MAC: Mines and Communities

Bargaining in Beijing

Published by MAC on 2009-09-01

As predicted in this column, just over a month ago, Chinese authorities now appear to have settled for charging Rio Tinto staff with bribery, rather than espionage against the state.

This is in relation to allegations, made early in July, against the "Stern Gang" - four upper-echelon Rio executives in Beijing, suspected of under-handed dealings with Chinese steel mill owners.

The lesser charge will lower the bar on sentencing, and slightly improve relations between the regime and Australia's government, whose rhetoric ran smelter-hot in initial reaction to Beijing's actions.

We pointed out then that Rio Tinto wisely chose not to issue a blanket condemnation of the detentions. It may not have actually known the fine detail of what had been going on between its chief Chinese iron ore contract negotiator and his domestic counterparts. See:

Indeed, several of these Chinese officials were also pulled-in at the "Peoples' Pleasure."

Nonetheless, Rio bosses in Melbourne and London must have been savvy about the greasing of palms during such negotiations; it's been par for the course over the many years during which the company has bargained in Beijing.

Any studied ignorance about the practice on Rio's part reflects not so much weaknesses in its lines of management control, as on the company's overweaning attitude to its chosen partners.

Need we repeat the point ad nauseam? - Hubris has been the mark of Rio's global dealings since its formative years during the late nineteenth and early 20th centuries.

Sounding the Gong

John Gong, a Beijing professor of economics, writing last month in the Shanghai Daily, makes the point.

Citing "Plunder" (Partizan's critical study of Rio Tinto, published in 1992) Gong says that, under Australian law: "[T]he issue of Rio Tinto's corporate criminal responsibility is not whether its headquarters in Melbourne knows of Mr Hu's freewheeling dealing in China.

"The issue is whether Rio Tinto as a company creates and maintains a corporate culture of foreign bribery prevention or institutes unwritten rules that tacitly authorize non-compliance with the Foreign Bribery Amendment Act.

"On the basis of these considerations I think it perfectly legitimate for Chinese judiciary to pursue its investigation into Hu and some of his colleagues, and Rio Tinto has every reason to cooperate with the probe."

Not only that, of course: the company also has an absolute obligation to eschew any hint or taint of such bribery for the future.

[London Calling is published by Nostromo Research. Opinions expressed in this column do not necessarily reflect those of any other author, including the editors of the MAC website. Reproduction is welcome, so long as acknowledgment is given to Nosstromo Research, and to any sources quoted.]

Rio Tinto employees formally arrested by China

The group could well end up on trial on corporate espionage charges but seems to have escaped the charge of stealing state secrets

by Chris Buckley, Reuters

12 August 2009

BEIJING - Chinese prosecutors have formally arrested four employees of Anglo-Australian mining giant Rio Tinto on suspicion of obtaining commercial secrets and bribery, the official Xinhua news agency reported on Wednesday.

Australian Stern Hu and three Chinese staff of the world's second-biggest iron ore producer are suspected of "using improper means to obtain commercial secrets about our country's steel businesses", Xinhua cited prosecutors in Shanghai as saying.

The commercial secrets charge can bring jail terms of up to 3 years, or 7 years in "especially serious" cases [ID:nPEK372992]. The procuratorate, or prosecutors, also approved their arrest on suspicion of "commercial bribery", said the Xinhua report.

Xinhua did not mention accusations of stealing state secrets, a sweeping charge raised in earlier reports, which can attract tougher sentences.

"The procuratoratial organ conducted investigations and believes that it has evidence for suspecting the four, including Stern Hu, of the above crimes," said the Xinhua report.

Hu and the three other members of Rio Tinto's Shanghai-based iron ore marketing team -- Liu Caikui, Ge Minqiang and Wang Yong -- were detained on July 5. Hu, a Chinese-born Australian citizen and head of the team, was accused of obtaining the Chinese steel industry's negotiating stance in iron ore price talks, sources have said. Iron ore is used to make steel.

The Rio case has cast a shadow over Australia-China trade, worth $53 billion in two-way terms in 2008. But China's sidelining, for now, of the graver state secrets accusations may indicate an effort to cool political contention over the matter.

