In order for a foreign company to be of any scale and success in
China, it has to rely on third parties. Third parties are also one
of the biggest risk areas facing companies operating in China. Here
are five things you need to know about third party risk in
1. Third Parties are riskier than you think
Companies operating in China often focus on gifts and
entertainment when it comes to enforcement risks. But the use of
third parties is going to pose a much larger risk. Why? Companies
face the greatest enforcement risk when they are spending a
significant amount of money, which most often occurs with third
"Although meals and entertainment are going to be a
consistent concern, they will never amount to the same volume of
dollars and, consequently, the magnitude or risk that these third
parties pose." – Nathaniel Edmonds
2. Bribery is going further underground in China
Over the past decade, a persistent regulatory focus on China by
U.S. regulators has led to heightened due diligence on business
partners and more comprehensive financial controls and oversight.
As a result, we are seeing a greater awareness in the market of the
compliance requirements of multinational companies. However, this
increased understanding has in some cases caused improper payments
to shift to new areas, making them more difficult to detect.
"In Mandarin, they say that
– "for every policy, there is a counter
measure." For every new innovation in a compliance program,
there is a work-around or a new strategy to evade that control. For
that reason, compliance programs must constantly evolve."
– Ananda Martin
3. Risks will vary by industry
In different industries, there are varying types of technical
advisors or consultants that are given different names as
corruption schemes evolve. Those third parties are accustomed to
extract large sums of money from a company to create a slush fund
from which money can be passed on to government officials
improperly. What these risky service providers look like is very
industry specific and in some ways business specific depending on
the approach of how a company is going to market.
"Companies need to be very aware of their own specific
risks and should not just look broadly at 'China risks.'
Doing so sometimes misunderstands how specific the industries are
and how each of those employees and business advisors can be
ingenious in their way of avoiding the controls." –
4. Location is a factor
Preventing corruption becomes more challenging the farther you
travel from metropolitan centers. In more remote areas, companies
often find it difficult to implement centralized payment and
procurement systems due to the limitations of local vendors. They
may also find that they have fewer reputable local agents and
consultants to choose from, increasing the risk of conflicts of
interest between those third party service providers and government
"The further you go from 'tier-one' cities like
Shanghai and Beijing, the more likely you will run into due
diligence dead ends." – Ananda Martin
5. For any business in China, third party risks arise with or
without government interaction.
In China, unlike many other countries, there are significant
government interactions at nearly every stage of a business
transaction. Whenever there is a government interaction – and
whenever a third party is interacting with the government on a
company's behalf – that creates risk.
"Some of the most obvious examples are the ones where a
company's customers include the government or state-owned
entities. In those interactions, either in obtaining the contract
or in maintaining that contract afterwards, there are pretty
significant third party risks." – Nathaniel Edmonds
Running a business in China also presents many third party
risks, even when the government is not a customer, because
operating often requires numerous regulatory approvals and
licenses. There are various third parties who can help a company
navigate regulatory complexities, particularly with regards to
licensing and permitting. But in the absence of proper due
diligence, these "advisors" can pose significant risks to
companies unfamiliar with the risks of the Chinese market.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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