China Herald: US takes on Chinese fraudsters

Paul Gillis

Recent action by US authorities against ZTE and the Bank of China shows that a tough line with Chinese fraudsters works, writes accounting professor Paul Gillis on his weblog. "Chinese regulators are ...protecting Chinese fraudsters and thereby creating a safe harbor for those who wish to commit fraud against US investors."

Paul Gillis:

Now we have the case of ZTE which was recently accused by the Commerce Department of circumventing export restrictions by selling products with sensitive American technologies to Iran, despite having agreed to the export restrictions. The US actions likely make it difficult for American companies to serve as suppliers to ZTE. China has screamed foul, saying the US actions would severely affect the normal operations of Chinese companies.

There was also the recent case where the Bank of China’s New York branch refused to comply with a US court order to turn over customer information related to a counterfeiting case. After facing $50,000 a day fines, the Bank of China relented and turned over the information.

It is becoming clear that Chinese regulators are playing US regulators for fools. They are protecting Chinese fraudsters and thereby creating a safe harbor for those who wish to commit fraud against US investors. At the same time, they welcome application of the rule of law in the US to protect Chinese investors. US regulators are letting them have their cake and eat it too.

The PCAOB has been unable to negotiate an arrangement to conduct inspections of Chinese audit firms, which seriously undermines protection of US investors in Chinese companies.The SEC has been unable to bring Chinese fraudsters to justice; as long as they stay in China they remain outside of the grasp of US regulators. China has shown no interest in prosecuting Chinese fraudsters for crimes committed in China that are clearly crimes in China, apparently on the basis that victims of the crimes were not Chinese. And US regulators have had little success in getting cooperation from Chinese regulators at bringing the fraudsters to justice in the United States.

What China is doing is a version of the poker strategy of shooting the angles. In poker, angle shooting is the act of using various underhanded, unfair methods to take advantage of inexperienced opponents. The difference between angle shooting and cheating is simply a matter of degree.

The SEC and PCAOB should take a lesson from the Bank of China case. When the pain was great enough, China backed down and produced the documents. The SEC got a partial victory against the Big Four accounting firms in China when it threatened to ban them because China would not allow the production of documents. I believe that if the SEC/PCAOB can make a credible threat that they will kick Chinese companies off US exchanges they can get China to prosecute fraudsters who rip off US shareholders, to help recover funds, and to properly regulate auditors and listed companies.

More at the ChinaAccountingBlog.

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