Case study 2: Vietnam Corruption

Case study 2: Vietnam Corruption

Assignment 2 – Read the Attached Case – Coping with Corruption in Trading with Vietnam Total Marks – 30 ( weightage 10%)

Answer the Question #s 1& 2 together and 6&7 together

In addition to the case, you are expected to do your own research to add supporting details for your answers to your answers – Think in terms of why, why not , how etc to add details

You may use Newspaper/Magazine/Journal articles , Research Reports, World bank Data, Stats Canada, Government websites etc (NO Wikipedia!!). You are also advised to support your answers with textbook concepts from the relevant chapters You are expected to include at least 8-10 secondary sources (in total ,other than the case) to support your answers

Provide a cover page

Type your answers in 12 point, Times New Roman font ONLY, 1.5 line spacing, normal margins and spaces.

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Referencing: Do not copy-paste any information from any source. You are required to analyze and paraphrase your research. Use APA style for references with in-text referencing and complete references in the end. Please click on this link to see example of APA referencing basics – https://owl.english.purdue.edu/owl/resource/560/02/

Your answers will be marked for the following –

1. Content – your answer should be comprehensive, make sure to cover all sections of the question with correct and convincing supporting arguments.
It is strongly recommended that you provide separate paragraphs, headings etc to organize and provide a better flow to your answers.

