Coping with Corruption in Trading with China

Case Study

Coping with Corruption in Trading with China

Course Code: 525

Global and International Marketing

Prepared for,

Tahmina Khanam

Assistant Professor

Strategic and International Management (SIM)

Department of Management

University of Dhaka

Prepared by,

Md. Azim-Ul-Islam

ID: 325

Strategic and International Management (SIM)

Department of Management

University of Dhaka

Date of Submission: 24^th January, 2017

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Q-1: List all the different types of bribes, payments, or favors represented in this case under (a) FCPA, (b) Criminal Law of PRC, and (c) Law against Unfair Competition of the PRC. Why is each either legal or illegal?

Answer:

A.    List of all the different types of bribes, payments, or favors represented in this case under FCPA

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Illegal	US regulation strictly forbids any kinds of unfair  payments for US companies to their host countries’ officials
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Illegal	US regulation strictly forbids any kinds of unfair  payments for US companies to their host countries’ officials

B.     List of all the different types of bribes, payments, or favors represented in this case under Criminal Law of PRC

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
Foreign trader offered Chinese bank official for overseas tour.	Illegal	It’s a favor given to Chinese officials to win a business deal which violates PRC’s Criminal Law
A Japanese firm invited Chinese CIB officials to Japan.	Illegal	The trips offer to CIB officials violates Criminal Law of PRC. Because it was done to avoid inspection.
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Illegal	This is also a violation of PRC’s criminal law as it includes payment and other favors given to Chinese officials to win a business deal.

C.     List of all the different types of bribes, payments, or favors represented in this case under Law against Unfair Competition of the PRC

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
Trader paid kickbacks to officials at a PRC foreign trade corporation.	Illegal	Violates the law against unfair competition as foreign traders paid kickbacks in order to sale their products.
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Illegal	As MNCs giving bribes and favors to Chinese trading officials it violates the anti-unfair competition law of PRC.

D.    No Violation

Types of bribes, payments or favors	Legal/ Illegal	Reasoning
A US firm refused to pay kickbacks in demand of Chinese official.	Legal	The company didn’t comply with unfair request by Chinese officials.

Q-2: For those practices that you listed as illegal, classify each as lubrication, extortion, or subornation, and explain your reasoning.

Answer:

Lists of Practices	Classification	Reasoning
MNC paid for US apartment, car, university education and expenses for the child of Chinese officials.	Subornation & extortion	Some MNCs are asked to pay for overseas education of the Chinese official’s children.
A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs. They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour.	Lubrication & subornation	A US company facilitated a software contract by providing bribes and favors to Chinese government officials.
Foreign trader offered Chinese bank official for overseas tour.	Lubrication	The bank branch refused to issue letter of credit primarily but they   issued the letter of credit after the overseas tour offers.
A Japanese firm invited Chinese CIB officials to Japan.	Lubrication & subornation	The Japanese company offered this trip to avoid inspection of their product in China.
Trader paid kickbacks to officials at a PRC foreign trade corporation.	Extortion	Traders were asked to pay an specific percentage of kickbacks to do business in China.

Q-3: Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA)?

Answer:

According to Foreign Corrupt Practices Act (FCPA-1977) it is illegal for companies to pay bribes to foreign officials, candidates, or political parties. Penalties can be assessed against company officials, directors, employees, or agents found guilty or paying a bribe or of knowingly participating in or authorizing the payment of a bribe.

However, there are exceptions which, says payment can be made only for the purpose to facilitate routine governmental action of host countries. 

The payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act (FCPA) are-

·         MNCs’ payment for US apartment, car, university education and expenses for the child of Chinese officials.

·         A US firm paid a Chinese consultant more than $1m including gifts, hotels, shopping sprees and entertainment costs.

·         They arranged a travel for two Chinese banking officials with their family members to Asia, Europe and America and beard all the cost for this informal tour

Q-4: Assuming that the FCPA did not exist, what is the ethical response to each of the payments, favors, or bribes you have identified?

Answer:

There are three ethical principles which provide a framework to help a marketer to distinguish between right or wrong in case of markets where these terms are not defined by laws. Which are-

Utilitarian Ethics- Does the action optimize the common good or benefits of all constituencies? Who are the pertinent constituencies?

Rights of the Parties- Does the action respect the rights of the individuals involved?

Justice of Fairness- Does the action respects the canons of justices or fairness to all parties involved?

In this case there is a dilemma. Agreeing with foreign corrupt officials will be unethical because it benefits only a few rather common people. Because MNCs add these costs to the selling price of the product. So ultimately common people have to pay the money and a few Chinese officials enjoy the facilities.  On the other hand disagreeing will lead to limitationof scope  for doing business in China.

General ethical response to these payments will be not to involve in these deals. A more conclusive response to solicitude the problem can be making a counter offer that the amount of money asked by Chinese officials will be paid in form of CSR activities and making the offer publicly as much as possible.

Q-5: In your view, which of the expenses detailed in the lawsuit could be in violation of the FCPA, and which could be legitimate business expenses as the American Company contends?.Discuss.

Answer:

Expenses that could be in violation:

·         Giving expensive gifts

·         Paying for hotels

·         Entertainment costs

·         Sony Camera

·         Luxury outfits

·         Vacations unrelated to business

·         Funding of daughter’s European trip or son’s tennis & golf membership

The Expenses listed above are unjustifiable and unrelated to any business activities.

Legitimate business expenses:

·         Giving fees to Chinese consultant

·         Corporate jet (for business trips)

·         Apartment in Shanghai for business purposes (perhaps company member need to stay in the city or can be used as a place to entertain foreign officials)

·          

Q-6: Discuss the legal/ethical issues raised by the comments by the retired Foreign Service Agent and the consultant.

Answer:

A US Foreign Service agent raised question about how strictly US Foreign Corrupt Practice Act is imposed. He raised a legal issue that, all American firms doing business in china will lose its business if they follow US FCPA act. So he indirectly says that to do business in corrupt practicing economies a firm has to focus on acting ethically rather than acting legally. Ethical practices are those which do not harm common goods.

Q-7: List alternatives to paying bribes in international markets and discuss the plusses and minuses of each.

Answer:

Alternative 1: Stay out of the deals where corrupt practices are in act

Pluses: 

a.       Protecting Company’s reputation.

b.      Remaining clear to regulatory authority

c.       Escape from future difficulties

Minuses:

a.       Losing business deals.

b.      Losing competition.

c.       Bypassing opportunities.

Alternative 2: Proposing counter offer and paying by legal means.

Pluses:

a.       Improving brand value

b.      Escaping corruption

c.       Building customer loyalty

Minuses:

a.       Increasing costs

b.      Potential disagreements etc.

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