A Court Case, Recent Media Reports Outline Graft in Airline Industry
BY 2013-05-28 21:03:11
(Shanghai) – In late April, the Supreme People's Court in Shanghai sentenced a former employee involved in engine procurement for China Eastern Airlines Corp. Ltd. and Air China Ltd. to life in prison for bribery.
In his stints at the two airlines, Chen Xin was in charge of areas such as civil aircraft procurement, and in negotiations and decision-making involved with buying engine models.
Court documents show that in April 2011 he surrendered to police. Neither airline commented at the time, and the case was largely forgotten.
Then, The Sunday Times of Britain reported in January this year that Rolls-Royce PLC, the second largest manufacturer of commercial aircraft engines in the world, landed a procurement order from Air China in 2005 and another from China Eastern in 2010 through bribery. It named the bribe-taker as Chen Xin.
The court said that Chen took 12.2 million yuan in bribes while at the two companies. Court documents also show he took bribes to help the makers of aircraft engines win orders, and also accepted money to speed up deals involving China Eastern and Airbus S.A.S.
By piecing together details from the court documents and from The Sunday Times a picture of the airline industry unwritten procurement rules emerges.
'US$ 50,000 per Aircraft'
In March 2004, Chen became vice general manager of Air China's planning and development department. In this role he was responsible for buying engines for 20 A330-200 aircrafts, a versatile mid-size plane made by Airbus, for Air China in 2005. He was also involved when the bidding process started.
The bidders were three world's major engine producers: General Electric Co., Pratt & Whitney and Rolls-Royce, public record shows. Agent Lin Nanbin said the company he represented participated in the bidding, court documents show.
Chen met Lin through a third person, court documents show. Lin said Chen should keep an eye on the company that he represented. Soon after, Chen gave Air China's internal documents, which described the criteria for selecting engines, to Lin. Chen asked Lin to revise his company's bidding documents accordingly. The company Lin represented then won the bid.
Later, Chen asked Lin to give him US$ 50,000 per aircraft as a reward, and the total amount was US$ 1 million. Court documents show Lin sent the money to Chen.
In early 2009 Chen moved to China Eastern, and took responsibility for buying engines to power 16 A330-200 planes. In the second half of 2009, Lin again asked Chen to help the company he represented win the order and again promised to pay Chen US$ 50,000 per plane. Later the company that Lin represented won the order.
In August 2010, Lin sent a total of 4.4 million yuan to Chen through an underground bank, court documents show.
The court documents do not mention the names of the companies that made the engines due to a lack of evidence about which company Lin represented.
However, The Sunday Times reported that Rolls-Royce won contracts with the two airlines.
In 2005, Rolls-Royce said that it got an order worth US$ 800 million from Air China and its engines would be used on 20 Airbus A330 aircraft. In November 2010, Rolls-Royce said it won an engine order worth of US$ 1.2 billion from China Eastern, and its engines would power 16 A330 planes.
Last year, the Serious Fraud Office (SFO), an independent government department in Britain that investigates and prosecutes serious or complex fraud and corruption, started to investigate Rolls-Royce over misconduct in Indonesia and China.
Rolls-Royce released a statement late last year on its website that said it submitted materials regarding overseas agents suspected of bribery and corruption to the SFO.
Rolls-Royce's agent in China was involved in Chen's case, a source with knowledge of the matter said.
However, Rolls-Royce was not the only manufacturer of aircraft engines involved. Zhang Zhenju, who represented another manufacturer of aircraft engines, sent 1.3 million yuan to Chen from March to November 2009 to win a bid from China Eastern linked to its 30 A320 planes, a short-to-medium range Airbus airliner, court documents show.
Chen also made money other ways. In the first half of 2009, Xia Dili, chairman of a Hong Kong aircraft leasing company, became acquainted with Chen and asked him hasten the signing a contract between China Eastern and Airbus for the purchase of 16 A330-200 planes. The relationship between Xia and Airbus was not known.
At the end of December 2009, China Eastern said it signed an agreement with Airbus in Shanghai. And Xia paid Chen a HK$ 2 million as a reward, court documents show.
The Real Operator
The manufacturers of aircraft engines involved in Chen's case did not bribe him directly, but through its agents in China.
"Many agents do the same in this sector," a source who once worked with an engine maker said. "Your competitor does it, and you will be in inferior position if you don't.
"The engine producers don't bribe directly. They will find agents. If there is something wrong, it is a problem for the agent to deal with."
The agent and the manufacturer will discuss who pays the bribe, but normally the agent will not use the money he made from the engine maker to pay the bribery, the same source said. So in fact it is the engine producer who pays it.
The agent is likely to win the bid if he knows the airline's buying price, the same source said. If the agent also knows the other manufacturers' price, his chances of winning are even better. Chen was in a position to provide this information.
The engine manufacturers have several agents in China, the source said. When they select an agent, the important factors are an agent's efficiency and their connections: they must know someone who can help the company to win the business.
The departments that Chen served in at Air China and China Eastern were the companies' decision-making organs, the source said. His department was responsible for purchasing and drafting feasibility reports.
Although Chen was a middle-management, he had to report to his superior for approval, the source said. "In China the middle-management is the real operator for many things."