Newspaper article International Herald Tribune

Consultants' Arrests Create a Chill in China ; Foreign Companies Rely on Investigative Firms to Assess Business Dealings

Newspaper article International Herald Tribune

Consultants' Arrests Create a Chill in China ; Foreign Companies Rely on Investigative Firms to Assess Business Dealings

Article excerpt

Peter Humphrey and his wife, Yu Yingzhen, ran a consulting firm that is part of an industry to guide foreign corporations through China's opaque and often treacherous business environment.

CORRECTION APPENDED

When Peter Humphrey and his wife, Yu Yingzheng, appeared on Chinese national television recently, handcuffed and wearing orange prison vests, it was the first time in more than a month that family and friends had seen the British-American couple, well-known figures in the foreign business world here.

But any sense of relief was tempered by what they saw next: Mr. Humphrey, his face electronically blurred, his head bowed, confessed to a crime and apologized to the Chinese government.

The broadcast not only stirred immediate alarm among foreigners in China, but also cast a light on a murky corner of business life in the world's most dynamic economy. Until they disappeared in July, Mr. Humphrey and Ms. Yu ran ChinaWhys, one of many firms in the hush- hush industry of consultants and investigators in Beijing, Shanghai and Hong Kong that promise to guide foreign corporations through China's opaque and often treacherous business environment.

The companies sell services that are considered essential to doing business in China, including background checks, financial audits, fraud investigations and trademark protection. In most of the world, such work is fairly mundane. But in China, where public records are limited and corruption is rampant, it can be tricky and dangerous.

The arrests of Mr. Humphrey and Ms. Yu on charges of illegally acquiring private personal information, and the recent jailing of several other business researchers on similar charges, suggest the risks are rising. Taken together with bribery investigations against GlaxoSmithKline and other drug makers, increasing pressure on American car companies to lower their prices in China and not-so- veiled threats against American technology companies to subcontract to Chinese companies, China appears to be throwing new obstacles in the way of foreign companies doing business in the country.

Foreign investors -- hedge funds, private equity firms and multinational companies -- typically hire consulting firms like ChinaWhys to investigate potential partners and employees or keep tabs on current ones.

The goal is to uncover wrongdoing that could hurt investments, things like a hidden relationship with a supplier or a fraud that could sink a publicly listed company.

"Unfortunately, even as due diligence into the integrity of domestic enterprises in China has become more important in the light of perceived widespread fraud and misrepresentation, access to records has become even more difficult," said John Kuzmik, a consultant and former partner-in-charge of the law firm Baker Botts in Hong Kong. "Investigators are working in a very gray and somewhat dangerous environment."

China has yet to develop a comprehensive system for collecting and assessing individual credit histories, or even gaining access to criminal or land records, Mr. Kuzmik said. And last year, the government began clamping down on access to corporate and household registration documents.

Much of the business going to these firms comes from Western lawyers, who must perform due diligence on Chinese deals for their clients but are wary about getting their hands dirty in the process.

"We work with private investigators, but we don't want to know where they get the information," said a lawyer in a major American law firm in China.

Because the rules about access to corporate and other records are uncertain -- and the police and the courts themselves are susceptible to outside influence -- the greatest risk may be an investigation of an individual with the means to retaliate.

That appears to be what happened to Huang Kun, a Canadian investigator who is in a Chinese jail and is expected to face criminal charges after helping prepare a negative report about Silvercorp, a mining operation that suffered a 20 percent fall in its share price on the Toronto stock exchange after Mr. …

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