Stern Hu, the Australian in charge of iron ore marketing at Rio Tinto, and three Chinese colleagues were detained in July for allegedly bribing 16 Chinese steel mills for information on Beijing’s iron ore negotiations strategy.
The implications of the detentions are wide ranging: It amounts to a wake-up call for all foreign firms in China.
“The message to foreigners is obey the law and if obeying the law means it’s tough to do your business go somewhere else,” said Steve M. Dickinson, a Qingdao-based partner with Harris & Moure.
Foreign executives are worried. “No one knows exactly what [Hu] has been accused of, but it could be something that a lot of people do in the course of an acquisition,” said an executive with prior experience in mergers and acquisitions in China who wished not be named due to the sensitive nature of the case.
The information the four Rio Tinto executives are accused of obtaining was classified as a state secret because it was considered key to China’s iron ore price negotiations. But the definition of trade secrets in China is murky at best.
“The law does not require that certain information be identified as a “state secret” for its possession by a non-authorized person to make that person subject to prosecution,” Nicholas C. Howson, an assistant professor at the University of Michigan School of Law, told China Economic Review. That has left the law open to abuse by authorities.
Whether the case is truly a state secret will never be known, but it is certain Beijing thinks that it has a case and some type of bribery was probably involved.
“The police here are very very careful. They don’t randomly arrest people or try to put pressure on them,” said Dickinson. “They gather evidence and if they come and arrest you, they’ve got the case or they won’t come.”
Neither is this likely to be the last time a foreign company stands accused of stealing trade or state secrets. Howson argues that as China develops a true market economy operated in a more transparent fashion, such actions will only become more common.
The detentions might have implications for the – currently deadlocked – iron ore negotiations too.
“[China] has made it impossible to negotiate a commercial contract now,” Dickinson said. “BHP Billiton and everyone else is going to be scared off now. So who’s going to negotiate with them?”