Media groups panic over China kickbacks scandal

In a Chinese media market worth nearly $50bn a year there’s plenty of room for entrepreneurial activities, some of which may cross the line into illegality.

One example seems to be the activities of Chongqing Huayu media broker Zhen Zhixiang but Zhen has only been nabbed by the Chinese authorities as he is suspected of tax avoidance and money laundering via a brothel in the basement of the local Hilton hotel.

But two employees of Publicis Groupe media buyer Vivaki, which dealt with Zhen, CEO Warren Hui and colleague Ye Pengtao, have also been question by police. Other media agencies were also involved with Chongqing Huayu.

Zhen took client money and placed it with various media shops who, in turn, invested it in media. What’s worrying the big marcoms groups, who all have media businesses in China, is whether the police investigation will shine an uncomfortable light on these unorthodox, although not in themselves illegal, activities.

The norm these days is for clients to place their money with an agency to invest in agreed media at an agreed price. The agency then receives a fee or an agreed commission. Any discounts or rebates from the media owner are then returned to the client.

But it hasn’t always been thus (and clearly still isn’t).

Back in 1968 two enterprising Frenchmen, the Gross brothers, set up a company called Centre Achete Radio et Television, Caret or Carat as it came to be known. Carat would buy huge chunks of French media time and space at vast discounts and sell it on to clients, pocketing the difference. This was called media broking, what Chongqing Huayu and others in China do, except they buy or borrow from clients not media owners.

But media broking was effectively banned in the US and UK and so when Carat bought the UK media independent TMD (Carat was later acquired by WCRS Group and then became the foundation of the Aegis quoted media group) it had to change its ways, in the UK anyway.

And in 1993 the French government passed the so-called Loi Sapin in France which effectively outlawed media broking after complaints from advertisers that they were being fleeced.

Clearly there are numerous opportunities within such a framework for corruption, agencies hanging on to discounts that the client thinks should be theirs (in effect charging the clients a false price) and individuals creaming money off the top.

But none of this would work if media owners weren’t so keen to grab advertising business at virtually any price. And they still do it, with or without broking. Media owners will take on business at hugely reduced rates if it means keeping their competitors out; they will offer bigger and bigger commissions to agencies if it helps them get the business and it’s the agency’s job (it is, after all, the financial principal in the transaction) to sort this with its clients. Poster companies pay huge commissions of up to 20 per cent to agencies, including the so-called poster specialists like WPP-own Kinetic and Aegis-owned Posterscope, on the grounds that posters are tricky and time-consuming to buy.

Many people in the industry would say, privately of course, that they’re players in a market and only doing what players in the financial markets do legally and more openly. But rules are rules.

Some people estimate that around half of the agency media income in China comes from top-up deals from media owners, or ‘sur commissions’ as they used to be known in Carat’s French heyday.

If some of these start coming to light then there will be hell to pay, with big global clients saying we want our money back (among other terms of abuse) and the Chinese authorities being presented with a big stick to beat multinational agencies and clients, if that should suit their purposes.

For the past week or so this story has gone quiet, with Publicis stonewalling over its executives Hui and Pengtao, saying that as it isn’t involved in any wrongdoing it hasn’t been told anything and therefore can’t take any action.

But all this probably won’t stay quiet for long and the stakes for the big marcoms groups and others are very high indeed.

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.