Chinese business culture creates potential ethical and legal challenges for US businesses. Imperative to understand and navigate the ethical minefield in China for all doing business there.

1. John Elms

2. • Introduction
• Guanxi defined
• Its uses in Chinese business culture
• How it can go wrong
• Foreign Corrupt Practices Act (FCPA)
• Recommendations

3. • John Elms, Managing Director, Elms & Company, LLC
• Hong Kong Resident 1995-1998
• Entrepreneur Tianjin, China 2001-2003
• CEO SpectraLink Corporation 2003-2007
• CEO Azalea Networks, Beijing 2007-2009
• Chinese language skills at upper-
intermediate level

4. • Relationships between individuals creating
and reinforcing obligations for the continued
exchange of favors
• Strength based on time establishing, depth of
favors, and mutual benefits derived
• Deep personal trust and reliability are at the
core
• Closest western comparison would be the
“good old boy” network

5. • Established through personal favors, most
often entertaining and gift giving, but also
introduction to intermediaries for other
assistance, hiring of offspring, etc.
• Personal and not transferable
• Basis is personal trust and mutual benefit in a
system otherwise lacking
– West relies on contracts, East relies on personal
relationships
• Often how things get done where the rule of
law is lacking

6. • Provides access to new customers and
political guardian angels
• Perpetuates and deepens existing client
relationships
• Facilitates business operations: political,
regulatory, legal, etc.
– Speed of government approvals and time to market
– Avoid scrutiny and over-regulation
– Develop competitive intelligence
– Secure purchase contracts

7. • The Guanxi relationship trumps all other
affiliations and is protected at all costs leading
to:
– Paying inflated prices to help a “friend”
– Pushing deals to preferred distribution partners to help a
“friend”
– Sharing confidential company information to help a
“friend”
– Disclosing competitive bid information to help a “friend”
• Because the guanxi relationship is bilateral, the
“friend” always reciprocates the favor creating
linkage between the acts and therefore an FCPA
challenge.

8. • Enacted 1977
• US Firms doing business in foreign markets
must be familiar with and ensure compliance
• DOJ is chief criminal enforcement agency, SEC
provides civil enforcement for public
companies
• Provides for up to $2 million in fines for
businesses, $100 thousand plus 5 years
imprisonment for individuals
• 120 companies currently under investigation
at May 26, 2009 per DOJ spokesperson [ref. WSJ]

9. • Who: any individual, firm, officer, director,
employee or agent of a firm and any
stockholder acting on behalf of the firm.
• Corrupt intent: payment must be intended to
induce the recipient to misuse his official
position to direct business wrongfully to the
payer or any other person.
• Payment: paying, offering, or promising to
pay (or authorizing to pay or offer) money or
anything of value

10. • Recipient: Must be a foreign official, foreign
political party, or party official or any candidate
for foreign political office.
– Employees of China state owned enterprises
would be considered “foreign officials” under the
FCPA
• Business purpose test: Payments made in order
to assist the firm in obtaining or retaining
business for or with, or directing business to, any
person.
– DOJ interprets obtaining or retaining business
broadly

11. • Unlawful to make a payment to a third party
while knowing that all or part of the payment
will go directly or indirectly to a foreign
official.
– Conscious disregard or deliberate indifference do
not relieve the individual of his/her obligations
• Third parties may include, and often do, joint
venture partners and/or agents
– Local JV partners carry risks for US firm
– Agents do not obviate the risks

12. The burden is on the accused to
demonstrate that payments made
were not in violation of the FCPA
Know what is going on in China at
all times

13. • Unusual payment patterns/financial
arrangements
• History of corruption in the country or
industry
• Unusually high commissions or discounts
• Lack of accounting transparency
• Lack of qualifications to perform the work
contemplated
• Fulfillment partners that have been selected
by government officials

14. For more information and recommendations on ensuring
compliance, contact:
John Elms
john@elmscompany.com