Chinese company ensnared in kickback scandal in Philippines

LLUIS GENE/AFP/GETTY IMAGES - Zhongxing Telecommunications Equipment, or ZTE, is at the center of a case before the Philippine anti-graft tribunal. A man uses a ZTE iPazzPort as a videogame remote control at the Mobile World Congress on February 28, 2012 in Barcelona.

MANILA — After a tense showdown over a disputed shoal in the South China Sea, the closest U.S. ally in Southeast Asia and a rising China now face a new source of potential friction over the alleged corrupt practices of a well-connected Chinese corporation.

At the center of a case before the Philippine anti-graft tribunal is Zhongxing Telecommunications Equipment, or ZTE, a state-linked manufacturing giant that sells communications gear in more than 140 countries. The company is not on trial, but its alleged payment of tens of millions of dollars in kickbacks in connection with a 2007 contract has led to graft charges against former president Gloria Magacapal-Arroyo, her husband and two other former senior officials. All deny any wrongdoing.

Gallery

Latest stories from Foreign

Sudan closes Iranian cultural sites in rift over influence

Decision could signal wider problems for Tehran.

Moscow will review military strategy in face of NATO plan

Moscow will review military strategy in face of NATO plan

Kremlin security official calls NATO an “external threat” and says planned force may alter Russian strategy.

U.S. firms complain of unfair treatment in China

U.S. firms complain of unfair treatment in China

Are foreign multinationals being “taken down” to promote domestic companies?

40 more maps that explain the world

40 more maps that explain the world

I’ve searched wide and far for maps that can reveal and surprise and inform in ways that the daily headlines might not.

The criminal prosecution, which follows a lengthy investigation into ZTE’s business practices by the Philippine Senate, puts a spotlight on the role played by Chinese companies in extending China’s economic reach around the world but also in straining Beijing’s doctrine of noninterference in the affairs of other states. While insisting that it does not meddle in foreign lands, China keeps getting dragged deep into the affairs of other countries by the pursuit of profit by corporations controlled by or closely tied to the state.

ZTE is also under scrutiny in Washington, where the House intelligence committee is investigating whether it and another large Chinese company, Huawei Technologies, pose a threat to national security through their equipment sales in the United States. In a letter sent this month to the company’s American subsidiary, ZTE USA, the intelligence committee’s chairman, Republican Rep. Mike Rogers (Mich.), and ranking Democrat, C.A. Dutch Ruppersberger (Md.), asked about ZTE’s “interactions” with China’s ruling Communist Party and various government bodies and posed a blunt question about its contract in the Philippines: “Did ZTE provide any kickbacks?”

Mitchell Peterson, a spokesman for ZTE in the United States, said the company will be “transparent, candid and cooperative” with the intelligence committee’s inquiry.

The inquiries into the giant Chinese telecommunications company are only the latest to find China and its state-linked firms in the center of foreign business disputes that have created headaches for Chinese diplomacy.

In the North African state of Algeria, a recent corruption case involving ZTE has dented China’s reputation in a country that had been one of its keenest supporters on the continent. ZTE has also come under criticism for equipment sales to Iran that opponents of the Islamic regime say allow authorities in Tehran to monitor the phone and Internet communications of dissidents.

The Nigerian government, meanwhile, is investigating a $470 million contract awarded to ZTE, complicating China’s efforts to woo Africa’s biggest oil producer.

And in another resource-rich area of Africa, the oil interests of the state-owned China National Petroleum Corp., or CNPC, and the company’s close ties to Sudanese President Omar Hassan al-Bashir, an indicted war crimes suspect, have pushed Beijing into the middle of a venomous and often violent feud between Sudan and the newly established Republic of South Sudan, which seceded last summer.

Ex-election official charged

In the Philippines, among those charged with graft is Benjamin Abalos Sr., the former head of the Election Commission. According to testimony during hearings by the Philippine Senate, Abalos took large kickbacks from ZTE in connection with a contract for the construction of a broadband network and fed some $30 million into the campaign coffers of Philippine politicians ahead of a 2007 election.

His Manila attorney, Gabby Villareal, said Abalos “categorically denies receiving any money” from ZTE. Claims that he did, the attorney said, are just hearsay.

Teddy Casino, a member of the Philippine Congress who initiated the current prosecution by filing a complaint in the fall, said he does not believe ZTE was trying to buy votes. But Casino said he does think that, through the payment of bribes, the company did unwittingly taint the electoral process.

“This is a serious matter,” he said, adding that Chinese money should “stay away from our politics.”

Casino is a member of Bayan Muna, a left-wing political group that has for years railed against interference in Philippine affairs by the country’s former colonial master, the United States, which until 1991 had a large naval facility and an air force base here. Casino still considers the United States — which is bound closely to the Philippines by a 1951 mutual defense treaty — to be a menace, but he now sees China in much the same way.

