Compliance in China: Immense Fines against US Corporation in Rotten Meat Scandal

The food scandal, which already happened in 2014, had huge international press coverage. The Chinese company Shanghai Huxi had delivered rotten meat to McDonalds, KFC and Pizza Hut, among others, and kept a so-called “Yin & Yang bookkeeping”, which was discovered through a journalistic investigation. The production and expiry dates were manipulated and information for audits was doctored. Now, the Chinese government took action. On October 2, 2016, Huxi’s parent company OSI (China) Holding Co., Ltd., which belongs to the American OSI Holding, was fined 7.3 million RMB (1.1 million USD), while Shanghai Huxi was fined 17 million RMB (2.5 million USD). Responsible persons have received prison sentences from 19 to 36 months already in July 2016.

When the inspectors took a close look at the production of Shanghai Huxi in 2014, they found proper production conditions: all employees were working under orderly supervision, were clothed as required and processed fresh meat. However, if the auditors had visited the factory a couple of days earlier, a completely different picture would have been revealed – such as sneaking rotten meat back into the production process in order to cut costs.

This case shows that even large foreign companies have insufficient control over their third parties in China and Asia, as well as the severe consequences suppliers’ compliance violations can cause. The problem about governmental inspection is that the audited companies often find out about the controls in advance due to corruption and prepare accordingly – usually because internal compliance audits are missing.

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