When China Comes Calling with Lucky Money

Red and gold paper envelopes are sold in Chinese stores around the world. Go into any of the hundreds of small shops on and around Canal Street in New York City, a neighborhood historically known as Chinatown, and you can purchase them to use for gifts of money. The red color symbolizes good luck and is believed to ward off evil spirits. The gold lettering can be whatever the gift-giver chooses whether a zodiac sign or a message of future good fortune.

The envelopes are most commonly presented at social and family gatherings such as weddings or holidays like Chinese New Year, but they are also tied firmly to doing business.

The tradition of giving money has a long history in China but it is now running up against anti-corruption laws, when they exist, in the countries where the Chinese government is engaged in its international global development strategy called the “Belt and Road Initiative.”

According to a white paper published in January 2015 by Charney Research about doing business in China and titled Corruption in China: What Companies Need to Know, “It is common knowledge that firms often find themselves obliged to make payments or give gifts to officials to do business.” The research detailed in the report notes, “Corruption is worst in real estate...” and “Local officials...get corrupt payments most often.”

This form of bribery is common practice within the Chinese business community despite an aggressive war against corruption launched in 2012 by the Communist Party that has reportedly put thousands of people in jail. The CEO of ETG, a Chinese development company that has been trying unsuccessfully to build a large resort and multiple golf courses on the remote island of Yap for several years, suddenly disappeared in 2013. It was learned that he had been sent to jail on charges of “illegally acquiring and selling land, invoice forgery and tax evasion and engaging in fraudulent loan schemes.” There were also alleged links to “corruption investigations.” He continued his pursuit of land in Yap after his release and last visited the island in this summer, traveling with an entourage in two private jets and meeting with a group that included several current and former elected and appointed government leaders and chiefs at hosted dinners and forays to potential building sites.

A 2015 report in Forbes magazine titled New Data: Bribery Is Often 'An Unspoken Rule' In China, states, “Of the executives that reported their businesses had to bribe to stay in business, 79 percent said those payments were made to local government officials.” Trying to change behaviors that are commonplace in everyday life is reported to be a challenge for the Communist Party.

But just how serious the Chinese government actually is about ending corruption is questionable when it is widely known that graft is being given to elected and appointed officials throughout the world as the country continues to hammer their initiative forward that has put “debt diplomacy” into everyday language.

One has only to look to Saipan, a US commonwealth, to see the effect of one Chinese developer and how the company paved the way for the massive casino that was voted down several times by the island’s citizens only to be passed finally by the legislature without the public’s approval. The local government denies any wrongdoing, but the developer has been charged with money laundering, human trafficking and other alleged crimes including “millions paid to the governor’s family,” according to a report by Bloomberg News in February 2018.

As for the FSM, the U.S. State Departments’ annual 2018 Investment Climate Statements report for the country notes, “There is little awareness or definition of responsible business conduct (RBC) in the FSM.” It goes on to say, “The host government does not promote RBC or factor it in evaluations for public contracts, nor does the country adhere to the convention on OECD [Organisation for Economic Co-operation and Development] guidelines for multinational enterprises.” This is despite the fact that “FSM has laws prohibiting corruption and there are penalties for corrupt acts.” Both entities – the giver and receiver – are culpable under FSM law.

Most past offenses in FSM have involved procurement fraud with a few former senior government officials being convicted. One recent case involves Master Halbert who, among other duties, managed FSM’s airports for the Department of Transportation, Communications and Infrastructure. Halbert is the son-in-law of past president and current senator, Peter Christian, and son of former Senator Dohsis Halbert, who has been charged with accepting payments and gifts from Lyon Associates, a firm based in Hawaii that was contracted by Halbert for multi-million-dollar projects in Pohnpei. During the investigation, a photo surfaced of Christian and CEO Jim Lyon, both wearing shirts emblazoned with Lyon logos, meeting at Christian’s Cliff Rainbow Hotel in Pohnpei. Questions have arisen about Christian’s knowledge of the company’s illegal activities and his relatives’ complicity that allegedly included not just money but cars, tuition, travel, food and shopping expenses.

The U.S. State Department report also says that it “is not aware of significant anti-corruption efforts [in FSM]. The degree to which government officials accept direct bribes is unknown; however, misuse and misappropriation of government funds is widespread.” And when U.S. currency is involved, the FBI and U.S. Department of Justice perk up their ears and begin asking questions.

etg’s private jet making a visit to yap (2019)

etg’s private jet making a visit to yap (2019)

There are no non-governmental ‘watchdog’ organizations in FSM that monitor corruption and the media consists of one bi-weekly newspaper and a government-owned radio station that only broadcasts government-generated and approved information. Regional print, broadcast and social media cover the news about the widely-scattered states sporadically.

However, the national government’s Public Auditors office, with support from the state offices, launched an education program a few years ago and installed a 24/7 hotline that is accessible on the OPA website. Training is also conducted by OPA for its staff and other government personnel. But under a section titled “Resources to Report Corruption,” the State Department report notes, ‘The Public Auditor has highlighted irregularities, but with no enforcement capability. The [FSM] Department of Justice activity in this area has been variable.”

