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 is 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.
The information that Rio Tinto executives obtained was most likely classified as state secrets because it was key to price negotiations. However, the definition of state secrets in China is vague.
"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,"said Nicholas C. Howson, an assistant professor at the University of Michigan School of Law.
The truth behind the investigation may never be revealed, but it would appear Beijing thinks it has a case, and that bribery was involved. Howson believes these situations will become more common as China continues to develop as a market economy.
The detentions might also have implications for the – currently deadlocked – iron ore price talks too.
"[China] has made it impossible to negotiate a commercial contract now,"Dickinson said. "BHP Billiton and the others will be scared off. So who’s going to negotiate with them?"