The efforts of multinational companies to do business in China is marred by the tradition of Gunaxi – the concept of courting clients and networking that traditionally involves gift giving
A failure to understand local traditions has lead to several US-based companies infringing laws laid out by the SEC. Under the Foreign Corrupt Practices Act, anti-bribery previsions mean offering a payment of money of anything of value to foreign officials in an attempt to influence them is outlawed.
Yet it is considered normal practice in China when networking to wine and dine and give gifts to potential clients. This is where there has been some confusion over the term ‘anything of value’ laid out in the FCPA. Last year saw two high-profile American multinationals paid the price for misinterpreting Gunaxi and infringing the FCPA.
Employees of Pfizer’s subsidiary in China invited high-prescribing doctors in the Chinese government to what they described as meetings. But the events offered numerous recreational and entertainment activities to reward them for past product sales or prescriptions.
Pfizer also created point programs that allowed government doctors to accumulate points based on the number of Pfizer drugs they prescribed. The points could then be redeemed for gifts ranging from reading glasses to mobile phones. They conducted similar persuasion programs in Kazakhstan, Italy and Russia and despite disclosing these activities to the SEC, they were met with a $15m criminal fine.
The American multinational drugs company has since had to undergo a comprehensive worldwide review of its compliance program to prevent these problems from re-occurring. This includes conducting biannual training of employees and executives to ensure they understand the cultural differences and the conditions of gift-giving and hospitality expenditures to government officials try to network with.
In another case, IBM was forced to pay $10m after the SEC condemned their interpretation of the Gunaxi. The Chinese branch of the technology and consulting corporation was condemned for violating the FCPA as it granted travel expenses, gifts and even cash payments to Chinese officials. Unlike Pfizer who willingly exposed their expenses as they were not aware of the ethical infringements, IBM-China employees created slush funds with business partners cover up their spending on the improper gifts for employees of government-owned or government controlled companies. IBM have neither admitted nor denied violating the law, but have agreed not to violate it again and paid the $10m fine issues to them by the SEC.
These cases highlight a need for oversight and training of local staff to ensure proper understanding that what is viewed as ethical in country may not translate into another country’s legislation. In addition to comprehensive training, it is also of vital importance that executives ensure their employees adhere to anti-corruption responsibilities, particularly as more multinationals endeavor to do business with China.