bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

urlAlias

moreOnThisArticles

sponsorType

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

A FOREIGN APPLIANCE  maker negotiating a venture with a mainland company finds a top executive of the future partner has diverted funds into his own pocket.

A foreign manufacturer planning an investment in a factory discovers only 200 of 250 vendors claimed by the Chinese company actually exist and the other 50 are phantoms to increase the cost.

A foreign company producing office machinery uncovers a scheme by its own workers to collude with counterfeiters and substitute fake ink cartridges in place of the ones made at its Chinese plant.

PricewaterhouseCoopers Investigations Asia managing director Stephen Vickers said: 'Those are the sorts of real nightmares people have to deal with. You would be surprised how many people get into trouble because they don't even do the basic stuff.

'They'll play with spreadsheets until the cows come home and play with numbers and convince themselves the situation is fine, but they don't look at the background or the reputations.'

For corporate detectives such as Mr Vickers business is booming, as foreign firms rush in, spurred by China's World Trade Organisation entry and strong growth.

Although many foreign investors check out the financial standing of a future partner, they sometimes neglect to delve deeper. Equally important are checking potential political and environmental problems.

'I call it off-balance sheet risk. That's what burns people in China,' Mr Vickers said.

The former Hong Kong senior superintendent of police has five easy ways to avoid disastrous fraud and other problems.

Our people: Hire honest employees by conducting a thorough background check. This basic move will ensure you avoid the mistake of a foreign bank in Hong Kong, which discovered a private banking executive had a bogus Harvard degree and a history of fraud, but not before he stole US$60 million worth of clients' funds.

Zero tolerance: Have effective and visible deterrents to fraud.

Keep track of your chop: Have effective internal and external controls, including safeguarding the all-important chop used to stamp business documents.

Avoid the matrix: Have a hands-on business approach and clear reporting lines instead of diffuse matrix management.

Know your partner: Get a good local partner by checking the company's background and track its previous deals.

'Fraud is a growth industry. There's been no outbreak of honesty in China last year,' Mr Vickers said.

Ironically, that means more work for investigators, especially for companies entering the China market, which tend to be smaller and lacking in-country experience.

'The big boys are probably in already. It's the mid-size companies that haven't got the experience on the ground,' Mr Vickers said.

The investigative unit of the accounting giant is offering services such as 'investigative due diligence' and 'computer forensics' to help meet demand as more foreign firms operate in China.

Uncovering negative information about a partner would not necessarily scuttle a deal, just help the foreign company to avoid the pitfalls.

'Negative information helps to structure the deal better,' he said.

Helping companies protect their brands amid rampant piracy is another growth industry. Although the authorities have become more serious about fighting the problem, solid evidence is needed to bring a criminal case.

'A lot of companies spend a lot of time with lawyers and low-level investigators doing hundreds and hundreds of little raids all over the place. The net result is hundreds and hundreds of little raids but no serious impact on the problem,' Mr Vickers said.

Some of the tricks include mainland suppliers over producing goods ordered by foreign firms and selling the excess on the market, sometimes after repackaging, or lowering quality standards.

One type of distribution fraud sees a foreign company's distributors replacing real goods with fakes.

China's WTO entry does not necessarily mean the situation will improve even though the business environment should change for the better.

Foreign companies will be allowed to set up their own distribution systems, but many are likely to invest in existing distributors.

PricewaterhouseCoopers Investigations China director Peter Humphrey said: 'They will probably succumb to the temptation to buy up existing distributors. That is asking for trouble too, because a lot of these distribution companies are quite corrupt.'

Foreign companies considering a move on Shanghai or the rest of the mainland need to be prepared for all types of risk.

Mr Vickers said: 'You would be surprised about the trouble people get into.'



Horror stories clearly indicate firms fail to ask right questions