Last week, a man and a woman purported to be British investigator Peter Humphrey and his American wife Yu Zingzeng appeared on Chinese television to confess to crimes against the Chinese people. The performance – which looked like a scene from a B-grade spy movie – was the latest chapter of a unnerving saga in which they seem to have been caught in the shifting sands of Chinese privacy laws that were well known to Humphrey and a concern to him only three months before.
News of the couple’s television appearance and confession was covered by The Wall Street Journal on August 27, 2013 in its CHINA REALTIME REPORT.
The founder and managing director of risk management consultancy ChinaWhys, Humphrey noted in May the Chinese crackdown on information that was gathering steam in ACFE’s The Fraud Examiner. Entitled “How Fraud Investigation Just Got Harder in China: Exploring the impact of China’s clampdown on public records”, he wrote that:
“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.
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During 2011 and 2012, short-seller Muddy Waters not only shorted Chinese stocks (such as Sino Forest) that it had identified (possibly correctly) as fraudulent, it also published its findings on each firm in a manner viewed by authorities in Beijing as rabidly anti-Chinese, thus putting the Chinese Foreign Ministry on the back foot and unnecessarily provoking a government reaction. Soon after that, Bloomberg ran exposés on the business web and assets of a (now disgraced) Chinese Politburo member Mr. Bo Xi Lai and his wife, and then gave the family of China’s new President-to-be Mr. Xi Jinping similar treatment. In a third such article, the New York Times threw oil on the fire in October with a detailed piece on the wealth of Premier Wen Jiabao’s family.
For a moment it appeared that these publishing adventures–- using some of the investigative techniques of the forensic investigators, such as analysing (sic) AIC records –- were making China’s ruling elite wobble. In retaliatory crackdowns, one in May 2012 and one in January 2013, more than 1,000 local investigators and their alleged sources each time were detained, according to Chinese media. Then in February this year, the government issued strict new rules to restrict access to what it called ‘personal information.’
Critics describe this clampdown as an attempt to protect corrupt government officials from exposure. But as an anti-fraud worker in China serving purely corporate clients on corporate matters or in litigation support I find this a very dark day for due diligence and forensics work. I find this a step backwards that will make due diligence and catching fraudsters harder. We will have to be even more creative from now on.
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With financial returns and personal identification data less available to help connect the dots, fraud investigation and due diligence in China must rely more on human source inquiries, both with related parties and with insiders (such as managers, sales agents, production staff, suppliers and so on) to ascertain that real business exists; and a forensic internal review, if circumstances allow it, in order to identify not only signs of irregularities but to drill down into their origins. The costs of this work will be well justified if they can prevent or detect large losses.”
So while major media outlets portrayed the arrest of Humphrey and Yu as an unprecedented shot across the bow by the Chinese, surely they themselves could not have thought of it as such. Humphrey’s writing indicated he knew that more creative and deft – and maybe nefarious – methods might be required to garner corporate and personal information in China. The highlighted portions of his text that could be read at once as prescribing both industrious and nefariousness put the blood in the water that proved irresistible to law enforcement.
Whether Humphrey and Yu obtained and trafficked in – whatever that now means – the personal information of Chinese nationals or not, they had to have known that police eyes were on them. Having spent 37 years in China and the last 14 in investigations and due diligence, Humphrey – while he may not have calculated that he and his wife would be held for nearly seven weeks for their purported crimes – surely was aware of the likelihood that they were being watched by authorities and that questions might be asked of him and about his methods.
Regardless, here’s to hoping that a criminal or diplomatic solution to this sticky wicket is found and that he and his wife – whether pre- or post-sentence are released soon.