Tag Archives: SEC

Delisting US-Listed Chinese Equities Advances Glacially

Screenshot of US Securities and Exchange Commission announcement of proceeding with Holding Foreign Companies Accountable Act, March 24, 2001

THE UNITED STATES is formally proceeding with Trump-era plans to restrict Chinese companies access to US capital by delisting them from US stock exchanges. 

Under the Holding Foreign Companies Accountable Ac that became law in mid-December, the penultimate month of the Trump presidency, the SEC had 90 days to outline a process by which it will request certain US-listed companies to submit documentation to establish that they are not owned or controlled by a foreign government — by which the Trump administration meant China. Foreign firms will also be delisted from US exchanges if they fail to comply with US accounting standards. 

The US Securities and Exchange Commission (SEC) announced on March 24 that it had adopted measures to comply with the legally required 90-day deadline. 

Delistings now look inevitable in a one day, someday, maybe never sort of way. The procedures that have to be followed for US government agency rule-making gives the SEC the latitude to spin-out the process, should it so choose, a choice that the prevailing winds from the White House would drive. 

Many US-quoted Chinese companies could also spin-out any investigation into their ultimate ownership, plus they have to fail to meet the US audit requirement for three successive years. Nonetheless, they would have trouble complying with US audit requirements without violating Chinese laws. It is anyway improbable that they would prove willing to throw open their books to a foreign regulator.

It is possible that even after delisting, Chinese companies’ shares could trade in over-the-counter markets in the United States — unless the Biden administration or, more likely, its successor, decides to implement another Trump initiative to ban US investors from owning Chinese equities.

A bigger headache for Chinese tech firms at the moment is Beijing’s crackdown on the largest of their number, including Alibaba and Tencent, purportedly in the name of antitrust but more likely to rein in the growing power of a sector mostly privately, not state-owned but which authorities need to be aligned with state management of both the economy and cyberspace.


Filed under China-U.S., Markets

Would You Catch Corrupt Practices In Your Firm?

We suspect that IBM’s $10 million settlement with the U.S. securities regulator over accusations that it gave cash and gifts to Chinese and South Korean government officials in violation of the U.S. Foreign Corrupt Practices Act represents business as usual more than the rare bad apple. For the several years that what the U.S. Securities and Exchange Commission called IBM’s “conduits for bribes” continued, the company had anti-bribery policies in place, yet failed to detect the alleged transgressions. The question for Western multinationals operating in China to ask themselves now is whether they would have done better.

IBM neither admits nor denies wrongdoing, as is the practice in such cases. In its complaint filing the SEC, which handles Foreign Corrupt Practices Act cases; the U.S. Department of Justice would only be involved in a criminal case, said:

From at least 2004 to early 2009, employees of IBM (China) Investment Company Limited and IBM Global Services (China) Co., Ltd. (collectively, “IBM-China”), both wholly-owned IBM subsidiaries, engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-Chipa employees and more than 100 IBM China employees overall.

The SEC accused IBM employees of creating slush funds that were used to pay for overseas excursions by Chinese government officials masquerading as offsite training courses. IBM employees are also alleged to have given gifts, such as cameras and laptops to the officials.  This how the SEC said it all worked:

As part of its business, IBM-China entered into contractual agreements with its government-owned or controlled customers in China for hardware, software, and other services. These contracts contained provisions requiring IBM-China to provide training to the employees of these customers given the high-tech nature of IBM’s products and services. In some cases, IBM held this training offsite and required the customers to travel. In advance of any training trips, IBM-China employees were required to submit a Delegation Trip Request (“DTR”) detailing the business purpose of the trip, all planned sightseeing or entertainment activities, and anticipated expenses. The DTRs required approval by IBM-China managers. IBM-China’s policies required customers to pay for side-trips and stopovers unrelated to the training.

Between 2004 and 2009, IBM’s internal controls failed to detect at least 114 instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; amI (6) trips where per diem payments and gifts were provided to Chinese government officials. Moreover, IBM-China personnel also used its official travel agency in China to funnel money that was approved for legitimate business trips to fund unapproved trips. IBM-China personnel utilized the company’s procurement process to designate its preferred travel agents as “authorized training providers.” IBM-China personnel then submitted fraudulent purchase requests for “training services” from these “authorized training providers” and caused IBM- China to pay these vendors. The money paid to these vendors was used to pay for unapproved trips by Chinese government employees.

The takeaway for multinationals doing business in China is that 114 instances over at least five years slipped through IBM’s internal policies and controls designed to prevent or detect such violations of the U.S.’s Foreign Corrupt Practices Act. Remember, it is not just the bribes that the act goes after, it is also the accounting tricks that companies employ to cover them up. For whatever reason, in this case those controls proved deficient in preventing employees of IBM’s subsidiaries and, in the South Korean case, joint ventures from using local business partners and travel agencies as “conduits for bribes or other improper payments to government officials over long periods of time.” Are you confident yours would?

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Calling U.S.-Listed Chinese Companies To Account

The U.S. Securities and Exchange Commission has sanctioned a California firm of auditors in connection with fraudulent accounts of China Energy Savings Technology, a Chinese technology company that has been entangled with the SEC since 2006. The auditing firm, Moore Stephens Wurth Frazer & Torbet LLC along with K. Dean Yamagata, a CPA, have settled the case, as is customary in such matters, without admitting or denying the SEC’s findings of improper professional conduct. The firm is barred temporarily from accepting new auditing assignments in China and will pay $129,500. (SEC announcement.)

Bloomberg’s report notes that this is one case in what it calls a broader probe by the American regulators into Chinese companies listing in the U.S., particularly the 150 or so that have done so via a reverse merger (the acquisition of a listed shell company that then merges with its acquirer; it is a way round the requirements of making an initial public offer). A number of such companies, many small and whose operations remain overwhelmingly in China regardless of their U.S. listing, have employed small California firms to audit their books for the purposes of U.S. regulatory reporting. The suggestion is that these firms have outsourced the audit to local firms in China, beyond the remit of U.S. accounting oversight, thus leaving U.S investors at best at the mercy of shoddy accounting and at worst at risk of being defrauded.

Gadflies pushing for an SEC investigation have suggested a third of Chinese companies listed in the U.S. are reporting fictitious profits. An investigation by theStreet.com reckons the losses to American investors could run to $34 billion. Sporadic incidents of fraudulent reporting by U.S. listed Chinese companies have emerged before. Rino, a manufacturer and another Frazer client, was delisted by Nasdaq after admitting that it had reported fictitious details about contracts; Fuqi International and Sky One Medical have also acknowledged being the subject of SEC investigations.

The SEC, as its practice, won’t tip its hand to how widespread its investigation runs, or to how much cooperation, if any, it is getting from regulators in China. Going after Chinese firms’ American auditors would suggest it feels it is best off playing this on home turf.  There is nothing uniquely Chinese about penny-stock scams in U.S. markets. The question now is whether the SEC will uncover a systematic attempt to bilk U.S. investors, or whether it is just the gap between the U.S. and Chinese regulatory systems giving scope for sharp practice, reform of which will become another item to add to the long list of Sino-American trade and investment issues.

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