Bribery charges often involve a company making illegal payments to government officials in order to land lucrative contracts.

For example, in April 2010, German auto manufacturer Daimler AG made a \($185\) million settlement with the Securities Exchange Commission (SEC) because it had violated American antibribery laws.

The car company, which is now Daimler-

Chrysler Corp., had made at least 200 payments in over twenty-two countries over a ten-year period totaling \($56\) million in bribes to foreign officials in order to earn

\($1.9\) billion in sales and \($91.4\) million in illegal net income. Sometimes, however, bribery can be between two or more companies, as was the case in 2010 with Rio Tinto, the Anglo-Australian mineral company, and several Chinese steel companies.

China is one of the world’s largest producers of steel, accounting for almost 40% of the 2009 global output of steel. But China lacks iron ore, an essential ingredient in the production of steel. As such, China is one of the world’s largest importers of iron ore, spending almost \($50.1\) billion in 2009 on iron ore imports. The three largest Chinese suppliers are Rio Tinto; BHP Billiton Ltd, an Australian mining company; and Brazil’s Vale SA. They are among the world’s four largest mineral companies, and together they sell to China approximately 20% of the world’s total sales of iron ore.

In 2007, the price of iron ore rose substantially.

Many of China’s steel manufacturers were concerned that foreign suppliers would be forming cartels to manipulate the price of the mineral. As a result, many Chinese steel companies began to deal directly with sellers in order to obtain a better price. Rio Tinto adopted the policy that it would give priority to the large state-run Chinese steel companies.

Consequently, the smaller private steel companies resorted to bribery to increase their allocation.

In July 2009, China arrested Stern Hu, the general manager of Rio Tinto’s Chinese operations, and three other Rio Tinto employees, Wang Yong, Ge Minqiang, and Liu Caikui, who are Chinese citizens. The fact that Rio Tinto was a major Australian company and Stern Hu was an Australian citizen triggered strong public comment by Rio Tinto officials and the Australian government.

Rio Tinto and China have a checkered history, including Chinese frustration over Australia’s resistance to huge investments that China wanted to make in Australian mining and resource companies, Chinese frustration over negotiations for price reductions in Australian iron ore, and Chinese opposition to a joint venture between Rio Tinto and BHP Billiton that would give near-monopoly power over some resources.

Interestingly, just days before the trial, Rio Tinto agreed to a large joint venture with Chinalco, the Aluminum Company of China, to develop a very large iron ore deposit in Africa, and Rio Tinto’s CEO spoke at the China Development Forum pledging further assistance in finding new ore bodies.

The four Rio Tinto employees were initially charged with stealing China’s state secrets and industrial espionage by bribing Chinese steel company executives for information that led to the foreign mining companies increasing the price of iron ore. However, at the trial in March 2010, the four pleaded guilty to the theft of commercial secrets and accepting about

\($13.5\) million in bribes from more than a dozen Chinese steelmakers from 2003 to 2009. They were also found guilty of commercial espionage. In July 2009, the China Iron and Steel Association, which represents the Chinese steel industry, was in pricing and contract talks with Rio Tinto, BHP Billiton, and Vale. Rio Tinto was acting as the lead negotiator for the mining companies. During the negotiation process, the four Rio Tinto executives obtained confidential information through bribery about the association’s intended strategy. The judge alleged a “direct cause-and-effect relationship”

that the stolen confidential information cost Chinese steel mills an additional 1 billion yuan (\($150\) million). “They used illegal means to obtain commercial secrets that put the Chinese steel industry in a powerless position,” the judge said.

After a two-and-a-half-day trial Messrs.

Wang, Hu, Ge, and Liu were fined millions of yuan and sentenced to fourteen, ten, eight, and seven years, respectively. The court said that it had shown leniency because the four men had pleaded guilty.

Australia’s foreign minister, Stephen Smith, admitted that the sentences were consistent with Chinese sentencing practices but said that they were “very tough”

by Australian standards. On March 29, 2010, just after the convictions were announced, the four executives were fired by Rio Tinto. “Receiving bribes is a clear violation of Chinese law and Rio Tinto’s code of conduct,” said Sam Walsh, a senior executive with Rio Tinto.

That same day, on March 29, two Chinese steel executives, Tan Yixin and Wang Hongjiu, who had been with Shougang Steel Group and Laigang Steel Group, respectively, were found guilty of handing over the secret business documents to the four former Rio Tinto executives. But, according to a Chinese steel industry analyst, the sentiment in China is more for the men who gave the bribes than for those who accepted them. “As a matter of fact, there is popular sympathy for the managers who are charged. People believe they were acting on behalf of their companies. Giving bribes was not for their personal interest.”

The Chinese government never charged Rio Tinto with any criminal offense, although the court indicated that the company had used “stolen information to harm China’s economic interests.” An internal investigation by Rio Tinto found no evidence of wrongdoing by the company but said that the four former employees had engaged in “deplorable behavior” by accepting the bribes. Furthermore, such conduct was clearly at odds with the company’s ethical culture and “wholly outside our systems.”

Questions:-

1. The culture of giving and receiving payments is ingrained in China. On the other hand, accepting and paying bribes is a violation of Rio Tinto’s code of conduct. When does a payment stop being a gift and turn into a bribe?
2. The smaller Chinese steel companies bribed the Rio Tinto executives because of Rio Tinto’s policy of dealing only with large state-run steel companies.
Can a business policy, such as giving priority to only one set of firms, be unethical? Is Rio Tinto ethically responsible for the bribes that were given to its employees because of its policy?
3. Why were these bribes prosecuted?
4. What lessons should be taken from these convictions:

a. For foreign governments?

b. For corporations trading in and with China?

c. For individual employees?

d. For possible investors in China?
5. Should Rio Tinto have been charged?