2. Writing (5 marks)– structure ( provide headings and sub-headings), flow, grammar, spelling and punctuation

3. Referencing ( 5 marks)– APA style

Coping with Corruption in Trading with Vietnam
1See http://www.transparency.org for more details
Corruption is a fact of life in China. In fact, Transparency International, a German organization
that applies its Corruption Perception Index (CPI) globally,1 rates China with a CPI of 3.6 and is
number 75 of the 183 countries rated. New Zealand is rated the least corrupt at number 1 with a
CPI of 9.5, the United States at 1924 with a CPI of 7.51, and North Korea and Somalia the most
corrupt at number 182 with a CPI of 1.0. The country’s press frequently has detailed cases of
corruption and of campaigns to crack down on bribery and other forms of corruption. The
articles primarily have focused on domestic economic crimes among Chinese citizens and on
local officials who have been fired, sent to prison, or assessed other penalties.
There is strong evidence that the Chinese government is taking notice and issuing regulations to
fight corruption. Newly issued Communist Party of China (CPC) regulations on internal supervision
and disciplinary penalties have raised hopes that the new regulations will enhance efforts
against corruption. The regulations established “10 Taboos” for acts of party members that
violate political, personnel, and financial regulations and who are involved in bribery,
malfeasance, and infringement of others’ rights. The taboos included lobbying officials of higher
rank, handing out pamphlets or souvenirs without authorization, holding social activities to form
cliques, and offering or taking bribes. Also on the list were making phone calls, giving gifts,
holding banquets or conducting visits to win support, covering up illicit activities, spreading
hearsay against others, using intimidation or deception, and arranging jobs for others. Some
believe that the execution of three bankers, for “a run-of-the-mill fraud,” just before the
Communist Party’s annual meeting, was an indication of how serious the government was about
cracking down on corruption.
Much of China’s early efforts to stem corruption were focused on activities among domestic
Chinese companies and not on China’s foreign business community. Traders, trade consultants,
and analysts have said that foreign firms are vulnerable to a variety of corrupt practices.
Although some of these firms said they had no experience with corruption in China, the majority
said they increasingly were asked to make payments to improve business, engage in blackmarket
trade of import and export licenses, and bribe officials to push goods through customs or
the Commodity Inspection Bureau, or engage in collusion to beat the system. The Hong Kong
Independent Commission Against Corruption reports that outright bribes, as well as gifts or
payment to establish guanxi, or “connections,” average 3 to 5 percent of operating costs in the
PRC, or $3 billion to $5 billion of the $100 billion of foreign investments that have been made
there. The most common corrupt practices confronting foreign companies in China are examined
here.
PAYING TO IMPROVE BUSINESS
Foreign traders make several types of payments to facilitate sales in China. The most common
method is a trip abroad. Chinese officials, who rarely have a chance to visit overseas, often
prefer foreign travel to cash or gifts. (This was especially true when few PRC officials had been
abroad.) As a result, traders report that dangling foreign trips in front of their PRC clients has
become a regular part of negotiating large trade deals that involve products with a technological
component. “Foreign travel is always the first inducement we offer,” said an executive involved
in machinery trade. In most cases, traders build these costs into the product’s sale price. Some
trips are “reasonable and bona fide expenditures directly related to the promotion, demonstration,
or explanation of products and services, or the execution of a contract with a foreign government
agency,” but it may be another matter when officials on foreign junkets are offered large per
diems and aren’t invited specifically to gain technical knowledge.
Foreign travel isn’t always an inducement—it also can be extorted. In one case, a PRC bank
branch refused to issue a letter of credit for a machinery import deal. The Chinese customer suggested
that the foreign trader invite the bank official on an overseas inspection tour. Once the
invitation was extended, the bank issued the letter of credit.
ANGLING FOR CASH
Some MNCs are asked to sponsor overseas education for the children of trading officials. One
person told a Chinese source that an MNC paid for that individual’s U.S. $1,500-a-month
apartment, as well as a car, university education, and expenses.
Firms find direct requests for cash payments—undeniably illegal—the most difficult. One wellplaced
source said that a major trader, eager for buyers in the face of an international market
glut, had fallen into regularly paying large kickbacks into the Honduran, U.S., and Swiss
accounts of officials at a PRC foreign trade corporation. Refusing to make payments may not
only hurt sales, it can also be terrifying. A U.S. firm was one of several bidders for a large sale; a
Chinese official demanded the MNC pay a 3 percent kickback. When the company
representative refused, the official threatened: “You had better not say anything about this. You
still have to do business in China, and stay in hotels here.” Not surprisingly, the U.S. company
lost the deal.
Traders of certain commodities may be tempted to resort to the black market for import and
export licenses that are difficult to obtain legally. A fairly disorganized underground market, for
instance, exists for licenses to export China-made garments to the United States.
Some branches of the Commodity Inspection Bureau (CIB) also have posed problems for traders.
Abuses have emerged in the CIB since it started inspecting imports in 1987. A Japanese
company, for instance, informed CIB officials of its intention to bring heavy industrial items into
China—items that had met Japanese and U.S. standards. The officials responded that they
planned to dismantle the products on arrival for inspection purposes. The problem was resolved
only after the firm invited the officials to visit Japan. Some traders get around such problems by
purchasing inspection certificates on the black market. According to press accounts, these forms,
complete with signatures and seals, can be bought for roughly U.S. $200.
Some claim that, for the appropriate compensation, customs officials in a southern province are
very willing to reduce the dutiable value of imports as much as 50 percent. Because the savings
can far exceed transport costs, some imports that would logically enter China through a northern
port are redirected through the southern province.
The new Communist Party of China (CPC) regulations address some of these problems, but
unfortunately, the new law raises more questions than answers. Two kinds of bribes are covered
under the new law: The “Criminal Law of the PRC,” known as common bribery, applies to the
bribery of state officials and employees of state-owned enterprises, which are most of China’s
large companies. Anyone who demands or accepts money or property in return for benefits is
guilty of bribery. The other is the “Law Against Unfair Competition of the PRC,” known as
commercial bribery. It prohibits businesses from giving money or property to customers to sell
or purchase products.
The law is confusing in that it says nothing about punishment for gifts and benefits costing less