"That lowers the temperature," said Jerome Cohen, an expert on Chinese law at New York University, speaking of the absence of the state secrets accusations.

"That puts this as a white collar crime, a commercial crime, and not espionage involving state secrets."

Chinese Vice Minister of Commerce, Fu Ziying, told a news conference in Beijing the case would receive a "fair verdict" -- a term suggesting a trial is certain -- and said it showed his government wanted to create a fair and open marketplace.

"I believe this case will not, and should not, affect the healthy and stable development of Chinese-Australian bilateral trade and economic relations," he said.

The arrests do not amount to a decision to go to trial but allow authorities to continue investigating, said Mo Shaoping, a prominent criminal lawyer in Beijing.

"The arrest means the suspects remain in detention and the police can continue investigations, usually for up to two more months," Mo told Reuters.

Cohen said that without the state secrets accusations, which authorities can use to justify keeping suspects entirely isolated, the Rio suspects stand a stronger chance of being allowed to see lawyers.

Rio Tinto's shares have fallen about 5% from their close at the end of last week of A$60.57, before a weekend report from China that said the company had been spying for six years.

The shares were at A$57.35 by 0400 GMT on Wednesday.

Rival BHP Billiton has fallen about 1.3% to A$37.50 over the same period and the benchmark Australian S&P/ASX 200 index has risen about 0.6%.

No Comment from Rio

Rio Tinto declined to comment when contacted by Reuters about the arrests. Rio has previously said the four did nothing wrong.

Australia's Foreign Ministry said Australian diplomats in Shanghai were informed of the arrests late on Tuesday but a spokeswoman refused to comment on whether China had softened its position by using the commercial secrets charge.

"We are not prepared to speculate, though the range of possible penalties under these articles is less severe than for state secrets," the spokeswoman said.

Prime Minister Kevin Rudd has warned China it had significant economic interests at stake in detaining Hu and that the world was watching how it handled a case that has highlighted the risks of doing business in the world's third-largest economy.

Australia exported $15 billion worth of iron ore to China in 2008, accounting for 41% of China's iron ore imports in that period.

The Xinhua report also said that in recent days Chinese steel executives had been formally arrested on suspicion of "providing commercial secrets" to Hu.

An online article published in a magazine run by China's state secrets agency at the weekend said Rio spied on Chinese mills for six years, resulting in the mills overpaying $102 billion for iron ore, Rio Tinto's biggest earner.

The Australian government on Tuesday dismissed the Chinese report, which had rattled investors.

"I think they (China) wanted to get the bad PR behind them as much as they could but at the same time get a message out to corporations operating in China," Scott Harrison of Pacific Strategies and Assessments, an Asia-focused risk consultancy company, told Reuters of the formal arrests.

"Although it may reduce international pressure, at the grassroots level I don't think its going to reduce the concerns of companies operating here," he said.

(Additional reporting by Emma Graham-Harrison in Beijing, Joseph Chaney in Sydney and Rob Taylor in Canberra; Editing by Dean Yates)


Behind the headlines in the Rio Tinto case

By John Gong, Shanghai Daily

24 July 2009

DEPUTY Foreign Minister He Yafei urged Australia to treat Rio Tinto spy case "properly" during a press briefing on Wednesday.

That same day Australian Foreign Minister Stephen Smith ruled out the possibility of a quick settlement of the dispute.

The detention earlier this month of four Rio Tinto employees in Shanghai on charges of spying and stealing State secrets during iron ore price talks has drawn an inordinate amount of international attention.

Agence France-Presse said the arrest of Stern Hu, a Rio Tinto Group executive, "has sent tremors through the international business community and shows the potential risks of doing business with China."

The New York Times quoted John Frankenstein, an associate professor of economics at Brooklyn College, as saying "this could cast a chill over the business environment in China."

And the opposition party in Australia wasted no time to drum up pressure on Prime Minister Kevin Rudd, expressing similar concerns.

Some observers even suggested the arrest was in retaliation for the collapse of a bid by Chinalco, a state-owned Chinese aluminum manufacturer, to invest US$19.5 billion in Rio Tinto.

