What to do on cross-border fraud - Mark Schaub

Mark Schaub

Cross-border fraud in China is on the rise, says Shanghai-based lawyer Mark Schaub in Lexology. And when it happens, you should take action right away. First he paints what could happen.

Mark Schaub:

It was an ordinary Tuesday morning in February when Mandy, a senior accountant in MCA Corporation Ltd, a major US machinery manufacturing company, received 2 emails from company’s CEO Steve Green. This email address was not Mr. Green’s usual one but Mandy did not pay much attention to this since Mr. Green did on occasion use alternative email addresses. 

The email came with the subject ‘Urgent and Confidential’.  The first line of Mr. Green’s email stated “Below information is highly confidential, please communicate with me via this email and do not copy in anyone else”.  Mandy read on. According to the email, Mr. Green was currently in China conducting a top secret M&A deal and was being supported by a firm named Elite Consulting. The email attached two bills from Elite Consulting requesting immediate payment of in total USD$4,320,000. As prompt and efficient as Mandy always is, she wired the amount on the same day to the Chinese bank accounts that was indicated in the email. 

The next morning, Mandy was shocked to see Mr. Green pass by her office thinking ‘shouldn’t he be in China?’ All of sudden, the unfamiliar email address with nobody else copied, the mysterious consulting firm, top secret communications, urgent payment to China all pointed to MCA having been the victim of a fraud. 

The above scenario, with slight variation, has become relatively common in the last 18 months. In addition to the above scams international companies increasingly need to be wary of cross border fraud involving phishing attacks, trade financing frauds, money laundering and many others. 

Cross-border fraud involving China is strongly on the rise. The victims of the cross-border scams suffer millions of dollars in losses every year to criminals who operate across borders and behind shell companies. These sophisticated criminals are difficult to catch and funds can be difficult to trace.

Tips to act at Lexology.

Mark Schaub is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more experts on managing your China risk? Do check out this list.    

US takes on Chinese fraudsters - Paul Gillis

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.

Paul Gillis is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you interested in more political experts on the China Speakers Bureau? Do check out this list.  

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Horror investment stories in China - Shaun Rein

Shaun Rein by Fantake via Flickr

Shaun Rein recalls in CNBC a proposed investment of US§ 50 million in a Chinese internet venture that did not exist, and was only cancelled after some solid due dilligence was done. The investor "had only been to China once, when the CEO of the target firm had wined and dined him, introduced him to some supposedly high-ranking government officials, and showed him a packed outlet.
Rein summarizes:

Despite the many horror stories investors run into in China, it still amazes me how little due diligence is actually done by people investing there.

If it can almost happen to professional private equity firms, it can happen to you. Even though I have been, and continue to be, one of the biggest China bulls for over a decade and a half, I recommend a healthy dose of caution for most everyday investors before buying Chinese stocks. In fact, they might be better off investing in companies like Apple or Yum! Brands that make money in China but whose numbers you can trust.

Unfortunately, fraud is commonplace there and the investment banks, law firms, and accounting firms that should be protecting you and doing due diligence aren't doing their jobs. Why not? Often they just want to get deals done to get their commissions and, frankly, often they are simply not up to the job. I've seen many non-Chinese speaking executives fly into China for for a few days to conduct due diligence and get hoodwinked.

The whole story in CNBC.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.

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