than $600 or even whether these transactions can amount to bribes. Thus, tickets to sports events,
which can cost several hundred dollars, wining and dining executives, or even pharmaceutical
samples to physicians remain in a gray area. The only clue is that Communist Party guidelines
prohibit members from accepting gifts exceeding $500 but that doesn’t necessarily mean that
gifts under $500 won’t be considered a violation of the law. The trouble with China’s bribery
laws is that they can be interpreted to apply to any gift at all.
AN ILLUSTRATION
Here are some excerpts from a trial concerning a Chinese bank, a Chinese consultant, and several
U.S. companies in which charges of bribery, among other issues, are involved. The list of
charges, countercharges, and alleged bribery will give you a sample of the types of behavior that
can arise in a transaction where bribery is rampant.
A Chinese company alleged that it got pushed out of a lucrative business deal because an
American software company secretly funneled money to powerful Chinese government officials
to ensure a profitable banking contract. In court filings, lawyers for the Chinese company said
they had obtained copies of detailed e-mails and other records that show that the American
company paid over a million dollars in fees to a consultant for services in addition to reimbursing
the consultant about $170,000 in expenses covering an array of gifts, hotels, shopping sprees,
and entertainment costs.
The suit also contends that the American company arranged through the Chinese consultant for
two Chinese banking officials and family members to travel on vacation to Hong Kong, Paris,
Rome, Las Vegas, and the golfing resort of Pebble Beach, California. These trips were arranged
by a consultant who was reimbursed for an array of gifts given to the Chinese bankers and their
families. The gifts included expensive Sony cameras, luxury outfits from Versace and Burberry,
and perhaps even a $330,000 apartment in Shanghai.
The suit says an American company official e-mailed another company executive saying the
chairman of China Construction Bank was interested in playing golf at “Cobble Beach” (he
thought he meant Pebble Beach). Soon after, the American company paid for the chairman’s
hotel, car services, and green fees in Pebble Beach. After the chairman expressed an interest in
seeing Florida, the lawsuit says the American company sent its corporate jet to fly him from San
Francisco, where he had been visiting with another U.S. company, to its headquarters in Florida.
The lawsuit also charges that the American company reimbursed the consultant for tickets the
chairman’s wife and son used to travel in China and the United States. The lawsuit claims it also
paid for his son’s tennis club fees in Shanghai and golfing fees in Shenzhen and for the daughter
of the bank’s chief information officer to travel to Europe.
The American company contended that all payments made to the consultant and all the business
trips by the Chinese officials the company paid for were legitimate costs of doing business in
China. It is the price the company had to pay to help secure a huge software contract with China
Construction Bank worth about $176 million.
It is important to note that this is an illustration of a civil lawsuit between two companies and
does not involve charges by the U.S. government and possible violations of the FCPA. However,
the report indicated that the Justice Department was looking into the charges.
TWO COMMENTS ON DEALING WITH CORRUPTION
Comment of a Consultant As the head of one U.S. consulting firm asserts, “Corruption is a
huge issue, it’s systemic. Whether it’s self-dealing, phantom suppliers, kickbacks, intellectual
property theft or inappropriate dealings with governmental officials, crime and corruption are
risks companies face when operating in China. There are many instances where, unbeknownst to
the U.S. company, various payments are being made under the table. The company’s credo, the
company’s standard operating procedures, the company’s code of conduct, corporate
governance, best practices—all of that needs to be ingrained and it needs to be accepted. There
has to be constant training and constant reminding” to the local Chinese staff. Chinese culture is
“very different” from Western culture. As such, “a U.S. company cannot simply translate its
compliance policies and procedures into Chinese and expect them to have the same effect as in
the U.S. The entire approach must be tailored to the Chinese environment.”
Comment of Former U.S. Foreign Service Agent A retired agent of the U.S. Foreign
Service raises questions about how strictly the Foreign Corrupt Practices Act is enforced. The
economics officer of the U.S. Foreign Service says he intentionally subverted the intent of the
Foreign Corrupt Practices Act so U.S. investors and exporters would not lose out unfairly to
companies and agencies from other foreign countries.
“I figured out how business was actually done in corrupt countries, who was on the take, whether
the going rate for host country cooperation in a particular type of transaction was 10 percent or
25 percent and who was good or bad as a go between.”
“I would tell Americans trying to do business in the host country: ‘Don’t tell me about any
corrupt practices you are engaged in, because I am obliged to write that up and report you to
Washington, but do tell me in detail about corrupt activities by competing foreign companies. In
return, if your information is interesting, I’ll give you my best guess on how corruption works
here.’ By doing this I hope that I have helped level the playing field.”
QUESTIONS
1. List all the different types of bribes, payments, or favors represented in this case under (a)
FCPA, (b) Criminal Law of PRC, and (c) Law Against Unfair Competition of the PRC. Why
is each either legal or illegal?
2. For those practices that you listed as illegal, classify each as lubrication, extortion, or
subornation, and explain your reasoning. You can provide similar examples from
international business to support your reasoning
3. Which of the payments, favors, or bribes are illegal under the Foreign Corrupt Practices Act
(FCPA)?
4. Assuming that the FCPA did not exist, what is the ethical response to each of the payments,
favors, or bribes you have identified? Read the section titled Ethical and Socially
Responsible Decisions in Chapter 5 as a guide to assist you in your decision.
5. In your view, which of the expenses detailed in the lawsuit could be in violation of the
FCPA, and which could be legitimate business expenses as the American Company
contends? Discuss.
6. Discuss the legal/ethical issues raised by the comments by the retired Foreign Service agent
and the consultant.
7. List alternatives to paying bribes in international markets and discuss the plusses and
minuses of each by giving factual real international business examples.
Sources: Walter H. Drew, “Corrupt Thinking,” Foreign Policy, May/June 2005; David Barboza,
“Charges of Bribery in a Chinese Bank Deal,” The New York Times, November 29, 2006; “India,
China Ranked 72 out of 180 in Corruption Rankings,” The Hindustan Times, October 8, 2007;
“Take Great Care in Choosing Partners: Corruption Rampant, but Lately Its Drawing
Government Attention,” Business Insurance, March 26, 2007; “China’s Communist Party Issues
List of ‘Taboos’ Ahead of Politician Reshuffle,” International Herald Tribune, January 4, 2008;
“China Lists New Anti-Graft Rules,” BBC News, January 4, 2008; Transparency International,
2012.

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