Office staff work at Rio Tinto Group’s Shanghai office in Shanghai, China

China’s detention of Rio Tinto Group executives amid allegations of espionage and bribery should serve as a reminder to foreign companies that they may also risk prosecution by US enforcement agencies, lawyers said.

By treating information from state-owned companies as secrets, China affirmed the broad definition of public officials under the US legislation, said Shanghai-based lawyer Lesli Ligorner. The July 5 arrest of Rio’s iron ore chief in China Stern Hu and three others in the middle of price talks also underscored the resource’s importance to country, the world’s biggest user of the steelmaking ingredient.

“Negotiating discounts for your company didn’t use to seem this dangerous,” the partner at Paul, Hastings, Janofsky & Walker LLP said. Any company dealing in a highly regulated area such as power, water, cooking supply or raw materials must “be very, very careful” with sensitive information, she said.

China accused the Rio officials of harming its economic interests and security. Rio, the world’s third-largest miner, has denied allegations that its China-based executives bribed steelmakers for information in the iron ore talks.

Rio declines comment

Rio spokeswoman Amanda Buckley declined to comment on whether the company had communicated with the US Securities and Exchange Commission and Department of Justice, which enforce the FCPA, regarding the case.

“In a situation like this, it would be common and expected of the SEC to contact Rio Tinto about the payments and allegations,” said Cassin, author of “Bribery Everywhere, Chronicles from the Foreign Corrupt Practices Act.”

The US Securities and Exchange Commission (SEC) spokesman John Heine and Justice Department spokesman Ian McCaleb declined to comment.

The US with its prohibition on companies and employees offering payments to officials, governments and political parties in other countries, is one of the most active developed countries in fighting graft, according to Transparency International. China ranked 72nd out of 180 nations in the Berlin-based group’s 2008 Corruption Perceptions Index.

Avon, Schnitzer Steel

New York-based Avon Products Inc., the world’s largest direct seller of cosmetics, last year said it voluntarily notified the SEC and DOJ about an internal investigation into FCPA compliance in China. Portland, Oregon-based scrap recycler Schnitzer Steel Industries Inc. agreed to pay more than $15.2 million in 2006 to settle criminal and regulatory probes related to bribes to Chinese and South Korean steel mills.

“Doing business in China in what’s perceived as the normal way is no longer an option,” said Gareth Hughes, the Hong Kong-based head of the China disputes group at London-based Simmons & Simmons LLP, referring to the perception that bribery and corruption is the only way to get things done there.

China wants not just to clamp down on corruption, but to be seen to be clamping down on it, he said. The Chinese Supreme People’s Court and Supreme People’s Procuratorate in November clarified the definition of a bribe to include interests such as home renovations and travel expenses and last month started an anti-corruption hotline for the public to report graft.

In addition to clarifying the law regarding commercial bribery, Chinese authorities have also taken high-profile action on corruption recently, Hughes said.

Death sentences

A Beijing Court this month gave former China Petroleum & Chemical Corp. Chairman Chen Tonghai a suspended death sentence for bribery and the government has been strengthening its anti-corruption laws amid rising public opposition to official graft. Former Beijing Vice Mayor Liu Zhihua also got a suspended death sentence in October for accepting bribes.

Hu, a 52-year-old Australian citizen, has yet to be charged by China, Australian Trade Minister Simon Crean said in Singapore on July 20.

“The challenge or problem is for foreign companies like Rio Tinto not to succumb to easy promises of privileged access, privileged information, or some kind of special step up promising completion of a huge and profitable deal,” said Nicholas Howson, who teaches Chinese law at the University of Michigan Law School in Ann Arbor, Michigan.

While Chinese prosecutors may have a good case, “there are no guarantees that the PRC authorities will exercise the requisite discipline, transparency and due process in the forthcoming prosecution so as avoid walking into a public relations disaster,” Howson added.

Transparency, due process

Australian Prime Minister Kevin Rudd said July 15 that the world is watching how the case is handled and US Commerce Secretary Gary Locke urged “greater transparency” and due process. China said on July 16 that Australia’s comments were an “interference” with the nation’s legal sovereignty.

“This case is a shock to the foreign investment community in China because they’ve shown little interest in … issues of due process there in the past,” said Jerome Cohen, a professor at the New York University School of Law and a member of the New York-based Council on Foreign Relations.

“Business people like to look the other way,” he said. “This shows that they should pay more attention and put more pressure on the Chinese government to meet international standards.”

Source: Bloomberg