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China Law And Corruption. You'd Better Know Which Way The Wind Blows.

By Dan Harris and Steve Dickinson

By Dan Harris and Steve Dickinson There's an expression out there about tides exposing things but I know if I try to use it I will muck it up, so I'm going to quote from that which I know: Bob Dylan: Johnny's in the basement Mixing up the medicine I'm on the pavement Thinking about the government The man in the trench coat Badge out, laid off Says he's got a bad cough Wants to get it paid off Look out kid It's somethin' you did God knows when But you're doin' it again You better duck down the alley way Lookin' for a new friend The man in the coon-skin cap In the big pen Wants eleven dollar bills You only got ten. Maggie comes fleet foot Face full of black soot Talkin' that the heat put Plants in the bed but The phone's tapped anyway Maggie says that many say They must bust in early May Orders from the D. A. Look out kid Don't matter what you did Walk on your tip toes Don't try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don't need a weather man To know which way the wind blows. Now I apologize for going a bit overboard with Dylan here (is it even possible to go overboard with Dylan), but I have to believe this song, Subterranean Homesick Blues, explains China's current legal situation with more panache than I could ever muster on my own. So what is it saying? To sum up, you had better know which way the wind is blowing and it is harder than ever to tell because the directions just keep on shifting. The economy is trending down and paying bribes is illegal. You knew that already. What you probably do not know is that downward trending economies (queue the tide quote here) always seem to expose things that upward trending economies do such a good job of hiding. Madoff type ponzi schemes are a great example in the private sector. Corruption is a great example in the public sector. When things are going down, people get unhappy and start ratting out their co-workers. When things are going down, people lose their jobs or get demoted and secret files then tend to get exposed. When the economy is going up, nobody much begrudges the guys skimming off the top and nobody has much time to focus on that anyway. When things are going down.....

meet me in the Trap it's goin down meet me in the mall it's goin down meet me in the club it's goin down anywhere you meet me guaranteed to go down

And things appear to be going down for a Mr Garth Peterson, Morgan Stanley's former head of China Real Estate. I do not know what led to exposure in Mr. Peterson's case, but I do know that we should be expecting a lot more of these sorts of things to come out in the next 6-12 months. FT.com just did a story on Mr. Peterson, entitled, "Morgan Stanley acts over possible China corruption." China's leading business magazine, Caijing, has done a number of stories on this as well and those are, according to co-blogger, Steve Dickinson (who has been reading them in Chinese) painting him as having come from Singapore with little more than an ability to speak both mandarin and shanghainese and an ability to secure access. What is clear is that he secured a number of huge Shanghai real esate projects for Morgan Stanley and that, as usual, everything was fine while the party was rolling along. Now that things are cooling off, the fingers start to point and the heads start to roll:

The former China head of Morgan Stanley Real Estate is under investigation for possible violations of the foreign corrupt practices act, a US law that prohibits corporate bribery. In a filing to the Securities and Exchange Commission, the investment bank said it had discovered actions initiated by an unnamed China-based employee that "appear to have violated" the act. Three people familiar with the matter said the employee referred to in the filing was Garth Peterson, Morgan Stanley's top property deal-maker in China until he was fired around Christmas. The bank said it had "terminated the employee" involved and reported the activity to the authorities. Morgan Stanley has been particularly active in the murky and corrupt Chinese property market. "Morgan Stanley was one of the first movers into the Chinese real estate market," said Sam Crispin, managing director of Crispins Property Investment Management. "They have raised a lot of money and have done some great projects."

The article describes China's real estate sector as "rife with bribery and corruption. Consulting firms promise access to senior government officials and preferential treatment in bids for land and projects in exchange for large "consulting fees:"

"Unfortunately this kind of thing happens a lot in China but it is unusual for an international company like Morgan Stanley to let itself get directly involved," said one large real estate investor in China who asked not to be named. Morgan Stanley has put Sonny Kalsi, its global head of real estate investing, on administrative leave effective immediately. US companies and their agents are prohibited from paying bribes to win business abroad. Mr Peterson was based in Shanghai during the rise and fall of Chen Liangyu, the city's former mayor who was arrested in 2006 for corruption that was partly related to property deals.

One of our constant themes on this blog has been that the risk of doing things by the side door/back door in China is just too high. It may work for a while, but eventually you get caught. As a foreigner, when you get caught there is no network of protection to ease the burden. Even within the Chinese context, the guys that get caught can get into big trouble: life in prison, death penalty. The unfortunate truth is that if you don't play the corruption game, many markets are foreclosed. That's just the way it goes. It is better to stay out than take an unacceptable risk. Does anyone disagree with that?

Full post as published by China Law Blog on February 13, 2009 (boomark / email).