China Law and Corruption: You’d Better Know Which Way the Wind Blows.

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 (if it is 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.

China’s economy is trending down and paying bribes is illegal. You knew that already. What you probably don’t 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 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 Peterson 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 estate projects for Morgan Stanley and that, as usual, everything was fine while the party was rolling along. Now though when 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 will get caught. And as a foreigner, when you do 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 will be foreclosed. That’s just the way it goes.  But, it is way better to stay out of markets than to take unacceptable risks that land you in jail.

Does anyone disagree with that?

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