Posted by: mulrickillion | April 1, 2010

More than bribery: Wealth, power and Rio Tinto

by Peter Lee, Asia Times Online, Mar. 31, 2010 —

The closely watched case of the “Rio Tinto Four” – the four employees of the Australian resource giant on trial in Shanghai on charges related to bribery and theft of commercial secrets – concluded on March 29 with the imposition of crushing prison sentences ranging from seven to 14 years. The defendants plan to appeal. Everyone else seems anxious to move on.

 Du Shuanghua; quoting, the “Billionaire who bribed Rio exec unlikely to be charged”.

That includes Rio Tinto, which dismissed the four men as soon as the verdict came down; the Chinese government, which has been trying to contain the case as a simple matter of commercial law and not a symbol of hyperaggressive Chinese economic nationalism; and especially Du Shuanghua, one of China’s richest men, who was forced to expose his business methods and reputation to the enforced notoriety of a high-profile court case by revealing, in a written deposition, that he had paid a US$9 million “consideration” (ie bribe) to one of the Rio Tinto Four, Wang Yong.

If interest in the case quickly fades after the four disappear to serve their terms in Qingpu Prison, Chinese President Hu Jintao probably can also breathe easier. That is because Du Shuanghua had attempted to secure his political and economic position as one of China’s steel plutocrats with assistance from Hu Yishi, the president’s nephew once removed. Du’s involvement threatened to take the case beyond the sordid commercial shenanigans involved in feeding China’s need for iron ore, and mingle it with the business dealings that allegedly occupy and advantage some of China’s supreme leaders and their families. It appears unlikely that the Chinese government will find it necessary or desirable that Du’s maneuverings are further exposed in open court. China’s motives behind the Rio Tinto case might entail bringing Du to heel economically – not legally – and that objective has already been achieved. . . .

Du began his career as a staffer at a subsidiary of Capital Iron & Steel Corporation, known as Shougang: the steel company that taught China’s state-run enterprises how to bend – and perhaps break – the rules. . . . Shougang displayed an early and aggressive interest in financial engineering, partnering with Hong Kong tycoon Li Ka-shing to attain the Holy Grail of entrepreneurial minded Chinese enterprises: a backdoor Hong Kong stock exchange listing that gave the enterprise added independence, access to capital, and the visibility and opportunities that accrued to a “red chip” stock. Shougang’s partner in the brave new world of industrial production was the village of Daqiuzhuang, in Tianjin municipality near Beijing. Under its tough-talking village headman, Yu Zuomin (and allegedly with the assistance of powerful friends and possibly the preferential supply of steel from Shougang and other mills), Daqiuzhuang’s numerous factories established a near national monopoly over the production of welded steel pipe. As a result, the village was flooded with money and Mercedes cars, and provided China’s reformist leadership with a widely publicized exemplar of the nimble, successful, and profitable township enterprises that were desperately needed to employ the millions of farmers driven off the land by agricultural reforms. Shougang and Daqiuzhuang’s buccaneering ways attracted the fear and envy of their competitors and the concern of state planners watching the enterprises defiantly slip the macroeconomic and capital control leash again and again.

Even as Deng Xiaoping lay on his deathbed, Shougang received its political and legal comeuppance. The executive director of the Hong Kong company (which listed Deng’s son, Deng Zhifang, as a director) was arrested for economic crimes; his father, the chairman of Shougang, quickly resigned. A year later, after a standoff concerning the murder of an investigating official, PLA troops invested Daqiuzhuang and carted Yu Zuomin to jail. However, as a detailed 2008 investigative report at China MBA Net reveals [1], it appears that Du Shenghua carried on the legacy of Shougang and Daqiuzhuang in their swashbuckling business model, methods, and even personnel. . . .

However, Du Shuanghua had to worry about two key problems. The first was the jealousy of the national and provincial metallurgical establishment, which resented his pre-emption of the prime Rizhao location. . . .

However, it transpired that Du had other plans. In early 2009, he torpedoed the deal by selling roughly 25% of his Rizhao stake to Hong Kong’s Kai Yuan Holdings, thereby following the trail to a backdoor Hong Kong listing blazed by Shougang. Two of Kai Yuan’s key figures are Hu Yishi – the chairman of the board – and his father, Hu Jinxing, a non-executive director and cousin of Hu Jintao. . . .

In return for his interest, Du Shuanghua received no cash. He accepted 200 million shares of Kai Yuan stock at a vastly inflated price of HK$2.60 per share – at least 12 times their trading price. When these shares were added to another 100 million that Du had previously accumulated, he became Kai Yuan’s largest shareholder, with around 30% of the stock. . . .

