Foreign Law Firms Implicated in China’s Graft Storm

The following is an excerpt from today’s Online Caijing Magazine (English).   The original Caijing report is in Chinese.  The link will only take you to an abstract, rather than a full report, which is for the eyes of subscribers only.  Fair enough.  Luckily, someone somewhere somehow manages to post this.

Foreign Investment Process in Graft Storm

Since August, virtually every Chinese government regulatory department involved in foreign investment has been affected by a stormy investigation into high-level corruption.

A half-dozen officials have been forced to step down from the Ministry of Commerce (MOFCOM) and State Administration for Industry and Commerce (SAIC). Lawyers who served as brokers for questionable deals were punished as well.

Guo Jingyi, an official at MOFCOM’s Treaty and Law Department, was detained in mid-August by the Communist Party’s disciplinary arm. Also arrested were two lawyers, Zhang Yuzhu, director for the Beijing legal firm Seafront Law Office, and his former colleague Liu Yang.

In late September, authorities arrested Deng Zhan, a former deputy administrator of foreign investment at MOFCOM, on charges of accepting bribes. Du Baozhong, from MOFCOM’s treaty department, was detained in late October. And later Liu Wei, a deputy chief for foreign investment registration at SAIC, was arrested.

Guo and Deng were detained by party discipline inspectors in connection with their roles in approving foreign mergers and acquisitions. Liu was a link in the process and worked closely with Guo and Deng.

The cases of Zhang, charged with commercial bribery, and Deng, who allegedly accepted bribes, have been forwarded to judicial authorities.

Although there have been no official statements about connections between these individual cases or other details, the probe has sent shock waves throughout the foreign investment sector, affecting companies, financial service institutions and investors.

Like a loose string pulled on an old sweater, the investigations of Guo and his associates also may unravel the flawed regulatory system that affects the entire foreign investment field.

The cases reflect the shortcomings of gray-zone rules for approving startups, mergers and acquisitions involving foreign companies. Guo and his lawyer friends allegedly took advantage of these and other regulations for reasons still unclear.

At the same time, the cases have exposed the reality of the country’s often vague foreign investment regulations, which apparently lack administrative power in some areas and appear to be too restrictive in others.

A lawyer specializing in mergers and acquisitions involving foreign investment said, “To a large extent, Guo Jingyi’s rent-seeking behavior was all within the scope free discretion and in fact cleared administrative hurdles for normal business activities. This is really sad.”

An earlier report at ALB Legal News also reveals that two US law firms are under investigation for their involvement in the MOFCOM bribery scandal:

The Chinese government is investigating deals involving two US law firms in a wider corruption probe which saw the detention of officials responsible for approving foreign investment deals into the country.

According to Chinese media, special government investigators are reviewing investments cases in which two US-based law firms are involved. Media sources did not name the firms but revealed they had offices in Hong Kong and Beijing.

Richard Cassin, from US-based firm Cassin Law, said that American law firms embroiled in the corruption probe may risk criminal prosecution at home under the Foreign Corrupt Practices Act (FCPA). He also said that these problems may emerge when law firms are not careful enough in complying with the Act.

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More than 150 people attended an AmCham-China event with keynote speaker Guo Jingyi, director general of the Ministry of Commerce’s Treaty and Law Department, on November 6 at China World Hotel. Guo discussed the merger and acquisition regulations issued by the government in September and their impact on both foreign and domestic companies. He gave specific attention to the background of the drafting of the rules and their future implementation. Image from:
http://www.amcham-china.org.cn/

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9 Responses to Foreign Law Firms Implicated in China’s Graft Storm

  1. nanheyangrouchuan says:

    I wonder if China Law Blog has any dirty fingers in this…

  2. Ned Kelly says:

    Nanhe, there is no basis for speculation that China Law Blob (CLB) has had anything to do with this particular scandal. Remember, in America, a man is PRESUMED INNOCENT until proven guilty!

    Oh but wait, CLB’s business is in China, not America. So maybe he’s forfeited the right to be presumed innocent, which does not exist in China? Hmmm….

  3. C.A. Yeung says:

    For what I know, one of the foreign law firms involved got into trouble because they tried too hard to help a cosmetics company break into the Chinese market. Now, what makes you think CLB would have anything to do with cosmetics?

  4. C.A. Yeung says:

    Nanhe, in any case, it’s not too difficult to narrow down the possibilities. Remember, the biggest name in this scandal is Guo Jingyi. So do a Google search with this combination: “Jingyi Guo” + US law firm, and you will be astonished at what you can find. The tricky part of this search is that you shouldn’t be looking for what is contained in the website, because you won’t find it. Instead, look for what is missing.

  5. Mao Lives says:

    Guo Jingyi is an extremely intelligent, hardworking person who served China to the highest standards. Those who attack him are simply attacking a rare official who works smoothly within both the Chinese system as well as the international one. If there are any corrupt practices, it is certainly more senior party officials who have put them in place and benefited from them. Guo’s prosecution is simply dirty, corrupt politics in the worst Party tradition. It is officials like Guo Jingyi who will help lead China to a prosperous and peaceful position of global prominence.

  6. C.A. Yeung says:

    Mao Lives,

    Thanks for your comment. You have raised some very interesting points and your opinion on Guo Jingyi’s prosecution sounds plausible. I am wondering if you would be able to give me more information to substantiate your view. I don’t have more up-to-date news on hand, except yet another Caijing report published on 10 April 2009. So I would really appreciate if you could provide me with more information, or if you can point me to the right direction to conduct a more thorough investigation. Many thanks.

  7. Kim Jong Il says:

    Is the US Justice Department prosecuting the implicated US law firms? Which US law firms are involved?

  8. C.A. Yeung says:

    Kim Jong Il asked: “Is the US Justice Department prosecuting the implicated US law firms? Which US law firms are involved?”

    The Chinese authorities in charge of investigation has not revealed any names of foreign corporations or law firms implicated in this fiasco. However, once they do, we will expect the US Justice Department take action against those law firms.

    Meanwhile both the China Economic Review and the Australian have quoted a Wall Street Journal report which discloses that a US direct marketing company has launched a voluntary internal investigation into its business operations in China, citing possible FCPA violations. We are not sure whether this is related to the Guo Jingyi scandal.

    I am keeping an eye on this and will update when new evidence starts to emerge.

  9. C.A. Yeung says:

    Just before I log off, here is some new information that I have dug out today about the Seafront Law Firm. Seafront is the Chinese law firm that’s been under investigation for its role in the bribery scandal.

    According to practicesource.com:

    The Seafront Law Firm’s web site is now inaccessible. But the Google cache reveals that it is the successor firm to the Great Wall Law Office, which old-timers among you (among whom I must sadly count myself) will remember as having been set up under MOFTEC around 1986, back in the good old days when nobody worried that there might be something peculiar about MOFTEC making money from advising people on how to get approvals from MOFTEC. And MOFTEC is, of course, the predecessor of MOFCOM. So the guanxi here go deep.

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