How Does Corruption Affect the Alibaba IPO?

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Last week Chinese e-commerce giant Alibaba filed paperwork with the U.S. Securities and Exchange Commission for an initial public offering (IPO). As one of the largest companies in the world’s second largest economy, Alibaba represents an enormous opportunity for investors. They are expected to raise between $15 and $20 billion, making this IPO potentially bigger than Facebook’s.

While Alibaba already handles more sales volume than eBay and Amazon combined, there is added room for growth as internet penetration in China is only around 45 percent. Online shopping is projected to increase at a rate of 27 percent per year as the still-poor country grows richer and more connected.

Regardless of the perceived opportunities, foreign investors are not entirely convinced that Alibaba will be a good buy. The attitude toward Chinese companies in general is one of skepticism and uncertainty — perpetuated most recently by concerns about the transparency in auditing practices. Alibaba’s complex network of businesses and a lack of details surrounding partnerships with domestic logistics companies also raise some questions for potential investors.

In all the buzz surrounding Alibaba’a IPO, however, there is a missing element that could be cause for additional concern. By selling shares in the U.S., Alibaba opens itself to more exposure to the Foreign Corrupt Practices Act (FCPA), a piece of legislation that makes it illegal for companies to bribe officials of foreign governments. A number of multinational companies from around the world have already been ensnared in FCPA investigations as a result of corruption in China and the idea that Alibaba has grown within a market rife with corrupt acts could be cause for increased suspicion. Compounding this risk is the fact that the company has been the subject of investigations by domestic authorities in the past.

Setting aside the typical corruption risks that operating in China brings, such as a culture of gift giving and the prevalence of personal connections, the business model under which the company operates poses some interesting questions with regards to the FCPA. The law not only prohibits employees from distributing bribes, but also assigns responsibility for the actions of agents and third-parties (which are very broadly defined).

Given that Alibaba operates as an online marketplace and takes a commission from sales by other retailers, the question becomes whether or not those individual retailers can be considered third parties. If so, then the company could potentially be held liable for any corrupt act conducted by sellers who use the marketplace.

While the situation above is currently hypothetical, the wide reach of laws such as the FCPA and the UK Bribery Act are not. As more Chinese and other emerging market companies jump to take advantage of the deep capital markets provided by U.S.-based exchanges, they are going to run into the challenges of complying with international anti-corruption legislation.

Many countries, including China, understand the importance that eliminating corruption holds for the future growth of their economies, but most anti-corruption campaigns are largely government driven and generally act to punish only officials who accept bribes.

This type of campaign is unsustainable for a number of reasons. First, implementation only continues as long as there is a strong political will among the responsible authorities. When it comes time for transitions in leadership, the future of such programs is often put in jeopardy. Similarly, changes in the political climate can place pressure on the authorities and force them to abandon their efforts.

A deeper issue is that such campaigns treat the symptoms of corruption without curing the disease. Unless there are lasting reforms that establish transparency, accountability, and the rule of law, arresting officials who accept bribes only creates an opportunity for someone else to step in and take advantage of the position.

The private sector – especially companies looking to join the global market – has a direct stake in combating bribery and other corrupt practices. Doing so not only helps the bottom line, but creates stronger markets and reduces the risk of being swept into costly investigations when it comes time to do business on a global level.

Business can take an active role in the fight as well.  Like any business transaction, corruption is fueled by supply and demand. By taking collective action and refusing to partake in corruption, the private sector can effectively eliminate the supply side of the problem. Officials cannot collect bribes when there are none being offered.

CIPE has had success with this model in places like Thailand and is currently exploring avenues for expanding to other regions.  Until business and governments start working together to solve the corruption issue, the risks will always be there.

Frank Stroker is an Assistant Program Officer for Global Programs at CIPE.

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