Rio Tinto case is reminder to keep watchful eye
April 16, 2010 | BY
clpstaff &clp articles &In addition to tightening internal control policies, international companies need to be aware of which of their Chinese executives are most exposed to…
In addition to tightening internal control policies, international companies need to be aware of which of their Chinese executives are most exposed to corruption and likely to bring risk to the company.
On March 29 2010, the Shanghai No. 1 Intermediate People's Court handed down its verdict to four defendants in the Rio Tinto corruption case. All were found guilty on charges of bribery and stealing commercial secrets, and sentenced to jail terms ranging from seven to 14 years.
The trial was closely watched by the international business community in China, viewing its proceedings and outcome as a barometer for how the PRC courts would handle foreign firms. Some Australian officials deemed the sentences overly harsh, but the Chinese government maintained the punishment was in line with the seriousness of the crime.
This case has brought to light once again, how crucial it is for foreign companies to keep a stringent watch on all parties involved in its business, from executives to intermediary parties.
“Corporate governance cannot simply mirror overseas practices, but must be run on a sliding scale, pinpointing high-risk departments and individuals within the company,” said Nicolas Groffman, a partner in Beijing at Mallesons Stephen Jaques.
He pointed out that areas needing particular attention are market research activities, where commercial or state secret issues might arise, and relationship strategies that involve government and state-owned enterprises.
“In-house counsel should not simply lean back in their chairs and tell the business people what the Foreign Corrupt Practices Act (FCPA) says and what the Chinese law says, with dire warnings of the consequences,” said Groffman. “You need to engage with and assist your colleagues in navigating the environment with minimum risk.” He admitted this is “extremely difficult”, but worth trying to implement.
Groffman listed other internal control measures that counsel should reinforce:
- Focused training: Companies must ensure all its employed individuals are aware of how far they can go in dealing with third parties, in particular government authorities and state-owned enterprises.
- Compliance advice: Companies ought to seek professional advice for their compliance regimes and issues.
- Use of agents: Companies should have strict internal policies about how they hire agents and whom they report to.
“This is one of the biggest liability areas for internationals,” said Groffman. “Many wrongly believe that because independent agents are not part of the company group, the actions of those agents will not bring about liability for the company.”
- Due diligence: The FCPA section should be thorough and blended into the overall due diligence, not stuck out separately.
- Probity checks: Companies should ensure these checks are routinely done on individuals whom they will work with. CM
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