Legal News

A Matter of Trust? A Harder Look at the Rio Tinto Convictions

By Ashby Jones

So what to make of these Rio Tinto convictions in China?

For now, the Western world seems undecided, if not downright confused. Some are lambasting the ruling as politically motivated, a frightening example of how far China’s legal system has yet to come. Others are viewing the situation with a bit more sympathy to China.

Let’s recap: On Monday, a Chinese court handed down a 10-year prison sentence to Stern Hu in a case described by the WSJ’s James Areddy as “a dramatic and closely watched case that abruptly swung from politically charged accusations of espionage to admissions of bribery over iron-ore contracts.”

Three of Hu’s Rio Tinto colleagues received sentences ranging from seven to 14 years.

The Anglo-Australian mining company-which had once defended its four accused employees-swiftly fired them Monday, saying there was “clear evidence” they took bribes. The company described the actions of the convicted employees as “deplorable” and said they acted “wholly outside our systems.”

At the same time, the Australian government criticized the process used to convict Hu, an Australian citizen. Australian Prime Minister Kevin Rudd said early Tuesday that China had “missed an opportunity to demonstrate to the world at large transparency that would be consistent with its emerging global role.”

And was the prosecution of the men politically motivated? Writing on the WSJ’s opinion page, Hugo Restall on Tuesday calls those “suspicions inevitable.” Writes Restall:

Remember that early last year, cash-starved Rio Tinto angered China by inviting Aluminum Corp. of China, or Chinalco, to take a $19.5 billion equity stake and then backed out of the deal under a combination of shareholder, government and public pressure. Rio was also driving a tough bargain in iron-ore price negotiations with Chinese buyers. Many observers speculated that the four executives were pawns in a high stakes game of tit-for-tat orchestrated from Beijing.

But if retribution was at play, so were other forces, writes Restall:

The ill will created by the whipsawing prices and huge losses suffered by some firms supplied plenty of motivation for someone to drop the dime on Rio.

Restall concludes that while Rio Tinto executives may have taken kickbacks, the animus to prosecute them likely came not from the Chinalco situation, but for reneging on smaller deals for iron ore, deals that had been nailed down by handshakes. Writes Restall:

Everyone doing business in China should be clear by now on the rules-there is no rule of law. Deals can be done on the basis of mutual trust, which creates some level of certainty. The four Rio Tinto executives may be guilty of corruption, but the real reason they are in prison is because that trust broke down.

Full post as published by Law Blog - WSJ.com on March 30, 2010 (boomark / email).