Rio Tinto Is and Google Refused To Be, Corrupt, Rule of Law in China

Google hasn’t left yet, but it will.  And, maybe, if they leave quickly enough, they are going to leave with their reputation as a responsible company largely intact.  Yesterday’s bombshell admissions by three Rio Tinto employees that they, collectively, accepted more than $12 million in bribes should be a comforting scene for any Google executives left wondering if they made the right choice.

No, you’re wrong.  This has absolutely nothing to do with international politics. I don’t care what the White House says.  So, stay with me.

In a 2006 essay titled ‘The Many Aspects of CCP Dictatorship,” imprisoned Chinese intellectual Lu Xiabo poetically summed up how the CCP’s tolerance of widespread corruption in government and business is not grounded in individual greed, but rather is motivated by the same self-preservation paranoia which has always been the hallmark of the country’s wide-ranging censorship efforts.

“The regime intentionally maintains a kind of blurry and flexible gray order: it flaunts its rule by law, but practices rule by man; it encourages influential officials and members of the elite to become rich but it also discredits the accumulation of capital by all those with vested interests as a grave original sin…

The dictators thus hold in their hands evidence that enables them to go after anyone at any time.  Yesterday, they cased women with you and called you “brother”; today the might serve you a detention warrant.  In the morning you may be a model entrepreneur worth hundreds of millions who attends a ribbon-cutting ceremony with a high government official; by the afternoon you could be a penniless economic criminal spurned by the entire society….”

His characterization helped me reconcile the facts of both the Rio Tinto scandal and Google’s pullout.

By officially outlawing corruption, while simultaneously letting the Baijiu flow and the headlights of a million new, black Audi A6s shine, the CCP gains tremendous leverage over its own members.  To control non-members, they rig the system so that the Chinese who want to get rich outside of the party system have to do something corrupt; by the time the independent Chinese entrepreneur has made his first hundred million, his case file is already quite thick; from there, CCP membership for that entrepreneur is a foregone conclusion.

Success if you’re born in China and want to do business in China, demands allegiance, demands corruption, whichever way you slice it.

Lu’s allusion to the model entrepreneur struck low and penniless overnight represents countless money-drunk individuals and companies that made the grave mistake of trying to rise above their agreed upon subservience.

Increasingly it looks as if that allusion aptly describes what Rio Tinto is, and what Google refused to be.

The key to understanding why is something I came up with and call the catch;

1) In China, corruption is allowed where it can be monitored, controlled, and won’t interfere with business.

2) If a business grows to the point where it has the potential to negatively impact the interests of the state, then corruption is imposed, whether or not it will interfere with business.

As far as foreign companies with the ability to invest into China are concerned, corruption is bad for business and so they are largely shielded from the Chinese system of gifts and bribery, if they so choose.

When the Rio Tinto affair first broke, in the summer of 2009, Dan Harris a long time transaction lawyer, in China, and author of China Law Blog pointed out that developing market economies, by and large, tempt everyone to take part in corruption, but that China is now different, having wisely figured out that worthwhile foreign businesses don’t feel safe putting money into a market that’s ripe with under the table dealings.

China’s shift in attitude towards foreign businesses has resulted in a parallel system of corporate governance; one for the purely domestic business economy, and one for the foreign corporation. As a result, good China lawyers now advise clients wishing to conduct business to follow the law, to the letter, because the law is guaranteed to be following them.

China has done an amazing job making it clear to its higher level government functionaries that routine foreign company filings are strictly off limits for corruption….My firm has done hundreds of company and trademark registrations in China and not one single time have we ever been hit up for “extra” money and not one single time have we ever felt we were treated unfairly or differently for not making any such offering.

Dan’s co-blogger Steve Dickinson was even more direct in a separate post that addressed the Rio Tinto case.

No commercial advantage is worth spending even one day in a Chinese jail, let alone being subject to the tender mercies of the state security bureau. The only sensible course of action is to avoid all such activity in China. If your business in China cannot be conducted without resorting to unlawful actions, leave China. It is that simple.

This would seem, on its own, to absolve foreign owned Rio Tinto and foreign owned Google of any need for corruption and bribery when doing business in/with China.  More importantly, both companies have the funds to hire as many of the world’s best China law experts as they needed to.

But, that’s where the second half of the catch comes in:

2) If a business grows to the point where it has the potential to negatively impact the interests of the state, then corruption is imposed, whether or not it will interfere with business.

Rio Tinto and Google were both big enough to impact China’s state-level interests.

At the time of Dan and Steve’s writing everyone thought that the Rio Tinto dispute was a quite ordinary one, and there was fairly wide consensus that the Chinese reaction had been magnified by embarrassment at not winning a contract bid.  Gradually, a consensus also developed that if the Chinese claims of bribery were accurate, then the Rio Tinto employees had clearly broken the law.

Yesterday’s admissions afford us a different perspective because of just how large the bribes were.  It speaks of a situation in which it would have been almost impossible for Rio Tinto higher ups not to know what was going on.  I’m assuming that Rio Tinto must have a HR department that’s at least high-school receptionist competent; you know, they can use the phone, and write the occasional email to check up on people, check employee holdings once in a while.

It also speaks of a highly sophisticated effort by Chinese interests to compromise the Rio Tinto operation.  Really, with $12 million dollars on the table one really has to ask who the Rio Tinto employees were loyal to.

This brings us to Google.  How many steps removed is a coordinated cyber espionage effort on it’s systems from a planned attacks on it’s work force through targeted bribes?  What else did Google find out when they realized that it’s accounts were being hacked? Hacked accounts of human rights activists are a pretty flimsy reason to pull out of a country.  And, Google must have known better than to challenge the self-censorship requirement of the Chinese market without a strong reason.

Finding out that my employees were being approached with bribes, and that some of them had actually been compromised…now that’s a thing that can bring a company crashing down.

Had that actually happened, Google’s request to be exempted from the self-censorship requirement would make perfect sense.   What now appears to the outside world as either an attempt to garner special treatment from the Chinese government or a moralistic stance against a perceived evil, would reveal itself to be as the only surefire defense against an attempt by the Chinese government to make it more controllable.

Essentially, (again, had instances of bribery been discovered) Google would have found itself to be on the brink of falling face first into a Catch 22.  According to all the laws set forth for foreign companies they would have been guilty of knowingly tolerating corruption, thereby breaking the law.  If they were to resolve the dispute behind closed doors, then they would have unwillingly accepted becoming a domestic Chinese enterprise, with all the strings involving loyalty to the state that came with it.

Under these circumstances, the only option was to get out.  Asking for a drop of the self-censorship requirement was probably just thrown in because they had nothing to lose by trying.  The extremely unlikely impossible capitulation by the Chinese on the issue of self-censorship would change the entire country and the way business was done.  That would be a big point for Google as far as history was concerned…

I’ll finish with this.

Rio Tinto very likely accepted corruption as a part of life in China, and it may turn out that Google didn’t.  Regardless of the choices their leaders made, both companies are prime examples of how rule of law as it applies to foreign business in China is limited by its parallel existence along side rule by men.  At some point, because the two forms of law can never be mutually exclusive, they are likely to cross, and bad things are sometimes going to result.   Still, when confronted with rule by men, there is always the choice to refuse rule by them.  Google refused.  Rio Tinto didn’t.