The recent detentions of four Rio Tinto executives has caused much concern. However, the situation has been misunderstood by most in the West because of a failure to understand the legal background.
The Rio Tinto employees are accused of conducting industrial espionage. Specifically, they are accused of bribery and theft of trade secrets. These acts are crimes under Chinese law. Therefore, if the accusations are factual, the four Rio Tinto employees are subject to criminal sanction in China, with typical prison sentences of up to four years.
The only thing unusual about this case is the decision of the Chinese government to treat the matter as a theft of state secrets. I assume the reason for this is that the allegedly stolen information is in fact highly secret and damaging to the position of the Chinese companies in iron ore price negotiations with Rio Tinto. If the accusations are true, the Rio Tinto employees and their collaborators committed a serious violation of Chinese law. The choice of the Chinese government to follow the state secrets route should not obscure this fundamental fact.
What does all this mean for other companies doing business in China? This proceeding is actually not a sudden shift in Chinese policy. Foreign companies need to understand that foreigners that violate Chinese law get arrested and punished. There is no free pass because you are foreign or because you work for a foreign company.
The market data situation is quite common in China. The Chinese market is only partially open and it operates according to rules different from the U.S. and Europe. This is particularly true regarding information flows. The Chinese government carefully controls market information and foreign companies are prohibited from conducting most types of market analysis in China.
Foreign companies operating in China therefore find the lack of market data to be a serious impediment to doing business in China. Since market data is not available from normal public sources, foreign companies are tempted to collect data using questionable or openly illegal methods. Bribery of a target company’s accountant or bookkeeper is one of those common techniques. Such practices are illegal and pose a significant risk of prosecution. The Rio Tinto matter is an example of this.
Foreign companies must strictly follow Chinese law. Commercial espionage is illegal in China and theft of trade secrets and bribery are crimes. Many foreign business people think the worst that will happen if they engage in these activities is getting sued by their competitor. They are then surprised when they are greeted not by a process server but by police officers who escort them to jail. Once they in jail, there is little we attorneys or your embassy can do to help. No commercial advantage is worth spending even one day in a Chinese jail, let alone being subject to the mercies of the China’s security bureau. The only sensible course of action is to avoid all such activity in China. If your business in China cannot be conducted without resorting to unlawful actions, you should leave China.
It is that simple.
For more on business and crime in China, check out Amazing Lawyers and the Criminal Side of China Business” and for more on the Rio Tinto case, check out this Wall Street Journal article and this New York Times article, both of which quote me on the case.