China, Contracts, International Law

How To Do Business In China Without Jail Time? Kill A Chicken

China belongs to the Chinese, and they do not particularly want foreigners there. How can you practice law in such an environment? Very carefully.

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I re-watched the movie The Painted Veil (the 2006 version with Naomi Watts and Edward Norton) this weekend. It’s a decent movie with a pretty thin plot, but I love its cinematography and its depiction of 1920s China.

I also love the lessons it teaches for surviving China.

The movie does a good job conveying how China viewed its foreigners back then. That is, China belongs to the Chinese, and they do not particularly want foreigners there — even doctors there to save lives. Foreigners are in China only to the extent that it makes sense to have them there, and they will never be treated the same as Chinese people.

When it comes to modern-day Chinese commercial law enforcement, the perceptions and the treatment of foreigners have not changed all that much…

Typically, both Chinese companies and foreign companies must adhere to the same laws, but the enforcement of those laws as against Chinese companies has little or nothing to do with the enforcement of those same laws as against foreign companies. Even if Chinese companies seem to be able to skirt China’s laws at will, the Chinese government will strictly and zealously apply those laws against you.

Way back in 2006, I wrote about how foreign companies doing business in China should be aware of how they will be treated differently from Chinese companies and act accordingly:

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We are aware of a Fortune 500 retail company that is opening units in China that meet or exceed the toughest United States environmental laws. I estimate this company’s environmental sensitivity will cost them at least an additional $25,000 per unit, yet I am firmly convinced this company is doing the right thing.  This company’s actions make sense because the odds are good that China’s environmental laws and enforcement will get tougher over time, and building environmentally sound units now will almost certainly cost less than having to retrofit existing units a few years from now.  On top of this, people often get very emotional about the environment and I can see Chinese citizens getting very angry at a foreign company whose units in China are less environmentally sound than their units in the United States or elsewhere.  This is obviously even more likely to be the case if there were to be some sort of environmental disaster.

A few months earlier, someone left the following dead-on comment on our blog, which goes right to the heart of the different legal treatment foreigners in China should expect:

When in China, do as the law says, not as the Chinese do. The laws are not intended to be enforced fairly – they’re there to be interpreted and enforced as local government sees fit to protect their clan, kin and cash-cows.

The ongoing China bribery allegations against GlaxoSmithKline highlight the legal double standard to which foreign companies are subjected in China and in his blog post, Big Pharma, Bad Medicine, and What GSK Can Teach MNCs in China, David Wolf, Managing Director of Allison+Partners’ China Practice, used GSK’s China situation as an example of why the Chinese government loves going after foreign companies on bribery charges:

In so doing the government has sent a powerful message not once, but twice: no industry or company, however vital to the well-being of the Chinese people, will be allowed to engage in illegal and unethical business practices, and the foreign firms will be punished first and with greatest vigor.

In so doing, the government accomplishes three aims: it slows or stops practices likely to enrage the populace; it sends an unequivocal warning to its own local industry; and it cripples or eliminates foreign competition for its own local firms.

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Wolf then provides the money quote, which any foreign company doing business in China ignores at its own peril:

To every other multinational company in every other industry in China, ask not for whom the bell tolls. Xi Jinping’s administration has put the world on notice that no matter what local firms do, unethical and illegal business practices on the part of multinationals in China will no longer be tolerated, and in fact they’re coming for the foreigners first.

It is time for an immediate and thorough self-examination for the kinds of business practices that will not withstand government or public scrutiny. The time to clean up is right now, even if it cost contracts, relationships, and hard-won business. Failure to do so only puts off the reckoning and ensures that the cost will be much higher when that reckoning comes.

Wolf ends his post by concluding that the future in China will belong to foreign companies “prepared to live and die by a better standard of behavior, not to those who follow the lead of the meanest actors in the market.” In other words, you can forget about the “everyone else is doing it” defense.

How can foreign companies doing business in China operate so as to avoid legal trouble? At minimum, they should be doing the following:

  • Have Rules. You cannot expect your China employees to follow ethical rules if you do not have such rules in place. You should make clear your stance against corruption when hiring, in your policy manuals, in your contracts, and in any due diligence you conduct of third parties. Needless to say, your company rules should be in both Chinese and in English.
  • Make Sure Your Rules Are Being Followed. Do not stick your head in the sand. If your China office is doing exceptionally well, there may be a reason for that. If it is doing exceptionally badly, this probably puts it at even greater risk. Make it your job to know what is going on in your China office, beyond the numbers in its accounting statements. If your China office is not following your company rules, you have a problem.
  • Make Sure Your China People Know That Your Rules Exist for a Reason. I cannot tell you how many times I have heard of Chinese employees who, when confronted about a rules violation, insisted they had broken the rules to benefit the company, because they thought the rules existed only to create plausible deniability. You must make sure that your China employees know that you truly do expect them to follow your rules and that there will be severe punishments for those who don’t.
  • Severely Punish/Fire Those Who Violate Your Rules. You want your people to know that you take your rules seriously? Kill a chicken.
  • Know the Laws. You cannot have good rules without knowing what is legal in China and what is not. This means that someone in your company — with the power to implement changes — must stay current on the laws and regulations that affect your business.

Got it?

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.

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