The detention of a fraud investigator in China whom sources say was working for GlaxoSmithKline appears to signal a serious problem for organizations doing business there that the U.S. Department of Justice and Great Britain’s Serious Fraud Office ought to try to nip in the bud. A crackdown in China on investigators and the ability to conduct internal probes and to perform due diligence reviews cannot and – by law – will not yield to Chinese efforts to frustrate the same. China needs to be told this in the strongest of terms and this can only credibly come from the U.S. and British governments.
This past Sunday, The Wall Street Journal reported that a well-known investigator in China and British national named Peter Humphrey was being held by Shanghai police for reasons that were not made clear. Humphrey is the managing director of ChinaWhys Co., a Hong Kong-based investigation firm that he founded with his wife. It focuses on fraud and accounting issues for multi-national businesses operating in China.
The day before, a spokesman for the Foreign Office had confirmed that it was aware of the arrest of an unnamed British national in Shanghai and indicated that it was providing consular assistance to the family. That statement was later revised by British authorities to say that the individual had been detained, not arrested. Chinese authorities didn’t respond to requests for comment.
It is noteworthy that persons held by Chinese police aren’t typically granted access to lawyers and foreigners are granted access to consular officers until a formal arrest is made, and so, Humphrey is on his own for the time being. His isolation in this regard seemed to be confirmed by the facts that his mobile phones had been switched off, he didn’t respond to e-mail messages, and efforts to reach his company and his wife were unsuccessful. Reuters later reported that Humphrey’s American wife, Yu Yingzeng, was also being detained by authorities.
GSK was quite mum on the matter. Although ChinaWhys and GSK teamed up to deliver a jointly-run anti-fraud and anti-corruption seminar in Shanghai in 2004, on Saturday, a spokesman said the Briton being detained by Chinese authorities had “never been a GSK employee.” Asked whether the person being held by authorities had ever worked as a contractor for the pharmaceutical giant, he declined to comment further.
Humphrey, a former reporter who speaks fluent Mandarin, has been in China since 1979. By his own account, he has mixed feelings about the country’s economic progress since then. At a presentation to the Texas-based Association of Certified Fraud Examiners last year, he noted that while China had made “stunning progress,” its tremendous economic achievements have come at the cost of a “dramatic resurgence of corruption and widespread fraud.”
While that statement – if known to them – probably would not endear him to Chinese authorities, it has more of an “icing-on-the-cake” feel than being the real cause for Humphrey’s detention. It’s a conservative bet that his past work for GSK and likely involvement in addressing the current travel-agency-as-bag-man scandal is what has put him on the hot seat.
Executives at due-diligence firms told the WSJ that Beijing is growing less tolerant of their activity, although they did not necessarily see it as a signal of a broader crackdown on their industry. One indicated that there has been a “tightening” of access to the kinds of information needed to conduct fraud investigations and carry out due diligence. By way of example, the WSJ article noted that Chinese government bureaus have begun sealing files relating to businesses ownership. This, of course, is a key component of every internal investigation and due diligence project.
While the detention of a single investigator and lock-downs on information can be dealt with on an ad hoc basis, a broader approach is needed if anti-corruption efforts in China are going to continue. While the Chinese government may suspect – and sometimes rightly so – that Western investigators are more cover-up and less come-to-Jesus, the Peter Humphreys of the world cannot and should not be left to fend for themselves.
If the due diligence and internal investigations practices mandated by the FCPA and the Bribery Act are going to be continued and enforced, then someone other than individual investigators and law firms are going to have to make it known to the Chinese that punitive actions against these practitioners cannot be accepted. Whether this can be done informally by a major corporation with commensurate clout or a trade group or groups, is uncertain. But pressure certainly should be brought to bear by the DOJ and SFO to ensure that China knows what is demanded of companies under the applicable U.S. and British statues and that these expectations are not going to change.
It would seem worthwhile for the U.S. and British governments to exhort China to accede to letting internal investigators and due diligence people do their thing. It is plain that companies cannot ignore the requirements of the FCPA and Bribery Act – nor will their governments let them – and so, the continued healthy access to Chinese markets is going to depend upon these professionals being able to do their jobs.
GSK may not be the best example and the Chinese have good reason to doubt anything that it says at this point. After all, its own investigations found no evidence of bribery or corruption in connection with the marketing and sale of Botox and other pharmaceuticals. But other companies do conduct earnest investigations and due diligence reviews that find wrongdoing and correct it. China needs to be made to understand – at the highest levels – that it benefits from these efforts as well and should not stand in their way.