Foreign Executives Need to Exercise Due Care in China

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Op-Ed Commentary: Chris Devonshire-Ellis

Aug. 23 – With the recent news that British consultant Peter Humphrey has now been formally arrested in the wake of the GSK bribery investigation, foreign executives in China need to take note and realize that China is toughening its stance on illegal activities.

During the era of both Jiang Zemin and Zhu Rongji (and to some extent Hu Jintao and Wen Jiabao), China tended to leave foreign executives and foreign nationals alone in China; particularly those from the West. Wary of media exposure and a long recognized failure to clamp down on dubious Chinese suppliers, such executives were previously given quite a bit of slack in their behavior in the country. Accordingly, minor abuses and technical breaches of Chinese law were numerous in these eras, such as executives working in China on tourist visas, or representative offices billing in RMB, or companies keeping payments to Chinese employees off the books; and China often chose to let these things slide, or to “look at it with one eye.” Those days have now come to an end.

While it is still unclear what misdemeanors Humphrey is being accused of, one reason being touted is that he purchased “private information” – a criminal offense in China. If true, that itself propels Humphrey somewhat bizarrely into the realms of other erstwhile whistleblowers such as Assange, Manning and Snowden – but with a crucial difference – here money has allegedly changed hands for the provision of illicit information. No matter whether one views the parameters of that as being the nudge-nudge information on a racehorse, insider dealing on the stock exchanges, or the low down on communist party officials, it remains, as soon as cash passes hands, a corrupting influence. All mainstream societies seem to agree on this fundamental point. When money changes hands, it is a bribe.

What is apparent is this: in being formally arrested, Humphrey is almost certain to face charges and, if so, highly likely to face a criminal trial. Given that 98 percent of China’s cases end up with a guilty verdict, and that the authorities must know that international media will be following the case, it appears that Humphrey probably did engage in practices deemed illegal. It is also unlikely that Humphrey was not aware of the potential consequences of any illegal actions, as he is a long-term China hand and speaks Mandarin fluently. Naivety concerning China in his position cannot apply. The difference is that while dubious business practices may have been tolerated in the past, today they are not. Whatever Humphrey had been doing – he got caught and now has to explain his actions in a court of law. While it remains relatively unusual for foreign executives to face criminal charges in China, that should not be used to mask the fact that if laws are broken, there are consequences. As a British national brought up within a highly evolved criminal legal system, and a career background that included a stint with PwC, Humphrey must have been well aware of the risks in offering money for such information. The arrest of both him and his wife, who jointly run the fraud investigation company ChinaWhys, probably also spells the end of his business, leaving little reward for his years of work.

The woes of Humphrey coincide with a “toughening” of visa regulations for foreigners. This too, has come in the wake of scandals involving wanted foreign pedophiles found employed in Chinese junior schools, and a whole host of expatriate job seekers “winging it” and being placed in positions they are not actually suited or qualified for. As a consequence, China job applicants are now firmly required to have two years’ relevant work experience before being considered eligible for an employment permit and visa (which I find tough on interns looking for China-related work experience), and Beijing has introduced new regulations requiring all expatriates to provide non-criminal record certificates – a regulation almost certain to be applied in other major cities.

That China is clamping down should be of no real surprise. The country has been pretty tolerant of expats arriving and finding jobs over the years, even as bar staff or as unqualified English teachers in schools (the latter an abuse that would not be tolerated in their home country). Chinese immigration authorities have also turned a blind eye to executives entering China multiple times on tourist visas. Why not just get a work permit? The constant applying for such visas is indicative of something not quite right in that expatriate’s workplace, and consequently marks them out as “low quality” or even undesirable. The United States and the EU are strong on illegal immigration, whereas China has been lax. But that doesn’t mean that is going to continue, and it won’t. With unemployment rates high in Europe, and to some extent the United States, a wave of perhaps not particularly talented or even desirable expatriates has been arriving in China to get a job. Unfortunately, some have proven to be more problematic than beneficial to the Chinese economy.

Accordingly, although the headlines seem to be suggesting that China is “cracking down” on expatriates, that’s not really true. The country wants to attract the best talent and to safeguard itself from the mediocre and potentially criminal. At the same time, it is pointing out to longer term expatriates (some of whom can become rather arrogant to be frank) that they need to abide by the law. Some long-term expatriates seem to feel they are so well connected and know China in such detail that they can penetrate its legal system and work outside of that without peril. Again, that may have been the case in the past, but it is not the case now.

That the likes of both long-term China hands and new-to-China expatriates appear to be targeted is irrelevant. Twenty-five years ago, when I first started working in China, I was given some simple advice – “Always remember you are a guest in China.” That still holds true, and the simple, and not unreasonable, message to expatriates in China today is this: Abide by the law. And that is fair enough if you intend to make a career in the country.

Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates – a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia.

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2 thoughts on “Foreign Executives Need to Exercise Due Care in China

    See also: http://www.theguardian.com/world/2013/aug/27/glaxosmithkline-case-charges-british-american

    My guess is they’ll press small charges and deport. Enough to ruin his China business, close it down and make sure he never comes to China again. The way ahead: probably consultancy back in London, albeit with a strict overview at any management level. But either way I think Peter in China is now a thing of the past. An example of a man who crossed a line imho, and in a foreign invested n industry asking for trouble. Peter will paint it as bravery, but the road into China is littered with corpses, and a dead career man is no use on the ground, sad to say, what and who you know is outmoded within months. Good luck Peter with what I hope will amount to be just permanent gardening leave and nothing more serious – CDE

    Peter on TV in handcuffs on Chinese TV, admitting guilt: http://www.telegraph.co.uk/finance/china-business/10267827/British-investigator-admits-wrongdoing-on-Chinese-TV.html

    This will have been part of a plea bargain to reduce sentencing, the Chinese tend to let people off if there is a public apology. There is some element of being treated as a scapegoat in this, and the public humiliation will prevent, for a while at least, fraud investigation companies from their activities in China. There are several that have been in China for some time and I understand the CR’s of many of them have hightailed it out of the country.

    It’s all over now for Humphrey in terms of a China career, all that remains is to see how lenient or otherwise any sentencing is. This confession and the fact he and his wife have a young son will count in their favor. Sad, but this is what happens if you run illegal business activities in the country.

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