Avoiding trouble in China

In the last three decades, China has shown stunning economic and social progress. However, its super achievements have come at a cost — the dramatic resurgence of corruption and widespread fraud. Here are ways that multinational companies can keep out of trouble in China.

UTStarcom, a U.S.-listed firm with Chinese roots, paid US$7 million for hundreds of overseas trips by the personnel of Chinese state-owned enterprise (SOE) telecom firms for so-called "customer training." Actually, the trips were sightseeing jaunts to flashy tourist and gambling spots including Las Vegas, Hawaii and New York.

How does this kind of racket work? Executives of major SOEs typically demand "product inspection" trips financed by U.S. manufacturers with a budget of US$4,000 to US$6,500 per person for spending 14 days in the U.S., Europe or Australia.

A typical itinerary includes New York, Las Vegas, Los Angeles and Hawaii, or trips to Australian cities with a Thailand leg, or with Rome, Madrid and Copenhagen thrown in.

The parties discuss such provisions with the manufacturer's Chinese SOE distributor, but the official contract doesn't include the production inspection trips' budget, except perhaps for a vague mention of "buyer's rights to inspect goods."