risky business in china

White-collarcrime (WCC)has grown to

epic proportions interms of dollars lostand the number ofparticipants since itfirst came to theattention of the Amer-ican business commu-nity in the early1970s. This epidemichas not been confinedto American bordersbut has infected coun-tries worldwide.Therefore, it is imper-ative that American companiesnot only be aware of the prob-lems posed by domestic WCC,but also be aware that as theyconduct business abroad, eitherthrough subsidiaries or with for-eign entities, they are beingexposed to similar WCC oppor-tunities. The purpose of thisarticle is to address the issue ofWCC in China including: (1)the definition of WCC, (2) theparticipants and the penalties,and (3) the protectivemeasures to be taken toavoid and prevent encounterswith the Chinese versionsof WCC.

GROWTH OF A GIANT

The People’s Republic ofChina was founded in 1949 andsince the country’s creation itseconomy has shown a rapid andsustained growth (“Overview,”2007). A commonly understoodconcept is that this type ofgrowth provides a basis uponwhich foreign trade can andshould grow. During the latterpart of the twentieth century,China opened its doors to for-eign trade and has since becomethe second-largest exporter aswell as the third-largest importerin the world (“People’s Republicof China,” 2007). In terms of

American involvement,by 2004 the U.S. com-panies were outsourc-ing work to China thathad been previouslyoutsourced to Mexico,and China has thusbecome a major marketfor U.S. goods (Kara-bell, 2007).

Unfortunately,China’s economicgrowth also fostered agrowth in WCC.Examples of this typeof crime include asecurities scandal in

the 1980s, import fraud in theearly 1990s, credit-card fraud inthe mid-1990s, and embezzle-ment in the late 1990s. (Borrus& Engardio, 1991; “China: AnEmerging Market,” 1994;Sender, 1995, 1997). Most ana-lysts see the growth and prolifer-ation of WCC as an unavoidableevent in such a rapidly develop-ing economy. According to Silk,this relationship of economicdevelopment to growth of WCC“is already well-documented indeveloped countries such as theUnited States and Japan, as wellas developing nations such asSouth Korea, Taiwan, Malaysia,

Want to do an M&A deal in China? Be very care-ful! Remember that corruption and white-collarcrime (WCC) is not confined to the United States.It is an epidemic that has infected businessabroad as well. And while the penalties for WCC inthe United States are tame, in China the punish-ment can be death.

The authors review WCC in China, includingwho is doing it, what the penalties are, and protec-tive measures executives can take to avoid andprevent encounters with the Chinese versions ofWCC. © 2008 Wiley Periodicals, Inc.

J. Ralph Byington and Jo Ann McGee

Risky Business in China

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© 2008 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI 10.1002/jcaf.20368

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Thailand, and Philippines.Simply put, economic growthoutpaces the government’s abil-ity to put legal safeguards inplace to prevent white-collarcrime” (Silk, 1994, p. 22). Whilethe growth of WCC in Chinamay not be an unusual event initself, it is still an occurrencethat U.S. corporate managementneeds to be aware of in order toavoid it and/or prevent it fromaffecting their company’s trans-actions with Chinese entities.

CHINA’S WHITE-COLLARCRIME

In 1976, Kelley definedwhite-collar crime (WCC) asillegal acts that are “character-ized by deceit, concealment, vio-lation of trust, and not dependentupon the application of threat ofphysical force or violence”(1976, p. 35). More recently, theAssociation of Certified FraudExaminers (ACFE) referred tothis type of crime as occupa-tional fraud and abuse (OFA)and defined it as the using ofone’s occupation to personallyenrich one’s life by the deliberatemisuse or misapplication of hisemployer’s resources or assets(ACFE, 2006). From these twodefinitions, we get a picture ofWCC in the United States as anonviolent misuse of anemployer’s resources or assetsand/or the violation of certainregulations and laws. SeeExhibit 1 for a list of typicalclassifications of white-collarcrimes committed in the UnitedStates.

