Super Spy, Dangerous Criminal or Geeky Geo?
The headline read: China Court Sentences US Geologist to 8 Years in Prison. China is ‘cracking down’ on foreign companies and their employees doing business in the country, and they are using obscure laws protecting the secrecy of state-run enterprises to insure that ‘commercial secrets’ are not leaked. Just ask Xue Feng. He is looking at the better part of a decade of hard time. When he studied geology he knew his life´s work would involve rocks; he just didn´t envision making little rocks out of big rocks on a road crew.
The China-born Feng, now a US citizen, was sentenced to eight years in prison recently for gathering data on China’s oil industry. The disturbing thing about this case is that, unlike other high profile cases like the one involving mining giant Rio Tinto, Feng was not charged with bribing officials or theft. Feng was merely collecting open-source data on energy resources. In fact, Feng was just doing his job; a job which his employer, IHS Energy openly paid him to do, just as they pay geologists and researchers to do all over the world.
IHS owns the big daddy of all energy research firms – Cambridge Energy Research Associates. CERA was founded by academic heavyweight Daniel Yergin. His books, The Prize and Commanding Heights, are considered seminal works. But he and his firm are by no means alone. Gathering this type of data is a big industry, and companies like IHS staff their ranks with professors and scientists from across the globe. Global publishers like Reuters and The Economist pay for this type of data all the time.
Perhaps the most alarming part of this story is that the data Feng collected was only classified as a ‘State Secret’ after he collected and sold the information.
This case sets a dangerous precedent for foreign companies operating in China. It lets them know that they are under serious scrutiny when gathering data on Chinese companies and industries. It doesn´t even seem to matter if the actions are legal or not, if they don´t like it they can retroactively outlaw it and prosecute the offenders.
Data, what Data?
So what exactly was this ‘secret data’ that Feng gathered about China’s oil industry? Feng received documents on geological conditions of onshore oil wells and a database that gave the coordinates of more than 30,000 oil and gas wells belonging to China National Petroleum Corporation and its listed subsidiary, PetroChina Ltd.
Sources close to the case have cited that the data was not even that complete, yet the ominous sounding Beijing No. 1 Intermediate People’s Court, in handing down Feng’s verdict, stated that his actions “endangered our country’s national security.”
People close to Feng report that he was a hard-working, stand up guy that was just doing his job as best he could; a job that he had no idea was running afoul of any laws. His employer’s entire business centered on acquiring and redistributing data of the sort that he and other associates were gathering; so again, he was simply doing his job.
The Dangerous Precedent
If you think that this is likely to alarm foreign businesses and their employees operating within China, you would be correct. After all, how does a foreign company know when something is a ‘state secret’ or a ‘commercial secret’, and what’s the difference? The law on ‘commercial secrets’ is contained in the PRC Criminal Law and the PRC Anti-Unfair Competition Law. (Wasn´t that also the official name of the Anti Dog-Eat-Dog law in Atlas Shrugged?) This Criminal Law defines ‘commercial secret’ as “technical information and operational information that are unknown to the public, can bring economic benefits to their rightful owner, are functional and are kept as secrets by their rightful owner”. Can you say vague?
After the Rio Tinto case, in a move to help alleviate criticism from foreign corporations and governments operating in the country, the Chinese government took steps to clarify the rules regarding state-run enterprise information secrecy. This guidance was meant to help identify the difference between ‘state secrets’ and ‘commercial secrets’ when dealing with Chinese enterprises.
On the 25th of March, the State Owned Assets Supervision and Administration Commission (SASAC) issued its Circular on Distributing Interim Regulations regarding Protection of Commercial Secrets of Central SOEs [2010] 41 (the Circular). It was released publicly on April 26th. It stated in the executive summary that business secrets of major state companies qualify as state secrets. Yet in the summary the SASAC recognized that secrets held by a state-owned company are not necessarily ‘state secrets’. Further reading reveals the distinction seems only to determine which crime you can be prosecuted for and the length of time you can wind up in jail!
At the end of the day it appears that the Chinese government can decide what is or is not a ‘state secret’ versus a ‘commercial secret’ at will, and retroactively. After all, by the admission of the prosecutor the data Feng stole was available for the asking in several ministries; and, Feng followed the proper procedures to acquire the data. He even signed for the data and produced valid identification when signing for it. If this makes you uncomfortable, you’re not alone.
Make no mistake, China is protectionist and it will do whatever is necessary to compete globally. The opening of key sectors of its economy to companies outside of China is only done when it is a clear benefit to China. It is not free enterprise. China will always guard and advance its own interests above all else, and those interests include technology transfer. The Chinese are happy to allow outside expertise to come in and help them advance technically challenging projects, but once that knowledge is gained, and there is no more need for outside assistance, the game can change, quickly. It is always dangerous to assume permission conveys rights.
As global speculators we can’t ignore opportunities in China. The moral of the story for companies and investors operating in China is there are no absolutes. Rights… yours are obligations; theirs are transitory at best. Speculate at will but understand the environment. Just because Jim O´Neil at Goldman Sachs made BRIC a mainstream concept, does not mean the risks have been removed or even lessened. We will continue to risk capital in China, but we do so with trepidation and price our risks accordingly. In that we are in the minority, which is where we want to be.
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1 comment
The US constitution prohibits ex post facto laws, laws that make formerly legal behavior illegal after the behavior has already occurred.
No one can possibly know what the law will be, only what it is now. Behavior that is ethical, moral and legal can suddenly be proscribed and punished.
Communism, which has always been fake, really is just an oligarchy of ruffians.