Editor's note: The following article was translated and edited from an article that appeared on takungpao.com. The article discusses the recent sentencing of Garth Peterson, a foreign executive formerly employed by a branch of Morgan Stanley in Shanghai, for "evading the company's internal controls", i.e. bribing a government official. While Peterson has admitted to this wrongdoing and a reckless lifestyle, he claims that his actions were not bribery, per se, but just another form of using "guanxi" (maintaining relationships) that are a staple of Chinese everyday life. 

In 2008, Garth Peterson, then a managing director in Morgan Stanley's Real Estate Investment and Fund Advisory business in Shanghai, was fired following a probe into his involvement in a suspected under-the-table real estate deal with a government official that had managed to evade the company's internal controls. Following a lengthy investigation, in April 2012, Peterson ultimately plead guilty to evading Morgan Stanley's internal controls – a federal offense under the U.S. Foreign Corrupt Practices Act (FCPA)—an anti-bribery law primarily intended to prevent illegal payments to foreign officials by U.S. companies. On August 16, Peterson was sentenced to nine months in prison and three years of supervised release.

Peterson's trial and sentencing have attracted a lot of media attention on both sides of the Pacific for several reasons. First, even though the U.S. has long sought to strengthen the enforcement of the FCPA (enacted in 1977), Peterson's case is one of the first to take place in the finance industry, leading some to question the act's actual efficacy. Second—and more relevant to the following article—the case has shed some light on the perceived notion that foreign companies doing business in China often must "get their hands dirty"; something that most Chinese likely already knew, but that may come as a bit of a shock to foreign audiences unaware of what guanxi is.

When in Rome…

In a recent report on his bribery case published by the Hong Kong Economic Times, Peterson is quoted making the following statement: "In China, it's all 'you help me, and I'll help you'. You cannot simply get rid of something like guanxi". Many believe that with bribery and other forms of corruption in Mainland China so prevalent, it's often the case that the senior managers in foreign companies have no choice but to "do as the Romans do." And according to one academic, the situation is even more severe than that: "if foreign companies in China don't abide by the same "hidden rules" as the Chinese, they'll never be successful here."

Garth Peterson is no doubt all too well aware of such "hidden rules" and the consequences of getting caught using them. In a recent television interview discussing his bribery case, Peterson acknowledged that while he himself believes his behavior to be improper, he also feels that China has a special business environment, and that his actions cannot simply be denounced as "bribery".

On his wild lifestyle; bypassing regulatory loopholes

Peterson, an American who grew up in Singapore, attended Hangzhou University, speaks fluent Mandarin and is the textbook definition of an "old China hand". Speaking of his time spent working in China's then booming real estate industry, which he remembers as a period of total craziness wherein people were always getting out of control partying, Peterson clearly states that he “never had to bribe anyone”, later stating that the three words that best describe his life in China are: smoking, drinking and womanizing. Peterson also divulged that three or four nights every week he was responsible for entertaining clients with late night KTV sessions, that he drank until he passed out on a nightly basis, and that he frequently woke up the next day at home laying beside a woman he didn't know, oftentimes later discovering that he'd run up a 200,000 USD wine tab the night before.

Peterson continues, with a hint of sarcasm, noting that although the U.S. authorities are determined to strengthen the enforcement of the FCPA, particularly in China, one look at the deeply rooted use of guanxi and you'll realize that such a thing is easier said than done. In his opinion, the U.S. and Morgan Stanley are simply trying to make an example out of him, instead of actually strengthening their enforcement (something he believes is not possible due to the inherent limitations of the FCPA), and that inside Morgan Stanley, there are still countless loopholes that the FCPA doesn't know about. Yet, despite Peterson's critical words, not everyone at Morgan Stanley shares his opinion, with one colleague bluntly stating, "He's fully adapted to the Chinese way of doing things".

You've got to play the guanxi game to win; scholars call for reform

In 2002, at the age of 32, Peterson began working at Morgan Stanley's Real Estate Fund Hong Kong office. By early 2003, he was already frequently going back and forth to Shanghai for one of the company's real estate projects. A colleague of his described him as a sort of "human spider", explaining that he is quick to weave a vast network of relationships wherever he goes. An apt metaphor it may be, but it still understates just how his impressive interpersonal talents were—from 2002 to 2008 when he was fired, Peterson participated in at least 28 separate deals for Morgan Stanley in China.

Peterson's professional rise and fall reflects the difficult position facing foreign companies doing business in China. In order to make inroads into the Chinese market, foreign companies must frequently employ Chinese personnel or Sinologue like Peterson, who are well versed in the art of using guanxi to interact with China's political and business circles; yet such practices often end up in violation of the FCPA.

Hu Xingdou (胡星斗), a professor at the Beijing Institute of Technology, is not one to mince words: "foreign companies bribing officials is definitely a part of the 'localization' process in China, as if you don't play by the country's unwritten rules, you'll never be successful here." According to Zhao Xiaobin (赵晓斌), the director of Hong Kong University's International Center for China Development Studies, while it's easy to simply condemn these foreign companies for bribing Chinese officials, the underlying cause of such behavior is ultimately the absence of effective regulation mechanisms in China. Hu believes that only through further deepening its institutional reforms can China truly establish the legal and institutional norms necessary to watch over the market economy.

Source: takungpao.com
 

Related links
The Art of Guanxi: Benefits, Pitfalls & The Lifetime Debt of Favours
Bribery More Likely Among Overseas Chinese Staff
The Cost of Preferential Treatment: Hong Bao in China

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Keywords: Garth Peterson bribery trial foreign companies in China bribery foreign corrupt practices in China