It must be acknowledged that there are two sides to corruption – the giver and the receiver and in the Pacific islands, culture and tradition are often in opposition to western ways.

Transparency International, a Berlin-based organization that works “with partners in government, business and civil society to put effective measures in place to tackle corruption,” published a Country Study report on FSM in 2004 which states, “The underlying cultures of the country constitute the earliest and most enduring sources of law and entail attitudes and values which affect perceptions of and reactions to corruption.” The “reluctance to openly criticize others, particularly chiefs” is paramount among the reasons given for the public’s “willingness to ignore or forget transgressions by leaders...” The report notes that “this attitude had carried over to some extent to politicians.”

The TI report illustrates the intersection of local culture and the law when a former national public auditor discovered “irregularities and missing funds” and pointed a finger at where the responsibility lay. “Members of Congress were not receptive to this ‘un-Micronesian’ behavior and when the auditor’s term was complete, he was not reappointed.”

On the other hand, there is a national Leadership Code that “reflects a contemporary western understanding of corruption,” but it applies only to national public officials, not state officials.

While this may be beneficial to maintaining a “harmonious society,” it is, the TI report says, “at variance with values entailed by the democratic rule of law.” The right to free speech in the U.S. and other western democracies includes the right to criticize and question anyone, including people in positions of leadership. While free speech is included in the FSM constitution, it is in conflict with the traditional culture. And since politicians in FSM are often thought of as having the same status as a chief, the concept of corruption is often at odds with cultural values and norms.

Traditional organizations like the Councils of Pilung and Tamol in Yap, “apply traditional standards to their own conduct,” the TI report observes. “Corruption must be understood in light of the traditional values that continue to permeate society and which remain an important part of the social fabric. It is important that traditional values and the principles of good governance accommodate each other.”

“Culture” is often used to explain or excuse acts of corruption, explains author Peter Lamour in the book Corruption: Expanding the Focus from Australian National University. In the Pacific islands, Lamour says, “cultural practices are used for the purposes of corruption rather than being the cause of corruption.” Lamour cites author Dennis Thompson’s statement, “To say ‘corruption’ is part of a culture is not unlike saying ‘back off, this is none of your business.’”

Openly criticizing or questioning someone is considered unacceptable and may cause loss of face. Which brings up the issue of fear of retaliation. It is nearly impossible to blow the whistle on a relative, friend or colleague. In these small islands where most people are related in some way through families and clans, complaints and testimony are often retracted as a result.

Asian business practices like those that are common in China, are blamed by some for increases in corruption when politicians receive financial gains from foreign investors in exchange for protection from oversight by immigration and other government officials. The same holds true with government contracts that go to foreign companies despite competitive bids from local businesses. In FSM, subcontracts are not required to be put out for bid so the principle contractor can, and often does, choose companies outside the country. Some contracts, like the one for the 2018 Micronesian Games in Yap, mandate a certain number of local workers be hired. But it is all too easy for the contractor to post a hiring notice in a place where it will not be seen, or ignore applications or, if questioned, say the applicants do not meet job requirements.

A blog post on the website ChineseConnects.com titled Bribery in China and the Red Envelope: Why They are Normal notes, “Bribery isn’t necessarily done to cut corners in China. It is done out of respect to let the person(s) you are cooperating with know that you are willing to go the extra mile to satisfy them as well as make them feel special for having accepted you into some kind of an agreement.” It goes on to explain, “...if someone were to try and cooperate with a company to benefit in some way, then a bribe or a ‘red envelope’ hongbao with money inside is often the appropriate way to secure proper relations.” “...bribery and politeness seem like next door neighbors in China...”, the writer says. “This is not to justify bribery in China, as it often leads to companies cutting corners that later result in environmental and social problems...” Nonetheless, according to Transparency International, “Business deals often involve corruption.”

The dilemma then is to determine what is acceptable within the cultures of both the giver and the receiver while remaining on the right side of the law and western mandates.

FSM is eager to attract foreign investment to the country and has expressed keen interest in attracting U.S. investors. A crucial roadblock for the U.S., however, is the Foreign Investment Act of 1977, a federal law that sets forth requirements for accounting transparency and prohibits bribery of foreign officials. In other words, U.S. companies cannot invest in kleptocracies. When bribery is prevalent, it becomes impossible to attract non-corrupt investors. It’s not just individuals who are putting themselves in jeopardy when they accept gifts, it’s their entire state and country and future economic development opportunities from one of FSM’s wealthiest and most powerful partners.

Beijing has been intent on strengthening its connection to the FSM government for some time now. But a former president’s chief of staff, Churchill Edward, is quoted in an article in the South China Morning Post in February 2013, “The Chinese are into political issues here and they want to penetrate the political arena, and that is something we have to be very wary about. We know this is a strategic move – the US military is sure about that – and we know how strategically important these islands are. And that worries us because the Chinese think differently to what we are used to.”

