Corruption in China is simply too big a risk for companies operating here to overlook. On September 12 the European Chamber Shanghai office held a seminar on corruption and financial fraud at the Radisson New World Hotel to better educate members on measures that can be taken to avoid exposure. Speakers Ghislain de Mareuil, a lawyer with the firm Paul, Hastings, Janofsky & Walker, and Christopher Torrens, the deputy country manager and director of corporate investigations in China for Control Risks, each gave very informative and relevant presentations.

Corruption is not just a local liability for companies in China, said de Mareuil, who spoke first on the legal aspects of corruption. Many Western companies' home countries have laws on the books prohibiting corruption abroad, in addition to the Organisation for Economic Cooperation and Development (OECD) convention on combating bribery of foreign public officials in international business transactions. Within China, corruption is a hot-button topic, and governments are under pressure to crack down on both officials and companies illegally exchanging money or gifts.

De Mareuil explained the two main categories of corruption - corruption of public officials and commercial corruption. China defines official corruption less broadly than the OECD convention, he said, as money or other gifts must be given to public officials (a category that can include executives at state-owned enterprises) in the company's name in order to obtain an "undue advantage" to qualify. If a company is judged to have received no undue advantage, then there is no corruption. A company promising to pay for an official's son's tuition fees at university in Europe in exchange for being approved for an application, for example, would not be deemed guilty in China, though it would in most other countries.

Commercial corruption involves either giving bribes to another company or non-public official - again, to obtain an advantage it would not have received otherwise - or receiving money or things of "relatively high value". Though what constitutes high value is not explicitly defined in the law - de Mareuil pointed out municipal codes requiring officials to report gifts over RMB200 (US$27, €19) in value as a possible guideline.

The penalties for corruption are serious. If a company is deemed liable for an instance of corruption it can be fined or, worse, its management could be disqualified. In order to shelter themselves from the transgressions of individuals in their ranks, de Mareuil cautioned that companies must institute clear company-wide codes of conduct and maintain tight controls on finance. He also advised that companies put in place a whistle-blowing system for reporting internal misdeeds and look out for "red flags" such as unusual payments and unreasonable transfer prices.

China may have a tough time with corruption, but Torrens said he didn't believe it has any unique cultural characteristics that make it more prone to it than any other emerging market. "It's just bigger and growing more rapidly than any other economy in history," and has had little time to evolve the proper safeguards to deal with it properly. The income gaps within government departments and enterprises, both foreign and domestic, can breed resentment and provide a motive for engaging in white-collar crime. "Once you have a motive, you're halfway there," said Torrens.

Many companies in China leave themselves more open to fraud and embezzlement than they may realise, said Torrens, citing a figure that twothirds of multinational corporations here have no internal auditing mechanism. He advised that companies put tight controls on high-risk areas of their business such as purchasing, sales, inventory, logistics and finance. Managers in these areas should be replaced or rotated on a regular basis, he said - those who refuse promotion or transfer are a red flag, as they usually have a vested interest in staying where they are. "Sixty to seventy percent of information walks out the door through employees," either in their pockets or in hard-to-notice USB drives.

Proper due diligence and thorough screening of potential employees' backgrounds, as well as continually renewed company codes of conduct, are advisable to reduce the risk of financial fraud. While white-collar crime will not disappear, he said, "if you invest the time and money to begin with, it's going to save you lots of trouble down the line."