Anti-Corruption Campaign In New Direction At Shenzhen Air

Shenzhen Airlines officials sentenced for fund misuse

China’s recent wave of anti-corruption probes at big state-owned firms is moving in another new direction, with word that 6 officials at regional carrier Shenzhen Airlines have been found guilty and sentenced for misappropriating funds. This particular case represents a new wrinkle in the recent wave of probes because it involves corruption through the use of business shenanigans, rather than direct bribes and embezzlement that have been the focus of most investigations so far. At the same time, Chinese graft investigators are getting some moral support from abroad, with word that Britain’s anti-corruption watchdog has received more funds for its own investigation of Rolls-Royce (London: RR) related to the luxury car maker’s activities in China and Indonesia.

This latest activity shows that China’s ongoing anti-graft campaign is accelerating with no signs of slowing, as the year-old administration of President Xi Jinping tries to root out corruption at all levels of state government and enterprise. I’ve said before that this kind of campaign is long overdue, and should be extremely helpful for creating a better, fairer business climate in China over the long term. But in the shorter term it could be quite disruptive, since many of the current channels for doing business may be shut down as officials worry about their vulnerability to new probes.

According to the latest reports, the probe at Shenzhen Airlines wrapped up late last week with the conviction and sentencing of 6 company officials for misuse of more than 2 billion yuan ($330 million) in company money. (Chinese article) The leader of the group was a consultant who received a sentence of 10 years, but the judge actually raised the figure to 14 years after the defendant lied about the use of the funds.

The case involves a relatively common kind of economic crime that sees big companies give business to outside firms with “insider” connections. In this particular case, Shenzhen Airlines hired the lead defendant as a consultant, who then opened a firm to offer services to the airline. Such practice is unethical and often illegal because it gives business to connected companies without a competitive bidding process. The result is that insiders benefit from the business, while the companies get stuck with higher costs for products and services that are often inferior to what they would get through a competitive bidding process.

This new development indicates that China’s anti-graft investigators are taking their recent campaign to a new level by looking for economic crimes beyond simple bribery and embezzlement. This latest broadening of the campaign comes as investigators are also becoming more active at the local level, following word last month of a locally-based anti-corruption probe against an executive at Shanghai-based supermarket operator Lianhua (HKEx: 980). (previous post)

Meantime, separate media reports are saying that Britain’s Serious Fraud Office (SFO) has received more funding from the UK treasury for its probe of Rolls-Royce, following initial reports of the investigation last month. (English report) There’s not much more detail in the newest reports, though the move indicates that Britain and other western countries intend to aggressively clamp down on corrupt practices overseas by their firms in tandem with the China campaign.

From the broader perspective, the ever-expanding nature of the China-based campaign, combined with complementary efforts by overseas agencies like the SFO, mean that China’s business environment could finally get a much-needed clean-up to bring it into line with norms from more mature markets. This kind of mushrooming of a campaign that originates in Beijing is quite typical in China, and we can probably expect to see the series of investigations pick up even more momentum in 2014, with a parallel acceleration of investigations by foreign governments.

Bottom line: A new case against Shenzhen Airlines officials for misuse of funds represents an expansion of Beijing’s anti-graft campaign, which is likely to continue gaining momentum this year.

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