Hong Kong punters immediately leapt to the conclusion that Du was either currying favor with Hu Jintao’s family for leverage in his tussle with the Shandong provincial metallurgical establishment, or ultimately had plans to inject the entire Rizhao operation into the Kai Yuan shell on favorable terms, and reap the benefits of a public listing for his mill in a global financial center – or both.

President Hu’s extended family is apparently active in business and government [2]. Aggrieved posters have seized upon a kickback scandal in Namibia involving Nuctech, a company headed by his son, Hu Haifeng, to raise the specter of corruption close to the president [3]. The Chinese informational apparatus is apparently extremely sensitive regarding challenges to Hu Jintao’s integrity, and it was reported that it blocked Internet searches with the keywords “Hu Haifeng”, “Nuctech”, and “Namibia”. . . .

The Rizhao matter might have remained the subject of unwelcome innuendo in the Hong Kong financial markets if not for the damaging revelations concerning Du’s business practices that emerged at the Rio Tinto trial. . . .

In fact, Western observers have entertained a persistent suspicion that the case against Rio Tinto was motivated by Chinese pique at the producers’ intransigence in last year’s (2009-10) iron ore negotiations – if true, a particularly damnable abuse of government power to pursue economic ends.

However, the recent court case revealed a totally different dynamic – and a central and troubling role for Du Shuanghua.

According to their confessions as reported in China’s National Business Daily (Western media did not gain access to the courtroom, while a couple of Chinese outlets did), the Rio Tinto 4 routinely extracted bribes from smaller and privately owned mills anxious to access Rio Tinto’s ore at favorable prices [4]. The court proceedings provided the interesting detail that the bribes, originally assessed in US dollars per tonne, were switched to yuan per tonne after the world financial crisis hit, and were in most cases delivered as cardboard boxes and garbage bags filled with 100-yuan notes. In total, bribery to the equivalent of 89.18 million yuan was alleged.

Astoundingly, according to a deposition entered by Du Shuanghua, almost two-thirds of this – equivalent to US$9 million – was paid into the bank account of Wang Yong, one of the Rio Tinto 4, on two occasions in 2007 behalf of Rizhao as a “consideration” – as Du delicately put it – for Wang’s valuable assistance, which was apparently required because Rizhao did not have the standing to purchase and import ore directly. At Wang Yong’s sentencing, the judge declared that Du had also provided Wang with 3 million yuan to purchase a house in Shanghai. . . .

In his deposition, Wang reportedly described Rio Tinto’s support as crucial to the success of Rizhao. Indeed, access to iron ore at competitive or preferential rates might have been extremely important to a highly leveraged non-state-owned-enterprise that relied on non-concessionary bank loans. The other defendants confessed to taking bribes from small fry in return for providing access to inexpensive ore, though they disputed the prosecutor’s calculation of the amounts involved.

Wang Yong, however, threw a spanner in the proceedings by indignantly denying that he had received a $9 million bribe from Du Shuanghua. The money, he declared, was a loan to enable his brother’s company to trade in Hong Kong stocks. The money, Wang insisted, but apparently without supporting evidence, had been returned to Rizhao in yuan. Finally, Wang requested that Du face him in court. . . .

At sentencing, the judge declared that mills representing by the China Iron & Steel Association suffered an aggregate loss of over 1 billion yuan in 2009 thanks to information Rio Tinto improperly obtained from its sources concerning the association’s negotiating position. These revelations disrupted the accepted international framing for the case: that corrupt and vindictive Chinese bureaucrats were persecuting Western businessmen for financial gain. Nevertheless, the press did its best to redefine bribery and corruption, even when practiced by Western multinationals, as something uniquely non-Western. . . .

Perhaps the Chinese government decided that it wanted to clip Du Shuanghua’s wings, and determined that the most effective way to attack this rich and powerful man was through his crucial but vulnerable and allegedly corrupt relationship with Rio Tinto. If so, the effort succeeded. . . . The man who had controlled his own mills and destiny for 20 years is now simply a minority stakeholder in a state-controlled iron and steel group in Shandong.

Perhaps the Chinese government is satisfied with Du Shuanghua’s marginalization – and his willingness to depose against Rio Tinto’s Wang Yong.

Even as top executives of Shougang and Laiwu Iron & Steel were convicted of bribery in parallel proceedings, News Business Daily reported that Du Shuanghua was not in legal jeopardy [10]: “The court determined that the nature of this instance of bribery was ‘demanding a bribe (Suohui in Chinese )’” by Wang Yong. According to the relevant laws and regulations, Du Shuanghua should not be pursued by the legal organs for criminal responsibility” . . . .

