INTERNET: Tencent Corruption Probe Nets Alibaba Exec

Bottom line: The detention on suspicion of corruption of a former Tencent executive now working at Alibaba shows that Chinese Internet companies could use such internal probes to disrupt business at their rivals.

Former Tencent worker detained for corruption

Chinese tech companies are getting increasingly aggressive in their campaign to root out internal corruption, with word that Tencent (HKEx: 700) is probing current and former employees from its video unit for accepting bribes. But what’s most interesting about this latest anti-corruption drive is that one of the executives detained by police now works at the entertainment unit of Tencent rival Alibaba (NYSE: BABA). That element of the case reflects the fact that executives at China’s leading Internet companies often move between each other, in a job-hopping phenomenon that is relatively common in China.

But the move also reveals a potentially potent weapon that companies like Tencent could use in the future to try and disrupt business at their rivals. We saw a similar case just last year, when online game giant NetEase (Nasdaq: NTES) made allegations against one of its former employees who left to start social networking app Momo (Nasdaq: MOMO), causing major headaches for Momo on the eve of its New York IPO.

It’s fairly common knowledge that bribery and other forms of corruption are common features in China’s corporate landscape. Such corruption sees company employees often accept bribes for a wide range of things, from buying products from particular suppliers, to giving websites preferable placement in search results.

Leading telecoms equipment and smartphone maker Huawei was one of the first Chinese tech firms to openly discuss the problem when it announced that more than 100 workers had been netted in an internal anti-corruption drive last year. (previous post) Since then, search leader Baidu (Nasdaq: BIDU) has also joined the campaign with its own drive that netted 3 director-level employees suspected of corruption earlier this year. (previous post)

This latest case involves an Internet executive named Patrick Liu, also known as Liu Chunning, who now works as president of Alibaba’s digital entertainment unit, and is also an executive director of Hong Kong-listed Alibaba Pictures (HKEx: 1060). But the actual suspected corruption involves Liu’s previous tenure as an executive at Tencent, and has no relationship to his current function at Alibaba, according to reports that cite sources at both Tencent and Alibaba. (English article; Chinese article)

Part of a Broader Probe

According to the reports, Liu is just one of about a half dozen former Tencent workers who have been investigated by the company for corruption since last year. The reports say that Liu, who joined the Alibaba unit 2 years ago, was taken away by police on June 22. Before joining Alibaba in 2013, he worked for a decade at Tencent, where he was close with company founder Pony Ma, the reports say.

This case looks similar to the ones at Baidu and Huawei, but it also has some striking similarities with the one last year involving NetEase and Momo. That case didn’t involve corruption, but instead saw NetEase allege that longtime former employee Tang Yan had acted unethically and also potentially illegally when he left the company in 2009 to set up Momo. (previous post)

NetEase strategically made its accusations on the eve of Momo’s New York IPO, delaying the offering briefly as US regulators sought an explanation and Momo itself sought to ease investor concerns. I previously observed that NetEase’s allegations were quite possibly true, since the company is a well-respected Chinese Internet player and also because practices like stealing information and other intellectual property from former employers is quite common in China.

But what’s most interesting in that case and now this latest instance with Patrick Liu is that both show how companies may try to use allegations of improper behavior to interrupt operations at their rivals and punish former employees viewed as traitors. Tencent would probably say it’s just trying to root out corruption, and that its investigation is unrelated to Liu’s decision to join a rival. But the fact remains that Liu’s sudden departure — perhaps permanently — is likely to cause big disruptions for Alibaba Pictures.

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