Photo by George Baird
I had a sorta friend in college who smoked like a chimney and drank like a Supreme Court Justice. When people would point out the danger of his ways, he would respond by emphatically noting that his grandfather also smoked and drank just as much and he did and his grandfather was still alive and kicking at 88. Does anyone not see a problem with this analysis?
And yet, my law firm’s international lawyers often hear something similar as an excuse for why a company or person is doing something that is not legal. Sometimes they will add that so and so who is a native of the country in which they are doing business has told them that what they are doing is okay, which to me is the equivalent of relying on someone with no medical training saying it’s okay to smoke.
What has happened to Fan Bing Bing spurs me to mention the above.
Fan Bing Bing is a terrific movie actress who recently got into BIG trouble with the Chinese tax authorities for having underreported her income via a dual-contract system in which only one contract is disclosed to the tax authorities. For more on this, check out China Movie Stars and The Two-Contract Problem.
But it isn’t just movie stars that employ the two-contract tax dodge; many foreign companies and expats do as well. Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.
Around once a month (and 4-5 times in December and January — not kidding), our international lawyers get a call from a foreigner in big trouble somewhere like China or Indonesia for having done something illegal. I myself have taken many of these calls and they usually start out with the person in trouble saying something like the following:
I always follow the law and I wanted to follow the law in __________ [country] but my ___________ assured me that this is how things are done in ___________[country] and so I reluctantly went along. And now I am in legal trouble for having done…..
The person who usually gets the blame is the accountant or general manager or even the person’s wife who is a native of whatever country in which the person is having his legal problems — I say “his” here because I cannot remember getting such a call from anyone not male. My tactic is to quickly push through this sort of discussion by bluntly saying, well yes, not paying your taxes or not doing X is illegal pretty much everywhere in the world and I am not aware of any country in the world where it is a defense to say that everyone else is operating illegally as well. So at this point, what I suggest is that we bring in a top-flight criminal lawyer and work on doing whatever we can to prevent you from going to jail and to reduce what you will need to pay.
Around ten years ago, A reader sent me an article regarding Sri Lankan parents being denied the return of their 17 year old daughter by a United States judge because the family was unable to prove they were in the United States legally. The judge was denying the daughter’s return both for immigration reasons and because her parents’ credibility had been so damaged by their history of immigration untruths. The reader asked if we were aware of anything like this having happened in China or the United States with Chinese businesspeople and whether “something like this” can impact one’s business in China. I responded by listing out all sorts of examples we had seen where one’s immigration status has harmed a business.
Many years ago, the international litigators at my firm handled an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her supposed extensive education and experience in the Russian fishing industry. She had secured this visa by claiming a college degree from one of Russia’s best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. One of my firm’s crackerjack paralegals somehow acquired a copy of this person’s visa application and noticed that her college degree from a college in Town A in Russia had been stamped by someone in Town B in Russia. This was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.
Our next move was to depose this person, and depose her we did. At her deposition, we asked her a series of questions intended to make clear we knew she had lied to get into the United States, including the following:
1. Who was your favorite professor? She said she had no favorite.
2. Name one of your professors. She said she could not remember a single one.
3. Name one professor at the entire college. She said she could not remember a single one.
4. Who was your best friend at college? She said she was too busy studying to have had any friends.
5. Name one fellow student at your college. She said she could not remember a single one.
6. List the classes you took. She gave a really vague answer.
7. Name some of the buildings on your campus. She could not remember a single one.
8. Describe the campus. She gave an incredibly vague description.
We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers.
And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being publicly exposed in a federal courtroom.
I was once contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company’s closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case would probably expose him to visa issues and how he should think long and hard before he brought it. He chose not to bring the case and instead to just walk away from a not insubstantial debt.
We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not 100% legal in whatever foreign country you are operating, you have pretty much foreclosed your ability to sue anyone in that foreign country, no matter what they do to you. To put it bluntly, you are ripe for the plucking.
A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.
One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity’s ability to hire foreigners and those foreigners’ ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company’s behalf.
And we too have seen our share of double contracts. Many years ago, a European company hired us to sue an American company for having failed to pay around 2.5 million dollars for the sale of a used airplane (I have forgotten the exact amount). This company told us they had a written contract for this transaction and we told them we liked their case. They then sent us the contract and instead of it listing the airplane price at $2.5 million, it listed it at $600,000. We raised the monetary discrepancy with the client who explained that “yes, this is what the contract says but the deal was for $2.5 million and the only reason it wasn’t written in the contract that way was because the other side insisted on it saying $600,000 to minimize its duties when it took the plane to its own country. We told them we were no longer interested in pursuing the case and as far as I know they ended up having to walk away from $2.5 million.
One of my favorite stories is when I went to Papua New Guinea to help a Russian client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa cost around $35 and the business visa cost around $500, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.
With so many companies these days looking to set up in Asian countries with even weaker law enforcement than China, our international business lawyers are often finding ourselves stressing the advantages of scrupulously following a country’s laws even when doing so is difficult and expensive. Our experience is that this virtually always pays off in the end — economically, with stability, and with peace of mind.