Bribery verdicts show peril of doing business in China

Australian executive of Rio Tinto among four jailed after secret hearing / Trial followed wrangles between Beijing and multinational mining companies

(REUTERS)

A senior Australian executive of one of the world's biggest mining companies was jailed for 10 years for commercial espionage by a Chinese court yesterday, in a case that threw light on the fractious relationship between Beijing and multinational business.

Stern Hu, a top former salesman of the Anglo-Australian mining giant Rio Tinto, was convicted along with three Chinese colleagues of taking bribes worth as much as $9m (£6m) after a three-day hearing in Shanghai, part of which was held in secret.

They were all fined and given prison sentences of between seven and 14 years. Hu, a classically trained violinist, was Rio Tinto's top iron ore salesman at the time of his arrest and was described by a former employer as an "outstanding individual".

Rio Tinto moved immediately to distance itself from the four, sacking them and saying that it was satisfied "beyond doubt" of their guilt, describing the violation of Chinese law as "deplorable behaviour". Australia's Foreign Minister, Stephen Smith, said the sentences were tough, "by any measure".

The trial sparked huge international interest, and plenty of embarrassment for Rio Tinto, but it is also part of a high-stakes game of brinkmanship that has emerged in recent years between China and some of the biggest multinational mining companies.

As the world's largest steel producer, China imports huge amounts of iron ore, and along with other Asian steel mills, sits down every 12 months with Rio Tinto, BHP Billiton and Brazil's Vale, to hammer out an annual price for the commodity. Conventionally, once one steel producer agrees a deal, the others accept the price.

Last year, unhappy at a deal Vale struck with a Japanese group to increase prices by 33 per cent, the China Iron and Steel Association (Cisa) rejected the agreement. Instead of agreeing to a price rise, Cisa had insisted on a 45 per cent discount. The miners ignored Cisa, leaving it to buy iron ore from the open market, giving the companies a boost as prices surged on expectations of an economic recovery, but leaving China embarrassed and billions of dollars out of pocket.

"The Rio Tinto trial has been all smoke and mirrors," said Joe Lunn, a mining analyst at the brokerage FinnCap. "It is very difficult to work out what has really gone on, but there is certainly a message from China saying that it will not be messed around with."

Talks on this year's iron ore price are well under way, but the two sides are as far apart as ever. China's increasingly aggressive stance towards the mining industry is mirrored in other areas. Beijing reacted angrily to Google's decision to pull out of the country over a censorship row earlier this month, while the country's oil refining group Sinopec last week called on the Beijing government to crack down and "exert its jurisdiction and severely punish those multinationals and merchants audaciously challenging Chinese laws".

Sinopec admitted that an employee had been dismissed by the company in 2004, and subsequently sent to prison, for taking bribes from Daimler, the German car company.

"The Rio Tinto case highlights how far the Chinese legal system still lags behind economic reforms," said Dr Linda Yueh, an economics fellow at Oxford University. "Unless this changes, China's position as an attractive place to do business could be dented."

The failure to agree a price last year came just two months before Rio Tinto further angered the Chinese by spurning an offer from its biggest shareholder, the Chinese state-owned aluminium producer, Chinalco, to invest $19.5bn in the company, and take its stake to 18 per cent. Smaller investors protested that the bigger Chinese interest would have too much influence over the group, which would in turn weigh heavily in Beijing's favour in future iron ore price talks. Walking this tightrope, Rio Tinto has been eager not to criticise China over the trial of Hu and his colleagues, Liu Caikui, Ge Minqiang and Wang Yong.

Yesterday, it said that its relationship with Beijing was unaffected by the guilty verdicts, pointing to last week's agreement with Chinalco to jointly develop what it has described as potentially the world's biggest iron ore deposit, at Simandou in Guinea. The miner had said little publicly about the trial before the verdicts, but yesterday launched a stinging attack on the four.

Sam Walsh, the head of its iron ore business, said: "Receiving bribes is a clear violation of Chinese law and Rio Tinto's code of conduct. We have been informed of the clear evidence presented in court that showed beyond doubt that the four convicted employees had accepted bribes."

The company refused to comment on the convictions relating to stealing commercial secrets, the part of the trial that had been held in secret.

About 90 per cent of criminal trials in China end in a conviction, while the country fell seven places to 79th in Transparency International's 2009 Corruption Perceptions Index. It is below Saudi Arabia, Bulgaria and Burkina Faso on the list. Amnesty International declined to comment on the case but has reported many cases where it says China did not meet international human rights standards.

The company also promised a wide-ranging inquiry into the case, saying that an initial investigation by the accountancy firm Ernst & Young had cleared it of any wrongdoing. Rio Tinto and Ernst & Young refused to comment on the details of the investigation. The Serious Fraud Office last week said that it was assessing the Rio Tinto case before deciding on whether to begin an investigation.

Hu became an Australian citizen in 1994 before joining the mining group two years later. John Dougall, the executive chairman of Australian technology company AWA, who employed Hu to run his China office in 1990, said: "Stern is an outstanding individual. His integrity is beyond reproach."

Mr Dougall accused the Australian Prime Minister, Kevin Rudd, of sitting back and letting "Stern be thrown to the wolves".