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New Study: Costs of Compliance in China Expected to Rise

According to a new study, the tightening of anti-corruption laws in China will increase the costs of compliance there for Western companies.

Issued by the American Chamber of Commerce in Shanghai, the report surveyed more than 400 companies that operate in China and discovered that approximately 40 percent of them are planning to spend significantly more on compliance, in anticipation of a newfound emphasis by local authorities on fighting widespread fraud.

Ken Jarrett, the president of the American Chamber of Commerce in Shanghai, said, “There is a big jump in the importance attached to compliance with local laws.” Nearly half the survey’s respondents assigned greater significance to the impact local laws would have on commerce than on international strictures.

Kent Kedl, managing director of Control Risks, which studies business corruption and fraud in China, said, “Two-thirds of US companies in China struggle with fraud and corruption. ” He continued, “But there is no unified anti-bribery or anti-corruption law in China, like the FCPA, and there are many regulatory bodies that enforce the law, so it’s all a bit confusing for companies right now.”

The new anti-corruption laws are the result of gathering pressure on Chinese authorities to confront what is increasingly viewed as widespread illegality built into business within its borders. A much publicized case of bribery and embezzlement involving high ranking officials at pharmaceutical giant GlaxoSmithKline has drawn even more attention to the problem.

Also, some experts suggest that the problem of corruption has become more conspicuous as the Chinese economy has gradually slowed. As long as business remained brisk, both the government and foreign investors were willing to turn a blind eye to what was seen as an endemic component of Chinese commerce. Now, however, that the costs of doing business in China are on the rise, and the profitability of doing business there has shrunk, Chinese authorities feel pressured to wash out rampant fraud.

The survey revealed that companies in China are mostly concerned with the the problem of bribery, so common a practice it often doesn’t carry the same moral stigma it does in the U.S. They were also worried about the threat that Chinese employees would defraud their companies.