The Chinese definition ofWCC, which is referred to aseconomic crime (EC), encom-passes the essence of the U.S.definitions of WCC but alsoincludes any crime that under-mines the socialist economicorder or endangers socialist

economic relations (Silk, 1994).White-collar crime in China istherefore expanded to includecrimes against the “state.” SeeExhibit 2 for a list of typicalclassifications of economiccrimes committed in China.Several of these classificationsof EC correspond to the U.S.classifications of the same nameand would seem not to needredefining. They include: (1)bribery, (2) fraud, (3) embezzle-ment, (4) identity theft, (5) cor-porate theft, (6) tax evasion, and(7) falsified statements. Furtherelaboration for some of theseclassifications, however, mayprove useful to U.S. corporatemanagement in their planneddefense against EC.

One analyst said that briberywas at its highest level in yearsin 1994. At that time, the presswas replete with reported inci-dents involving government offi-cials who received or wereoffered gifts or payments inexchange for a favor (Silk,1994). Despite efforts by theChinese government to curb thisbehavior, bribery is currently amajor issue in China. A recent

survey of the Chinese people byNankai University found that 94percent of the respondentsbelieved that bribery was wide-spread and that the worst casesinvolved officials within govern-ment. Certain areas of commercewere believed to be more likelyto see bribery activity, including:(1) government purchases, (2)land sales, (3) construction proj-ects, and (4) medical procure-ment (“Most Chinese See Bribesas Necessary,” 2006).

Tax evasion has long been aproblem in China because theChinese view tax compliance asa game of wits and endurance.Chinese tax authorities uncovermillions of dollars of tax irregu-larities each year (Silk, 1994)and are currently waging a cam-paign that targets high-incomeindividuals who are suspected oftax evasion (Personal Taxes,2007). Embezzlement was pres-ent in China before the prolifera-tion of the computer (“WorldWire Economic,” 1990) but wasmade easier to commit and toconceal with the increased use ofthe computer and other elec-tronic equipment (Silk, 1994).

20 The Journal of Corporate Accounting & Finance / January/February 2008

Examples of White-Collar Crime

• Bribery• Fraud/Conspiracy• Embezzlement• Identity Theft• Corporate Theft/Pirating of Intellectual Property• Tax Evasion• Inadequate Disclosure/Falsified Statements• Violation of Federal Securities Laws• Bid Rigging• Price Fixing• Violation of Currency Laws

Exhibit 1

DOI 10.1002/jcaf © 2008 Wiley Periodicals, Inc.

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As a result, this type of ECcontinues to exist as seen incases reported more recently inthe press (Chidley, 2004;McGregor, 2005; Yang, 2007).Recent reform to the Chinesesecurities industry wasprompted by the embezzlementof clients’ money (Fangging,2007).

Corporate theft, includingpiracy of intellectual propertysuch as copyrights, trademarks,and patent infringement, was agrowing problem for China inthe mid-1990s (Silk, 1994).Despite enforcement efforts tocurb this type of EC, it contin-ues to be prevalent. Accordingto Gonzales, China is “consid-ered to be the most problematiccountry in the world withregard to violating intellectualproperty right” (Gonzalez,2007). Corporate U.S. manage-ment should note that China isthe number-one source of coun-terfeit products that are seizedat U.S. borders.

Some of the other types ofEC that need defining are diver-sion of foreign exchange, disclo-sure of state secrets, smuggling,and speculation. Although eachof these types of EC has a corre-sponding relative in the U.S. listof WCC, there are some uniquecharacteristics pertaining to theChinese crimes in comparison tothe U.S. crimes. The diversion offoreign exchange involves thetaking of foreign currencyintended for one purpose andusing it for another. A uniqueaspect is that this crime fre-quently takes place outside thedetection of the foreignexchange regulators. Many ofthe payments for goods andservices in China are madethrough the use of offshoreaccounts—where the regulatorscannot monitor the activity (Silk,1994). In 2004, the foreignexchange regulator issued astatement that said that anyattempts to convert$10,000–50,000 of foreign cur-

rency into renmimbi must beaccompanied by proof that thefunds came from a legal source(“Business Digest,” 2004).

