Understanding China, One Blog at a Time

An American in China

China Making Due Diligence Illegal

Posted by w_thames_the_d on September 28, 2013


China is now jailing people for reporting on fraudulent Chinese companies.

Excerpt

On the afternoon of Dec. 28, Huang Kun was about to board a flight to Hong Kong when his Canadian passport was flagged by officials at Beijing’s International Airport, and he was taken into custody by Chinese police.

It was the beginning of a prolonged and often frightening ordeal for Mr. Huang that has landed the 35-year-old from British Columbia in a Chinese jail – sharing a one-bed cell with 20 other men. He is expected to soon face charges of criminally defaming a Vancouver-based mining company calledSilvercorp Metals Inc.

Mr. Huang knew when he went to the airport that day that police in the city of Luoyang, where Silvercorp’s flagship mining operations are located, had arrested and interrogated two associates of his. The men had helped him prepare a scathing research report that, when its allegations were published, sent Silvercorp’s share price tumbling 20 per cent in one day on the Toronto Stock Exchange.

What he didn’t know was that in the wake of a series of scandals involving Chinese companies listed on North American stock exchanges, authorities in China had decided to push back hard against those attacking the credibility of Chinese firms. Many of these critics had made small fortunes by “shorting” the stocks of those firms, essentially betting that their share prices would fall once the new information was revealed. Mr. Huang worked for one of those short-sellers.

In this case, documents obtained by The Globe and Mail may suggest that Silvercorp and its executives were working in concert with local authorities, and helping to pay for the investigation against Mr. Huang and his associates. Legal experts say Silvercorp’s alleged actions may be in violation of both Chinese and Canadian law.

http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/in-china-silvercorp-critic-caught-in-campaign-by-police/article4528671/?page=all

Excerpt 2

By Alexandra Harney

SHANGHAI, July 31 (Reuters) – The detention by Chinese authorities of a British corporate investigator and his American wife in the wake of a corruption probe into pharmaceutical giant GlaxoSmithKline has had a chilling effect on other risk consultants working in China.

It’s unclear why Peter Humphrey and Yu Yingzeng, whose firm ChinaWhys has done work for GSK and other drugmakers, were detained. But corporate investigators said they were concerned about the repercussions for the industry.

Multinationals, banks and investors rely on corporate investigators for information about potential partners and investments in China, where a lack of transparency is a hurdle to doing business. Restrictions in the flow of such background information could potentially leave foreign investors exposed to greater risk in the world’s second-largest economy.

ChinaWhys offers “discreet risk mitigation solutions, internal process audits, due diligence and commercial investigation services”, according to the firm’s website.

“(Humphrey’s) detention is really disturbing. It gives me an uneasy feeling that people who, on the face of it, are trying to help companies and individuals navigate their way around the system are being targeted,” said Gary Miller, litigation partner and head of the fraud group at London law firm Mishcon de Reya.

Mike Vermillion, senior director of third party risk management solutions at Oregon-based consultancy Navex Global, called the detentions chilling.

“I am certainly not getting on a plane to China next week,” Vermillion said.

Two sources with direct knowledge of the matter have said Humphrey and Yu were detained by Chinese authorities in Shanghai on July 10. They did not specify who was holding the couple.

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