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Avery Dennison case a window on the pitfalls U.S. firms face in China

The Pasadena firm is under federal investigation after it said it might have violated the Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing foreign officials.

January 12, 2009|Don Lee

SHANGHAI — When Pasadena-based Avery Dennison wanted to build its road and traffic business in China a few years ago, it hired people like Lily Tang. The Beijing homemaker had an asset the company craved: political connections.

Tang's husband, Chen Qi, is a senior official at the China Communications and Transportation Assn., a quasi-governmental group led by former ministers. That connection, said current and former Avery managers in China, helped the company win contracts for thousands of dollars' worth of government projects.

In one case, according to interviews and a copy of a signed contract reviewed by The Times, Avery received an order to supply $375,000 worth of reflective safety products for highway jobs in Tianjin, east of Beijing, and paid a commission of about 8% to an enterprise operated by a friend of Chen's.

Chen's friend, Guo Longjun of Beijing, said he had passed the money on to "experts," whom he wouldn't identify.

Such payments may be part of an ongoing federal investigation into whether Avery violated the Foreign Corrupt Practices Act, which prohibits U.S. businesses from bribing foreign officials.

Avery reported possible violations on its own in 2005. It characterized them as relatively minor and said it had taken corrective measures. Though it is by no means the only U.S. company involved in a corruption investigation of its business dealings in China, its experience provides a case study of the pitfalls American firms face as they try to capture a piece of the Chinese market.

Justice Department officials say enforcement of the FCPA is second only to fighting terrorism in terms of priority. Currently, at least 91 cases are open, triple the number four years ago, according to a report issued last month by Shearman & Sterling, a New York-based law firm that tracks FCPA cases.

China is getting more attention. Of 25 criminal prosecutions under the law in the last two years, six involved activities in China -- the largest number after Iraq and Nigeria. Among the companies involved were Lucent Technologies, which agreed to pay a $1-million penalty for supplying about 315 trips to the U.S. by Chinese officials. The company recorded some of them as "factory inspections," but they were in fact visits to places such as Disneyland, Las Vegas and the Grand Canyon, the Justice Department said.

The trips, plus educational expenses for a Chinese government employee, were valued in the millions of dollars, federal officials said. At stake were contracts worth at least $2 billion.

Such cases show that China is no longer just the world's factory floor; its size and its push to accelerate domestic spending make it an alluring market in its own right.

'It's risky'

Corruption, though, is a pervasive problem in China. The Communist Party leadership, seeing the lawlessness as a threat to its survival, is cracking down. From 2003 to 2007, officials investigated almost 20,000 commercial bribery cases involving state workers, China's procurator-general reported. The amount involved is about $500 million.

Avery, with $6.3 billion in sales last year, triggered the federal investigation by reporting possible FCPA violations. It said the matter involved a small number of local employees in its reflective-materials business who might have made improper payments and that it could incur fines or other penalties.

Since then, Avery has opened new manufacturing facilities in China, as well as its first stand-alone research center outside the United States -- even as it places a new emphasis on business ethics. The company's Chinese payroll has ballooned to 14,000, about 40% of its global workforce.

But the possible corruption case has proved anything but small. Sales in the reflective-materials unit have plunged. Avery has pushed out at least eight employees and managers. Several other senior staff members have quit in frustration.

Among them was Timothy Li, 58, who resigned as business development director of Avery's reflective and graphics division in Asia, based in Hong Kong. He said he had warned regional bosses about using consultants and other questionable tactics to secure contracts.

"I told them it's risky and I don't like to do these kinds of things," Li said in an interview, his voice rising and his arms clenching his chest.

Avery declined to comment about the Tianjin highway project or specific individuals, noting that personnel matters are confidential and that the investigation is ongoing.

But a company spokesman, Laurence Dwyer, said, "Avery Dennison is committed to conducting its business with honesty and to the highest ethical standards in all our businesses and in every region of the world."

U.S. firms are widely considered to operate with higher ethics than Chinese and Western competitors -- in large part because of stringent laws such as the FCPA, which took effect in 1977, and the Sarbanes-Oxley Act of 2002.

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