Disclosure of state secrets isknown in the United States asdisclosure of classified informa-tion. In China, similar statesecrets can include not only clas-sified information, but also tradeor project information. Veryoften, disclosure of financialdata related to a joint venturebetween a U.S. entity and a Chi-nese entity could result in severecriminal penalties for allinvolved. The Chinese version ofsmuggling is not all that differentfrom smuggling in other coun-tries. Basically, it involves themovement of goods withoutproper import/export documen-tation. The unique aspect is thatthe Chinese also include illegalemigration in this type of EC.Speculation is related to the vio-lation of the federal securitylaws and currency violations inthe United States. It involvesinterfering with the monetarypolicy, pricing issues, and thedistribution of goods. Typicalexamples of this type of ECinclude: (1) trading high-demandor controlled commodities on theblack market; (2) forging importand export licenses, bills, con-tracts, other negotiable securi-ties, and government approvals;and (3) illegally trading silver,gold, foreign currency, relics,and precious gems (Silk, 1994).

PARTICIPANTS AND PENALTIES

As noted above, a rapidlygrowing economy provides a fer-tile ground upon which WCCcan grow. In China, the absenceof an effective investigatingauthority, independent courts,and a free media have also madeit easier for WCC to go unde-tected and unpunished both

The Journal of Corporate Accounting & Finance / January/February 2008 21

Examples of Economic Crime

• Bribery• Fraud• Embezzlement• Violation of Consumer Rights/Identity Theft• Corporate Theft/Pirating of Intellectual Property• Tax Evasion• Inadequate Disclosure/Falsified Statements • Diversion of Foreign Exchange• Divulging of State’s Secrets• Computer Crimes• Speculation• Smuggling

Sources: Leggett (2002), Silk (1994).

Exhibit 2

© 2008 Wiley Periodicals, Inc. DOI 10.1002/jcaf

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inside and outside the govern-ment. As a result, WCC inChina reaches not only to thetop of the business sector, butalso to the ruling party. From1997 to 2002, the Chinesecourts handled 118,692 WCCcases involving public officials.These cases included bribery,embezzlement, and misappropri-ation of public funds andresulted in 188,482 sentencesfor offenders. Included in thosesentenced were 19 provincial orministerial-level officials, 2,031county or office-level officials,and 318 department or bureau-level officials (Lague &Lawrence, 2002).

According to Lague andLawrence, most WCC cases“never reach the courts becausethey are handled by theparty” (Lague & Lawrence,2002). It is therefore diffi-cult to get an accurate par-ticipant and a dollar figurefor Chinese WCC. Thereare some instances of WCCbeing reported in the pressthat can serve as examplesin order to ascertain whothe other participants areand the dollars lost. In Octo-ber 2004, a vice general man-ager of China Unicom XinglaiTrading was convicted onbribery charges. He hadaccepted $742,257 in bribes. Thehead of the Bank of China inShanghai and Hong Kong alongwith other bank executives wasconvicted of embezzling $1.7million. Another exampleinvolved 20 executives of theGreat Wall Machinery & Elec-tronics High-Technology Indus-trial Group Corp. and a numberof government officials whowere found guilty in a $172 mil-lion investment scheme(McGregor, 2005; “ShortMessage: Tough on White CollarCrime,” 2004; Silk, 1994).

