creates some level of certainty. The four Rio Tinto executives may be guilty of corruption, but the real reason they are in prison is because that trust broke down.”

 

Added the Australian news.com.au web site: “The heavy sentences for bribery and industrial espionage serve as a warning for firms wading into treacherous waters in the emerging giant, where "guanxi" (connections) are vital, sharp practice is common and laws are ill-defined.”

 

The challenge, many say, is the real rules are tough to know, and that some level bribery, in various forms, is often necessary to do business. But what Chinese officials overlook today could change tomorrow, if a given company falls out of favour with the city, provincial or national governments there.

 

This is whole affair is likely to strongly re-enforce one key point: when doing business with China, you better stay squeaky clean.

 

What do you think of the Rio Tinto convictions? Can you be successful doing business in China and stay squeaky clean? How real are these kinds of risks? Let us know your thoughts at the Feedback button below.


 
 
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