Dirty Dealings in China: Lucent Was the Warning Shot

Nearly two-and-a-half years after revelations of alleged improprieties at the China operations of Lucent (LU), the U.S. Securities and Exchange Commission has decided to take action against the telecommunications equipment operator. It appears by all accounts that Lucent were very cooperative in the investigation, and that this will work in their favor.

SEC vs. DOJ Suits
Now, if I were an SEC investigator on this case, I'd be thinking to myself "If, as it has been alleged in the course of this investigation, violations of the Foreign Corrupt Practices Act are common and widespread among technology vendors in China, do I a) close the Lucent case and walk away, waiting till we get a report, or b) go out looking to see if the trouble goes further?"

For those of you who may be reading this and thinking with some concern about what you might have done to get a large equipment order in China, let me put your mind (partially) at ease by saying that I'm not sure the SEC is going to go prospecting any place without some sort of cause. Legal ramifications aside, the SEC has plenty to do and probably won't spend the resources to go prospecting.

The big question, of course, is whether the same applies to the U.S. Department of Justice.

And if the stiff-suited men and women from DOJ did start digging into the collective soiled unmentionables of the industry, what would they find?

Corruption: Cost of Doing Business
Those of us who have lived here for some time regularly hear rumors of shady deals and payoffs, stories of children of prominent Chinese officials setting up technology consultancies to act as bag-men between U.S. tech firms and telecommunications operators. But the specifics never seem to line up, and so one is forced to dismiss the rumors of such Grand Graft.

However, Lucent does not seem to be alone. The Washington Post documented three other cases where the SEC had taken action in the last two years.

Indeed, you needn't look very hard to find corruption in business in China. A young lady here in the Hutong took a call from a reputable Chinese insurance firm yesterday. The agent at the other end of the phone, mistakenly thinking that the car the woman was responsible for insuring was a company car, offered her a 30% discount on the insurance, and an immediate 20% kickback on the premium to be paid in cash to the woman. This was not an offer between two people well-aquainted with each other. It was done sight unseen as if nothing could be more natural in the course of business.

In the PR industry, it is not uncommon for a local PR agency (and perhaps some foreign agencies as well, but I haven't heard tell) to pay a reporter on a per-word basis to run positive stories about the agency's clients. Last I heard, the going rate was about 1RMB per character.

I have also heard of reporters paying kickbacks to the media relations people in those agencies of up to 25% of those fees. That may not sound like a lot, but think of this: major technology players will have a million or more characters per year written about them.

I'm not a lawyer, so I'm not sure if any of the above violates the FCPA. But that's not the point.

How Deep is the Snake Hole?
The point is that American firms in China are operating in an environment where not only is corruption pervasive, but where it appears to be a critical part of doing business. It takes an extraordinary organization with committed leadership to resist the temptation to take short cuts, especially when it seems like everyone else is doing it.

So the question is, how deep is the snake hole? How many cases of corruption are out there waiting to be discovered by an intrepid Washington lawyer with a badge? And how will the prospects for U.S. business in China change when the badges start showing up in offices around Beijing?

But here's the most important question: How many executives are going to realize that it's time to start cleaning up the nonsense - big and small - that's taking place in their companies?

Lucent was the warning shot, folks. Time to start taking care of business - before the Feds come calling.

"Here...this big rattler was sleeping in a crate at Cisco's Junkyard. Right when I was gonna open to see what was in her. Jumped right at my face. Scared me so bad I had to kill him without thinking. Gotta be careful where you go pokin'. Who knows what you'll find?"
-- Wesley Bridsong, Lone Star