In 2003, Forbes published alist of the best places to go toprison in the United States.Included in this list were mini-mum-security federal prisoncamps where prisoners wereallowed to wear their ownclothes and actually go home todinner (“Short Message: Toughon White Collar Crime,” 2004).An example would be the Alder-son Federal Prison Camp in WestVirginia where Martha Stewartserved her prison term after herconviction. This prison isdescribed as being leafy andcampus-like and bears the nick-name of Camp Cupcake (Chid-ley, 2004). Despite recentreforms in this arena, the punish-ment for WCC in the UnitedStates remains fairly tame. This

attitude is in stark contrast to theChinese attitude, where even aminor crime can result in asevere penalty. Referring to theexamples in the preceding para-graph, the general manager ofChina Unicom and the head ofthe Bank of China both receiveddeath sentences. The formerpresident of Great Wall was exe-cuted, his wife received a 15-year prison sentence, and oneof the government officialsreceived a 20-year prison sen-tence. In the United States, aWCC conviction can mean a lossof job, a fine, or a stay in one ofthe “Camp Cupcakes” or anycombination of the three. In con-trast, a WCC conviction in China

may mean a loss of job andprison time (not of the CampCupcake nature) or loss of joband a death sentence! If thecriminal is fortunate enough toreceive a suspended death sen-tence, he/she is still looking atlife in prison.

PROTECTIVE MEASURES

Considering the prevalenceof WCC and the severe penaltiesfor WCC in China, U.S. corpo-rate management should take theprecautionary measures that arenecessary to prevent and/ordetect this type of activity. At aminimum, the measures taken toensure that WCC does notadversely affect a business entityin the United States should be

applied to every businessventure in China. (SeeByington & Christensen,2002, 2005, for a compre-hensive list of these mea-sures.) Management needsto be prepared to gobeyond basic measures.One author suggests thatall foreign parties doingbusiness in China mustperform due diligence, fol-

lowed by more due diligence,and then even more due dili-gence (Silk, 1994)! See Exhibit3 for an expanded list of mea-sures that corporate managementshould employ when doing busi-ness in China.

A PERVASIVE PROBLEM

As we have seen, white-collarcrime is a pervasive element inChina. Extensive examples ofWCC can be found not only inthe business sector, but also inthe governmental sector. Thepenalties for this type of crimeare more severe than in theUnited States with the severityfrequently involving the death of


In China, the absence of an effectiveinvestigating authority, independentcourts, and a free media have alsomade it easier for WCC to go unde-tected and unpunished both insideand outside the government.


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the offender. Any U.S. entityplanning to do business in Chinashould be prepared to invest in aprogram that will combat WCC.This program should include adetailed plan that incorporatesthe basic measures as notedabove, along with the measureslisted in Exhibit 3.

REFERENCES

Association of Certified Fraud Examiners.(2006). 2006 report to the nation onoccupational fraud and abuse. Austin,TX: Author.

Borrus, A., & Engardio, P. (1991, Decem-ber). Customs tears into the Chinese ragtrade. Business Week, pp. 51–52.Retrieved September 11, 2007, fromhttp://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9112300934&site=bsi-live

Business digest. (2004, April). Far EasternEconomic Review, 167(13), 27. RetrievedSeptember 13, 2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12974488&site=bsi-live

Byington, J. R., & Christensen, J. A. (2002).Can the CFO stop white collar crime?

Journal of Corporate Accounting andFinance, 14(1), 39–44.

Byington, J. R., & Christensen, J. A. (2005).SOX 404: How do you control yourinternal control? Journal of CorporateAccounting and Finance, 16(4), 35–40.

Chidley, J. (2004). Camp Cupcake has noth-ing on us. Canadian Business, 77(20), 4.Retrieved September 14, 2007, fromhttp://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=14895083&site=bsi-live

China: An emerging market for credit-cardcrime. (1994, July/August). CanadianBanker, 101(4). Retrieved September 11,2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9411304680&site=bsi-live

Fangging, W. (2007, July). China cleanupnears completion. Securities IndustryNews, 19(27), 27. Retrieved September12, 2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25919146&site=bsi-live

Farragher, G. (2007). Fraud risk in emergingmarkets is real, but manageable. InvestmentDealers’ Digest, 73(30), 14–15. RetrievedSeptember 11, 2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=26272472&site=bsi-live

Gonzalez, G. (2007). Intellectual propertytheft is top risk for firms with operationsin China. Business Insurance, 41(13),

16–19. Retrieved September 12, 2007,from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24676388&site=bsi-live

Karabell, Z. (2007, September 5). Watch outfor the China bashers. Wall Street Journal,p. A17.