Stern Hu, head of Rio Tinto's Shanghai office and a key figure in the spying case, had allegedly built a strategic intelligence database about his customers.

There are indications that the nature of the information in this database and the means by which he has acquired such information have landed him in trouble.

Information is vital in negotiations.

For example, knowing buyers' iron ore inventory level and the bottom line acceptable price are extremely important for the seller.

There is probably nothing wrong with collecting marketing information about customers to gain negotiation edge, but Hu is suspected of having bribed key figures in 16 Chinese steel mills in exchange for the information.

Hu's laptop is said to contain such information as his customers' iron ore purchase plan, monthly iron ore inventory level, production schedule, sales reports and so on.
There are also minutes of meetings at the highest level at these steel mills and the China Iron and Steel Association.

Hu probably knows more about his customer companies' operations and iron ore demand than some of those companies' CEOs.

Rule of law

Given this, how can the prosecution of a figure like Hu send tremors through the international business community or cast a chill over the business environment in China?

Do they mean that bribery and espionage can improve business environment?

During a visit to Shanghai last week, Australian Trade Minister Simon Crean said, "We can't apply Australian law in China just as China can't apply Chinese law in Australia."

Well, my comment is that at least Australian law can be applied in Australia.

And the Australian law I am talking about is the Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999, which formalizes in a statutory manner Australia's commitment to stamping out international corruption.

Prosecuting rogue companies that thrive on bribery is not just the task of the host country where these companies operate. The prosecution obligation also lies with the home country either independently or jointly in cooperation with the host country's law enforcement agencies.

There are good examples.

In December last year, Siemens pled guilty in US federal court to violating the US Foreign Corrupt Practices Act, which involved Siemens subsidiaries operating in China. As part of its settlement, Siemens agreed to pay US$450 million in criminal penalties.

On the same day, Siemens announced an agreement with German prosecutors to pay a US$569 million fine for violating Germany's anticorruption laws, in addition to the US$285 million that a Munich court ordered Siemens to pay earlier in 2007.

The fact that there is so far no news about Australian investigation into Rio Tinto and Hu's deeds makes me more concerned about Australia's business environment.

Tainted record

Rio Tinto is a hundred-year-old company that reportedly started to bribe in its overseas operations in the 19th century (Charles E. Harvey, "The Rio Tinto Company: an Economic History of an International Mining Concern 1873-1954").

Predictably, in modern times, Rio Tinto has not been a shining example in honoring human rights and the rule of law.

Roger Moody, in his book "Plunder," describes Rio Tinto's activities as ranging from abuse of indigenous peoples, brow-beating opponents, leaning on governments and price-fixing, to violating international law, union-busting and management of one of the world's biggest commodity cartels.

The company also has such a dismal environmental protection record that the Norwegian sovereign wealth fund, once Rio Tinto's largest shareholder,* entirely dislodged its position of 500 million British pounds (US$824 million) of stocks in Rio Tinto last year, citing concerns about the Grasberg goldmine in Indonesia operated by one of Rio Tinto's subsidiaries.


But Rio Tinto was quick to distance itself from Hu, insisting it knows of no evidence of bribery in China.

However, according to Australian law, the issue of Rio Tinto's corporate criminal responsibility is not whether its headquarters in Melbourne knows of Mr Hu's freewheeling dealing in China.

The issue is whether Rio Tinto as a company creates and maintains a corporate culture of foreign bribery prevention or institutes unwritten rules that tacitly authorize non-compliance with the Foreign Bribery Amendment Act.

On the basis of these considerations, I think it perfectly legitimate for Chinese judiciary to pursue its investigation into Hu and some of his colleagues, and Rio Tinto has every reason to cooperate with the probe.

(The author is associate professor of economics at the University of International Business and Economics, Beijing. His email: The views are h*

* MAC editorial note: Although Professor Gong correctly identifies the value of Rio Tinto shares dumped by Norway's Pension/Oil Fund's, the Fund was certainly not the company's major shareholder: its holding comprised well under the notifiable 3%. of Rio Tinto's market capitalisation at the time of the sale.

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