by Robert Cain for China Film Biz

April 29, 2012

The SEC doesn’t often make headlines in Hollywood, much less in China, but last week they dropped a bomb that made waves on both sides of the Pacific. Chinese and American film industry circles have been atwitter with talk over the SEC’s announcement that it is investigating all six of the major U.S. studios for possible violations of the Foreign Corrupt Practices Act (FCPA) with respect to their activities in China.

Although the SEC and the studios have all been very tight-lipped about details so far, the common presumption is that someone may have paid bribes to Chinese officials in order to obtain favorable business treatment.

If any such dirty dealings did take place—and I’m not saying they did, but it’s highly unlikely that the SEC is just fishing here—they would have most likely involved bribes or kickbacks to Chinese officials from an American company (or companies) in exchange for film import quota slots. Because China severely limits its number of Hollywood film imports, and because Hollywood films are doing bang-up business there—major Hollywood releases are now routinely cracking the $50 million mark at the Chinese box office—each quota slot represents a big, valuable chunk of business. It’s not hard to imagine six- or seven-figure “gifts” going to Chinese film officials for quota slot allocations.

The SEC’s announcement could hardly have come at a worse time for China’s Communist Party. Already beset with the radioactive political and PR fallout of the sordid Bo Xilai scandal (which includes, by the way, allegations of massive government corruption and bribe-taking), the Party is likely to stonewall the SEC and probably deny, in its usual ham-fisted fashion, that any wrongdoing ever occurs in the People’s Republic of China. That the SEC chose to spring its very public press release during the middle of the Beijing Film Festival, China’s big annual showcase for its film industry, merely added salt to an already festering wound.

The controversy has cast light on an oft-considered challenge for U.S. companies doing business in emerging economies: How to compete without paying bribes in countries where bribery and corruption are de rigeur. Where, in fact, not paying bribes can be tantamount to not getting anything done at all. Is it really wrong—leaving aside the strictly legal issues—to pay bribes when bribery is an established, even expected, aspect of doing business?

Having lived and worked extensively in China, Russia, Mexico and the Middle East, all places where bribery is very much a part of the fabric of daily life, I have often been forced to confront these questions. Personally I find the abuse of public office for personal gain detestable, but I’ve often found my moral indignation to be quaintly irrelevant in the face of brutish demands for cash to win favor or resolve problems. And while I have never paid a bribe in 25 years of doing business in China, I can’t really claim that my hands are entirely clean.

For instance, In Moscow I once loaned my driver the equivalent of $120 in rubles to pay a traffic cop to write up a truthful police report so that she wouldn’t be blamed for an accident in which a cement truck had plowed into the side of her car. In a business emergency in Kiev I paid the stationmaster a 150 percent ticket premium to secure a berth on a “sold out” train when I knew full well that the train was nearly half empty. The situation was all too clear: no bribe, no ticket. And in a truly frightening incident in Moscow I paid three armed cops $150 to persuade them not to gang rape my assistant in the back of their police van.

In China I’ve always been able to read potential bribery situations as they develop and extricate myself before I’m confronted with such problems. In southern China back in the late 1980s when I was asked to give “tea money” or to “take tea” I knew that was a coded request for a bribe. Upon hearing such proposals I would tell the would-be bribe receiver to take a hike. Needless to say, I didn’t always get what I wanted.

The penalties for violating the FCPA are stiff, at least on paper: fines of up to $5 million and up to 20 years in prison. But in practice, in the 35 years since President Jimmy Carter signed the FCPA into law, the SEC has yet to actually send any FCPA lawbreakers to jail.  Hollywood studio executives who might currently be under investigation needn’t worry much about personal repercussions; the SEC tends to prosecute and fine corporations, without ever naming the individuals who committed the crimes.

Given the risks and rewards, the decision matrix for an American corporate executive in China would seem to dictate paying bribes. The personal upside, in the form of enhanced business opportunities and bonuses, appears to far outweigh the personal downside of one’s company receiving a fine. Given this mix of motivations and disincentives, it’s likely that at least a few Hollywood executives have taken the risk and engaged in proscribed activities to benefit their businesses in China.

Still, at the risk of appearing naive or idealistic, I would urge anyone considering taking such actions to reconsider. For one thing, the SEC could well take a harder line on FCPA violations in the future. And engaging in bribery can be a slippery slope leading to unanticipated consequences. This kind of activity tends not to remain secret for long–after all, there must have been a whistleblower who brought the SEC’s attention down on the studios.

Although not always as expeditious as cold, hard cash, I’ve found that polite persistence, resourcefulness, and even stubbornness, can be effective ways of cutting through what might otherwise turn into bribery scenarios  in China. Very often if one person is an obstacle, it may be possible to find another who will be more honest and honorable in their dealings. And sometimes the deal just might not be worth the trouble. Letting people know that you won’t negotiate with financial bullies can often be all that’s needed to keep your business dealings in China aboveboard.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.