“They are both bullies,” he said.

In a written response to questions about its alleged illicit payments, ZTE did not address specific allegations raised in the Philippines but said that “abiding by Chinese and local laws is a basic principle that ZTE has always followed.” The company had no comment on the conviction in absentia this month by a court in Algeria of two ZTE executives found guilty of “influence peddling” through the payment of illegal commissions.

ZTE, which has nearly 90,000 employees and last year ranked as the world’s fourth-biggest maker of mobile phones, has issued shares on stock markets in Hong Kong and nearby Shenzhen. It denies being state-controlled and describes itself as an “independent company.” Its biggest shareholder, however, is a state-dominated entity, as are at least seven of its other 10 largest shareholders. It won its 2007 broadband network contract in the Philippines after China’s then-commerce minister, Bo Xilai, helped arrange a low-interest loan from a Chinese state bank to finance the deal, which was subsequently canceled. Bo, who went on to become Communist Party chief in Chongqing, was purged this year for unspecified “serious violations of discipline.”

‘Typical’ deal

When rumors of ZTE kickbacks began to surface and triggered a political storm in the Philippines, the U.S. Embassy in Manila in 2008 sent a cable to Washington reporting that “the ZTE case is typical of the deals that China reportedly uses worldwide to make friends and buy influence.” Unlike institutions such as the World Bank, according to the cable, which was later made public by WikiLeaks, “China does not link its aid to issues such as good governance, rule of law, or respect for human rights. Public skepticism and scrutiny have underlined shortcomings in China’s soft power efforts.”

A witness list drawn up recently for the trial here at a special anti-graft court known as Sandiganbayan includes two Chinese executives involved in the since-aborted ZTE contract for a broadband network to link government offices. ZTE’s head office in Shenzhen said neither person now works for the company but declined to say when they left or why.

The saga has shadowed efforts to resolve a potentially explosive dispute over the South China Sea, where a recent maritime flare-up at Scarborough Shoal led China to restrict imports of Philippine bananas, ostensibly for health reasons, and even raised fears of armed conflict.

President Benigno Aquino III, who took office in 2010, has made the fight against corruption a cornerstone of his administration, vowing to end a culture of impunity that is widely blamed for making the Philippines the economic laggard in an otherwise booming region.

His battle, however, has added to friction with China, an economic powerhouse that his predecessor, Arroyo, often bent over backwards to please. Her government signed a raft of big-ticket business deals with mostly state Chinese companies and, in a bid to reduce tensions in the South China Sea, also agreed to a program of joint seismic surveys of waters believed to be rich in oil and natural gas. The joint surveys triggered outrage here because they covered Philippine territory that is not claimed by China and, according to Arroyo’s critics, thus undermined Philippine sovereignty.

Politicians and media commentators have linked the now lapsed seismic-survey deal to alleged Chinese kickbacks, accusing Arroyo’s government of selling sovereignty in return for cash. “In short, it was territory in exchange for pay-offs,” said a columnist recently in the Manila Standard Today newspaper.

Speaking to Washington Post editors and reporters recently in Washington, Aquino denied wanting to cool relations with China and put an end to the ardor of the Arroyo years.

“We have set out to enhance the relationship,” he said, dismissing as “unfair” a suggestion that he took office determined to reverse Arroyo’s push for close economic and diplomatic ties with Beijing.

He acknowledged, however, that China has perhaps been upset by investigations into various business deals involving powerful Chinese companies. Beijing seems to have been angered most, he said, by his government’s suspension of a railway project for which China had offered more than $500 million in soft loans. This project, known as NorthRail, has also been mired in allegations of corruption.

But it is the ZTE affair that has attracted the most attention, thanks to intense media interest after Senate hearings that featured detailed testimony of illicit payments.

Jose De Venecia, a businessman who first blew the whistle on alleged kickbacks, said in an interview that his own company, Amsterdam Holdings, had proposed building a broadband network linking government offices in 2006 and offered to do it for $130 million. ZTE later proposed doing the same for $329 million and got the contract.

“I put two and two together — they were overpricing to pay so-called advances,” said De Venecia, recalling a December 2006 meeting he attended with ZTE executives and the then-head of the Philippine Election Commission in Shenzhen. The meeting, he said, revolved around discussion of kickbacks.

De Venecia, whose father served for more than a decade as speaker of the Philippine House of Representatives and had close ties with Chinese leaders, puts most of the blame for the broadband fiasco on officials in Manila, saying that China merely got sucked into local shenanigans by its determination to win the contract.

“Officials here were trying to extort money from ZTE. Unfortunately, ZTE was willing to participate,” De Venecia said. “ZTE is a company we will all remember.”

 
Read what others are saying