The Fraud Examiner

How Fraud Investigation Just Got Harder in China
 

Exploring the impact of China’s clampdown on public records  

 

May 2013

By Peter Humphrey, CFE

 

Over the past 15 years, I have witnessed the gradual emergence of an investigation industry in China. It began from crude anti-counterfeit outfits and family investigation agencies and gradually extended to the more sophisticated areas of due diligence, fraud investigation and forensics, as well as compliance and FCPA investigations. In the same period, we saw increasing availability of what in most countries we call “public records," including company registration files, annual returns and some limited, but useful, personal data. 

 

The availability of such records combined with a CFE's skill set of forensic accountants enabled anti-fraud professionals to do their job in a country where foreign investors feel at risk due to a high white-collar crime rate, a lack of transparency and strong cultural barriers in business operations.  

 

The promising environment that evolved for the fight against fraud and bribery in company operations in China has suffered a major setback due to a sudden government action to suppress certain data contained in such records. Why has this U-turn happened, and what is its impact on anti-fraud work? 

 

In January 2013, forensic and investigation firms -- and local law firms -- found that they or their search agents could no longer freely access records filed with the Administration of Industry and Commerce (AIC) bureaus around the country. The AIC registers, incorporates, inspects and regulates all companies in China, and collects their annual returns. These records, until recently accessible in full, contain useful data and documents relating to the birth, evolution and status of a company, names and personal details of shareholders, annual financial data and annual audit reports. 

 

It is by examining these records in conjunction with a forensic accounting review that a CFE here can close the circle on a fraud -- for example, by proving that Mr. X, an employee of Company Z, has set up his own firm (and, by the way, with no physical existence) and inserted this phantom into the sales chain as part of a large-scale distribution fraud against his employer. 

 



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