The use of bribery is baked into business dealings in China. It is also well documented that local-level government officials who have the power to accept or reject proposals are the primary beneficiaries of corruption. In 2015, Charney Research published a white paper about their quarterly China market intelligence poll of 2,293 C-level executives and 27 qualitative interviews. It was revealed that 79% of those polled who believed business had to bribe to operate confirmed that “payments and gifts were made to local government officials.” In one Transparency International survey of the Asia Pacific conducted in 2017, it is reported that “In contemporary China, bribe taking has become so entrenched that one party secretary in a poor country received death threats for rejecting over 600,000 Renminbi in bribes during his tenure.”

When ETG arrived in Yap several years ago, witnesses have reported that the firm’s CEO hosted a dinner at a locally owned hotel for elected, appointed and traditional leaders. According to one invited guest who spoke on condition of anonymity, a police officer walked in carrying a briefcase that he set down next to one of the key officials. Earlier, the officer had unlocked the trunk of one of the police cars in the parking lot where the briefcase was stored and opened it to show another officer, who also spoke on condition of anonymity, what was inside. It was filled with U.S. currency. The matter was investigated and one of the officers who was present during the evening testified, but he recanted his testimony. Not surprising when even the police are often resistant to implementing the law against relatives and higher-ups.

Is it realistic to expect that Chinese companies will change their own cultural ways of doing business that work well in an undeveloped country like FSM where, according to the State Department report, gross domestic income is only $3,350 per person; the minimum wage is very low in the government sector and essentially non-existent in the private sector; international development banks classify FSM as a grant-only client since they’re concerned about the country’s ability to repay loans; commercial banks are not allowed to provide mortgages or business financing; many political leaders are owners of the largest businesses and oppose the structural changes needed to increase competition; land cannot be sold to foreigners; misuse and misappropriation of government funds is widespread; transparency of government actions depends “more on personalities” than on the law; there is no government agency assigned to combat corruption and the free press is limited. Such countries are well-known to be ripe for exploitation. Add to that the strong adherence to “culture and tradition” and the answer is “probably not.”

The US is not without responsibility. Due to top down development during the Trust Territory days, it created a welfare mentality that still exists today. Being given the threat of a funding cutoff in 2023, when a U.S. trust fund kicks in that was agreed to when Compact 2 began in 2003, has not been motivation enough for FSM’s leaders to enact and carry through a successful development policy. Grants in the targeted areas of health, infrastructure, education and development have often resulted in misuse and misappropriation despite oversight by the Joint Economic Management Committee (JEMCO) that was set up to strengthen the management and accountability of economic assistance provided under the Amended Compact.

With negotiations for the next version of the Compact set to begin soon, discussions are certain to include more mandates to tighten good governance polices and policing. Compact 2 did just that in 2003 with enforcement tools, but auditing and reporting requirements were often late, inadequate or nonexistent and corruption has continued despite a few cases making their way to the courts.

Lamour addressed the issue of foreign aid and the region’s dependence on it in comparison to culture in this way: “These donors, banks and international organizations,” he wrote, “have become increasingly vocal about ‘good governance’ and increasingly willing to insist that Pacific Island governments meet the standards they set as a condition for their grants and concessions. Island leaders, in turn, are tempted to resort to ideas about ‘culture’ to explain why those external standards should not apply to them.”

According to the Bloomberg report about the casino in Saipan, “When laws have become inconvenient to the company, they’ve been flouted; when the requirements of its contract with the government have become onerous, they’ve been removed; when legislators have tried to interfere, they’ve been ignored.”

Over the last 30 years, the Chinese ambassadors who have rotated through the embassy in Pohnpei have defended their presence in the country. An article that appeared in 2018 in the Kaselehlie Press cited Zhang Weidong, the Chinese ambassador to Micronesia, saying that “Micronesia and China are equals on the international stage and Beijing's involvement in construction and development projects is motivated purely out of a desire to ‘aid a friend in need’.” The article goes on to say that Zhang added “that the two countries have a great deal in common - including a history of colonization by outside nations. Our policy is that we should aid developing countries and that we should all learn from each other, we should all help each other, and all respect each other.”

Are China’s businessmen who arrive in FSM with the goal of bringing the country into the Road and Belt Initiative willing to respect, recognize and adhere to those countries’ anti-corruption laws, no matter how weak, or will they continue to seek “friendship, peace and harmony,” as well as political influence and long-term land leases, through the distribution of little red envelopes and other gifts? And what about the officials who fall back on culture and tradition to explain their willingness or perceived duty to accept those gifts for fear of being considered impolite.

The maze-like confluence between western ways and local traditions and cultures as disparate as those in China and Micronesia is not easy to negotiate; especially in light of the fact that the main reason most corruption incidents go unreported is because people are afraid of the consequences, followed by a belief that it won’t make a difference. Then there is the possibility that they may have the same opportunity to be in line for a little red envelope of their own in the future.