The Serious Fraud Office, in Rio Tinto’s home jurisdiction of the UK, isn’t so sure that the company is off the hook. It is considering an investigation, as is the US Department of Justice. Conceivably, the Hong Kong Securities and Futures Commission could also take an interest in the stock trading activities of Wang Yong’s brother. . . .

Whatever happens, it seems unlikely that the motives for the Rio Tinto case – pointing toward an embarrassing political and financial nexus of corruption beyond a simple bribery scandal – will be further exposed to public view. . . .

The story in News Business Daily that set the cat among the pigeons was reportedly blocked (though it lives on at legions of bulletin boards), an indication (as in the Hu Haifeng/Nuctech/Namibia case) that the matter is seen as embarrassing to President Hu Jintao. As for Rizhao, it is busily proceeding with a special initiative: a high profile and undoubtedly important campaign to "fight corruption and rectify behavior".

>>Read the full article here.


See also, Billionaire who bribed Rio exec unlikely to be charged,, Mar. 31, 2010; John Garnaut (Shanghai) reports:

THE well-connected billionaire who testified to giving $US9 million in bribes to a Rio Tinto executive is unlikely to be prosecuted, according to a Chinese news report. The National Business Daily, which is partly owned by the Shanghai municipal government, reported yesterday that small private steel mills that paid bribes to Australian Stern Hu and three other Rio Tinto employees would be processed through the Chinese justice system, citing an inside source.

But the billionaire steel magnate who paid by far the biggest bribe would escape.

‘”According to the relevant laws and legal interpretation, Du Shuanghua is not to be pursued for criminal responsibility by judicial authorities,” said the report, which cited inside sources.

Other than Mr. Du, it said ‘”some companies involved in the case will be handled by the institutions of justice separately because of their bribery of Stern Hu and others”.

The National Business Daily is the only Chinese news outlet claiming to run inside stories on the Stern Hu court proceedings. Many other Chinese journalists covering the trial have been ordered not to publish their reports at all. . . .

See also, Court Stenographer at Rio Tinto Verdict

See also, Rio’s Hu gets 10 years in jail.

See also, Rio Tinto Trial Shines Harsh Spotlight on Chinese Criminal Justice, China Real Time Report – WSJ, Mar. 26, 2010; Stanley Lubman writes:

Regardless of what we may or may not learn later, this case has so far been marked by an extraordinary lack of transparency of the proceedings, the usual procedural handicaps imposed on defense lawyers, and manipulation of judicial procedures for political purposes.

See also, China steels for Rio Tinto court case, Asia Times Online, Mar. 23, 2010; Wu Zhong writes:

Contrary to overseas opinion, many analysts in China believe the change in the charge represents progress in China towards an improved rule of law. China’s Law for Protection of State Secrets, effective since 1989, has a broad and vague definition of “state secrets” (even now the National People’s Congress is considering a major revision). The “state secret” that may be relevant to the Rio case is “secret affairs regarding national economy and social development” . . . .

See also, Rio Tinto trial ends with no verdict, China Daily, Mar. 25, 2010; Qian Yanfeng reported:

The three-day trial of four Rio Tinto executives concluded on Wednesday without a verdict, a lawyer said. The trial wrapped up at Shanghai No 1 Intermediate People’s Court at midday, and no date was set for the verdict, said Zhai Jian, an attorney representing one of the accused. . . .

See also, Three Rio Tinto employees admit taking bribes in explosive China trial.

See also, Notes on the Stern Hu/Rio Tinto case, Chinese Law Prof Blog, Feb. 10, 2010; [An excerpt reads]:

They are also charged with trade secret infringement, but I want to comment here mainly on the bribery charges. As can be seen, they are charged not with giving bribes, which seems to have been the original charge, but with soliciting and taking bribes. The Xinhua report then puzzlingly goes on to say that “they lured the Chinese enterprises’ heads with promises, or through other illegal means, to obtain the steel companies’ commercial secrets on multiple occasions, causing ‘extremely serious consequence’ for the companies.” If obtaining the commercial secrets is linked with the bribery, this doesn’t make sense. You offer bribes to people to get their secrets; people don’t give you secrets and money. The money and the secrets are supposed to go in opposite directions.

It’s possible, of course, that the charges of illicitly obtaining commercial secrets are quite distinct from the charges of taking bribes. In that case, one wonders how the commercial secrets were obtained, if not through bribery (or if through bribery, why there was no charge of giving bribes). We will have to see what specific facts are alleged in the course of the trial.

Back to the charge of receiving bribes. . . .

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