Friday, May 18, 2012

China’s MFA – Masters in Fraud Administration

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Maintain Two Sets of Financial Books!

Manipulate Accounting Guidelines!

Forge Tax Receipts!

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The attached investigative report, though dense and dry, sheds light on consultancy businesses in China and Hong Kong that advise unscrupulous business owners on how to systematically defraud international investors. Such Fraud School operators include investment firms such as Chief Capital in Hong Kong.

The fever that raged among North American investors for most of the past decade to invest into Chinese businesses has cooled significantly in the past year as investors in publicly listed companies (e.g. Toronto-listed Sino-Forest and NASDAQ-listed ChinaCast Education, Fushi Copperweld, and Lihua International) have fallen victim to scams and a wide assortment of unethical business practices. International-listed Chinese companies are supposed to represent the crème-de-la-crème class of mainland businesses, since they purportedly need to pass muster with a battery of international accountants, lawyers and investment bankers and meet stringent international listing requirements. Sadly, too many such businesses are not so sweet and creamy after all, and the nice white foam simply hides murky, muddy currents beneath it. And, if the “best” class of Chinese companies is this spotty, what does it say about the rest of Chinese businesses?

Tim Clissold’s riveting book Mr. China about doing business in China in the 1980s chronicles some jaw-dropping cases of horrifying business practices. Clearly, not enough has changed in thirty years. The rule of law is still applied unevenly, if at all. And too many Chinese business operators see each transaction as a merciless zero-sum game, rather than an opportunity to build long-lasting commercial relationships.  

Given China’s economic importance, international investors will continue to beat the well-trodden path to the country’s doorstep, seeking riches. They are well-advised to come provisioned with a large helping of caveat emptor and a well-versed education in anti-fraud practices.

Fraud School