CHINA’S ongoing anti-corruption campaign may be mainly targeting domestic miscreants, but that doesn’t exempt foreign-invested companies from scrutiny.

Last year, some foreign pharmaceutical companies doing business in China got caught in the dragnet, accused of complicity in bribery and price-fixing.

Foreign companies that haven’t boned up sufficiently on Chinese laws and regulations are now taking closer notice.

A survey by the American Chamber of Commerce in Shanghai showed foreign awareness about compliance with the rules for doing business in China has sharply increased. About 46 percent of respondents said that compliance with local laws is more important to their business than, say, complying with international anti-bribery laws. In the previous survey a year ago, the rate was 31 percent.

At the same time, 18 percent of respondents said that more aggressive regulatory enforcement environment in China has greatly increased their business risk, double the ratio of those who said their business risk has decreased.

Kent Kedl, managing director for China at consulting firm Control Risks, said foreign companies are changing their mindset of how to do business “correctly” in China.

“In the past, foreign companies dealt with this as a Foreign Corrupt Practices Act issue, when their first concern should be compliance with Chinese regulations,” Kedl said.

Benjamin Shobert, founder and managing director of consulting firm Rubicon Strategy Group, said “doing business in China isn’t going to get any easier” due to the crackdown on corruption.

The issue has been most strongly felt in the healthcare industry, according to the survey by AmCham Shanghai.

High-profile probe

Small wonder after all the publicity last year about a high-profile government investigation of foreign and domestic pharmaceutical companies, with UK-based GlaxoSmithKline in the center of the maelstrom.

Last July, GSK and a spate of medical firms were accused of bribing officials and doctors to boost sales and fix prices of their products.

To facilitate the bribes, the company allegedly routed up to 3 billion yuan (US$489 million) through 700 third-party travel agencies and consultancies over six years. As a result, four senior Chinese executives of the company were detained.

Even before the current anti-corruption campaign was launched, the impetus for a crackdown on shady business practices was building.

In 2009, an Australian executive and three colleagues from Anglo-Australian mining giant Rio Tinto, the world’s second-largest iron ore exporter, were charged with collecting US$13.5 million in bribes from 20 Chinese steel mills. They were all sent to prison.

For companies as experienced in global trade as Rio and GSK, it is hard to comprehend how the line between legality and malfeasance was allowed to blur so badly.

In GSK’s case, one explanation offered is that the company got ensnared by the “unspoken rules” in China, where the practice of offering kickbacks is ubiquitous. When in China, do as the Chinese do?

The excuse that “everyone else is doing it” flies in the face of longstanding calls by foreign companies in China for greater market transparency and less oversight bureaucracy.

The ongoing anti-corruption campaign can help to accelerate the progress of both, said Li Weisen, an economics professor at Fudan University.

“No matter what motivates the government in these anti-corruption cases, they are good for the construction of better business practices for all players,” Li said. “In the long run, foreign companies will welcome the campaign rather than fear it.”

But at present, foreign companies do face challenges as they grapple to comply with the Chinese version of the Foreign Corrupt Practices Act.

As Shobert pointed out, ambiguities are less about the laws themselves and more about how laws are enforced by authorities.

One problem is the lack of a unified approach. China may need to assign or establish an integrated body to enforce anti-corruption laws, rather than dealing with the issue in bits and pieces that render the larger process rather inconsistent.

Also, rules and regulations need to be standardized so that what holds true in metropolises like Beijing, Shanghai and Guangzhou also applies to smaller cities less sophisticated in globally accepted business practices.

“Companies, as they move into more underdeveloped markets in China, need to understand that their risks will be different from those they face in their more established Chinese markets,” Shobert said.

Kedl suggested that companies “segment the Chinese market based on corruption risk.” For example, a healthcare company may think about operating in a Tier 5 city with the approach used for a Tier 2 city to cope with the cultural, political and business differences.

Bumpy road

The road ahead may be bumpy for all.

At GlaxoSmithKline, some employees staged a strike to vent their anger toward the company’s new payment system that denied them bonuses last year. The “bonus” was related to fulfilling sales targets — a sticky area where bribery often breeds.

Starting this year, GSK China restructured its compensation program for its sales force, hoping to eliminate the impetus for wrongdoing. Under the new program, bonuses for sales professionals are no longer based on achieving individual sales targets. Instead, all sales employees will be evaluated according to their technical knowledge, quality of service and adherence to the company values of transparency and integrity, the firm said in a statement.

Herve Gisserot, senior vice president and general manager of GSK Pharmaceuticals and Vaccines China, said the company remains fully committed to supplying medicines to China.

“The new sales compensation system will enable us to put patients’ needs at the heart of everything that we do,” Gisserot said. “Our medical representatives are the gateway to our customers, and it is important that we inspire, coach and ultimately reward people working within the organization to focus on behavior that reflects our values.”

Rhetoric it may be, but the statement shows that foreign companies are taking the anti-corruption campaign to heart and trying to change the ethical mindset of line staff.

The survey by AmCham Shanghai said half of respondents are increasing ethics training, with 46 percent adopting programs focusing on compliance and 31 percent on programs monitoring the campaign.

Companies said the impact has been greater oversight from headquarters on audits and compliance as well as adjustments to commercial practices and incentive plans.