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How Chinese Corruption Puts the West at a Disadvantage

November 26, 2018
Of the twenty most corrupt nations on Transparency International’s list of “most corrupt nations”, ten are located in sub-Saharan Africa alone. As African countries seek to develop and attract foreign investment, Westerners have raised increasing concerns about the prevalence of corruption across the continent and its impact on business. Then-Vice President Joe Biden told a conference of African leaders in 2016 that corruption represents a “cancer” which “not only undermines but prevents the establishment of genuine democratic systems [and] stifles economic growth and scares away investment.”[1]

Chinese companies have increasingly sought to gain a presence on the African continent, mirroring a strategic effort by China that includes the first Chinese base on the continent in Djibouti. From 2000 to 2015, China’s Export-Import bank gave African countries over $63 billion in developmental loans, over $12 billion more than the World Bank.[2] China’s “One Belt One Road” initiative promises billions more in direct investment in Africa, particularly aimed at improving existing transportation networks.

With the Chinese drive to increase economic influence in Africa has come notable instances of corruption. In 2017, the Department of Justice accused a Chinese businessman of bribing the Foreign Minister of Uganda (who at the time was serving as the President of the UN General Assembly) in exchange for business favors. The Justice Department has accused Chinese Businessman Patrick Ho of funneling $2 million to Chadian dictator Idriss Deby in exchange for the commutation of an environmental fine.[3]

FCPA and Africa

American companies that engage in overseas bribery are punished under the Foreign Corrupt Practices Act (FCPA) of 1977. In May 2017, a consultant to Och-Ziff Management (who happened to be the son of Gabon’s President) was sentenced to two years in prison for his role in coordinating a bribery scheme that targeted government officials in countries including Niger and the Democratic Republic of the Congo, in exchange for mining rights. One bribe involved $4 million funneled to Niger officials for Uranium mining rights on a project Och-Ziff was involved in, spending that was later classified as “investment” on SEC filings.[4]

European and OECD countries are similarly strict with their enforcement of corresponding foreign bribery statutes. Italian prosecutors allege that a senior ENI (the state owned oil giant) executive and Shell executives paid $1.3 billion to Nigerian officials for oil rights, knowing it would be transferred to companies controlled by a man named Dan Etete (who was the former oil minister) and kickbacks would be paid to the executives. The ENI prosecution represents one of the largest bribery scandals to hit the oil industry, and has caused Western executives to use extra caution in the face of increasingly vigorous enforcement. According to the OECD (a club of rich countries), corruption investigations within member countries have increased 25% from 2015 to 2016.[5]

The Corruption Challenge

In the competition to unlock Africa’s economic potential, most experts agree that stricter enforcement of foreign bribery laws in the West puts American and European companies at a competitive disadvantage to Chinese ones, at least in the short term. “If I am an American company and I want to do a deal, particularly in Africa and less developed areas, and I am approaching African officials but losing out because Chinese companies are bribing those officials, I am going to be irked,” Rob Precht, president of New York-based legal think tank Justice Labs. Although China formally adopted a foreign bribery law to comply with the UN Convention Against Corruption in 2011, it has done “next to nothing to enforce it,” said Andrew Spalding, an expert on international corruption.[6]

The more vigorously the U.S. and EU enforce foreign bribery statutes, the greater the Chinese advantage becomes as western companies find it harder to do business or are blocked from opportunities by Chinese firms behaving unethically. China has participated in what can best be described as a willful disregard of malfeasance committed by its companies abroad. The unintentional side effect of a vigorous implementation of foreign bribery laws is unfortunate, as it harms often law-abiding actors at the expense of foreign rule-breakers.

Consequences of Chinese Bribery

The disparity in enforcement may have contributed to China’s growing economic hegemony over the continent. Chinese goods trade with Africa grew to $188 billion in 2015, compared with $53 billion with the United States in the same year. According to experts, many African nations prefer Chinese money because it comes without the demands for improvements in human rights and democratic institutions that western countries impose.[7]

Broadly, stricter enforcement of foreign bribery laws leads to companies exercising more caution in their dealings with foreign officials, many of whom may expect gifts or bribes. Italy’s decision to prosecute ENI executives for paying a standard license fee with the understanding the money would be used illegally heightens the legal standard for foreign bribery.[8]

Western companies, fearful of corruption prosecutions at home, must compete on an uneven playing field with Chinese firms that have the ability to offer bribes with relative impunity. In the case of Chad, a company such as ExxonMobil or Royal Dutch Shell would most certainly face legal repercussions for arranging a bribe in order to avoid an environmental fine. Yet the Chinese National Petroleum Corporation (CNPC) was alleged to have arranged such a bribe and has not been held responsible as a corporation by the Chinese government.

Potential Solutions

Although some in the business community would like to see the FCPA weakened or repealed entirely, the FCPA plays a key role in fostering legitimate development and promoting business partnerships in foreign countries. Thankfully, Europe and America lack an appetite to rescind foreign bribery protections. Such an action would almost certainly worsen the bribery situation. Companies operating in foreign countries do not and cannot have the responsibility for changing decades of poor governance in Africa. Companies only have the moral duty to behave ethically and fairly in another country.

The United States and its allies must confront China and demand enforcement of the UN Convention against Corruption, an international treaty to which China is a signatory but does not abide by. This is the only possible way to incentivize financially anti-corruption efforts. Continuing a dialogue with African countries and rewarding those which take concrete and meaningful actions to combat corruption is a surefire way of promoting responsible growth. The worst possible outcome would be for western companies to avoid Africa entirely, and cede economic power in this emerging continent to others. It is up to the international community to change that, starting with a hard line against foreign countries and companies who feed the cycle of corruption without demanding a change. In the long term, Western, African and Chinese businesses benefit from a fair playing field.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

   [1]https://www.voanews.com/a/corruption-concerns-tain-buregeoning-china-africa-trade/2432469.html

   [2]https://www.washingtonpost.com/news/monkey-cage/wp/2017/07/24/chinas-belt-and-road-opens-up-new-business-in-africa-for-both-the-u-s-and-china/?utm_term=.85f280e54944

   [3]https://www.cnn.com/2018/02/09/world/patrick-ho-corruption-china-africa/index.html

   [4]https://www.bloomberg.com/news/articles/2017-05-31/och-ziff-fixer-in-africa-sentenced-to-two-years-in-prison

   [5]https://www.wsj.com/articles/inside-the-bribery-scandal-thats-sweeping-through-the-oil-industry-1518543648

   [6]https://edition.cnn.com/2018/02/09/world/patrick-ho-corruption-china-africa/index.html

   [7]https://edition.cnn.com/2018/02/09/world/patrick-ho-corruption-china-africa/index.html

   [8]https://www.wsj.com/articles/inside-the-bribery-scandal-thats-sweeping-through-the-oil-industry-1518543648

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