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Corruption poses threat to China procurement

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Posted on 8/08/2013 by Wayne Brophy FCILT

Companies looking to source products from China could find large procurement deals under threat from “rampant corruption”, a new report has found.

Global risk analytics firm Maplecroft says that corruption is “deeply entrenched” in both the government and the private sector. The nation’s economic boom has brought a sharp rise in investment in the past few years, but many industries and functions remain unregulated and there is a distinct lack of accountability in many areas.

In addition, because the relations of manufacturers and traders are so complex in the world’s second largest economy, foreign buyers can find it difficult to monitor the whole of the supply chain for any signs of wrongdoing. Particularly in heavy industry, the report says that corruption is one the biggest concerns when striking a large scale procurement deal.

“Facilitation payments are commonly demanded by officials to carry out administrative and other services for businesses and on large procurement deals,” Maplecroft says.

In the last few months, the Chinese government has passed new legislation to prevent illegal cash transactions from being disguised as legitimate exports, while rules on excessive gift-buying have been introduced in a bit to combat widespread bribery.

Maplecroft is also warning that foreign companies will potentially face damage to their reputations and legal risks when it comes to liaising with local officials. Both within and outside of China, growing awareness of the problem of corruption has led to increasing scrutiny of the workings of local government, potentially making business’ relations with officials a matter of public comment.

Reputational risks are always a concern when sourcing products from China, the report adds, since firms risk associating themselves with unacceptable working conditions and other ethical concerns which surround the nation’s industries.

Other challenges faced by companies seeking to procure goods from the world’s second largest economy include the cost of compliance with environmental regulations and long-running legal battles.

Significantly, intellectual property rights are not closely guarded, creating a risk of infringement. Because the research and development capacity of some Chinese firms is comparatively limited and corruption is so widespread among the judiciary, the country has built up a “culture of impunity” over intellectual property and industrial espionage, meaning that infringements are a constant threat.

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