Kelley, C. M. (1976, June). Accountants andauditors vs. white collar crime. InternalAuditor, 33(3), 35–39.

Lague, D., & Lawrence, S. V. (2002,October). Rank corruption. Far EasternEconomic Review, 165(43), 32. RetrievedSeptember 14, 2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=8716717&site=bsi-live

Leggett, K. (2002, August 7). Charges arefiled in landmark Chinese fraud case—Three former executives of a listed storeoperator accused of hiding losses. WallStreet Journal (Eastern Edition), p. A12.Retrieved September 11, 2007, fromhttp://proquest.umi.com/pqdweb?did=146789541&sid=3&Fmt=3&clientld=18355&RQT=309&VName=OQD

McGregor, R. (2005, August 13). Death sen-tence in Chinese fraud case banking cor-ruption trial. Financial Times, p. 7.Retrieved August 20, 2007, fromhttp://proquest.umi.com/pqdweb?index=0&did=881626931&Srch....

Most Chinese see bribes as necessary. (2006, October). Purchasing, 135(14), 20.

The Journal of Corporate Accounting & Finance / January/February 2008 23

WCC Prevention and Detection in China

• Review and verify any partners’ authority to act.• Confirm that officials granting approvals have the proper authority to do so.• Exercise special care in handling and transmitting Chinese documents labeled as internal or classified.• Realize that Chinese laws are subject to broad interpretation.• When in doubt about the legality of a transaction, seek legal counsel.• Structure agreements in order to have access to the operation.• Structure agreements in order to have access to the accounting records.• Implement a strong system of internal controls.• Perform periodic compliance audits.• Employ a reputable international accounting firm that will perform the independent audit under international

accounting standards.• Employ individuals who can read and speak the language.• Exercise effective, consistent, and on-site management and control.

Sources: Farragher (2007); Silk (1994).

Exhibit 3

© 2008 Wiley Periodicals, Inc. DOI 10.1002/jcaf

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Retrieved September 11, 2007, fromhttp://search. ebscohost.com/login.aspx?direct=true&db=bth&AN=22716047&site=bsi-live

Overview. (2007, September 5). People’sDaily Online. Retrieved September 5,2007, from http://english.peopledaily.com.cn/china/19990914A113.html

People’s Republic of China. (2007).Wikipedia. Retrieved September 10,2007, from http://en.wikipedia.org/wiki/People’s_Republic_of_China

Personal taxes. (2007). Country Commerce,pp. 98–103. Retrieved September 12,2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24274185&site=bsi-live

Sender, H. (1995, September). No longergolden. Far Eastern Economic Review,158(39), 95. Retrieved September 11,2007, from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9510076600&site=bsi-live

Sender, H. (1997, January). House of cards.Far Eastern Economic Review, 160(4),53. Retrieved August 20, 2007, fromhttp://proquest.umi.com/pqdweb?index=8&did=10918474&Srch

Short message: Tough on white-collar crime.(2004, December). Wireless Asia, 7(10),32. Retrieved September 11, 2007, fromhttp://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15841664&site=bsi-live

Silk, M. A. (1994). Cracking down oneconomic crime. China Business Review,21(3), 21–28.

World wire economic. (1990, April 16). WallStreet Journal (Eastern Edition), p. A10.Retrieved August 20, 2007, fromhttp://proquest.umi.com/pqdweb?did=4207307&sid=1&Fmt=2&clientid=18355&RQT=309&VName=PQD

Yang, A. (2007, April). Shanghai readyingfor the 2010 World Expo, but importantcommissions remain unfilled. Architectural Record, 195(4), 15.Retrieved September 12, 2007, fromhttp://search. ebscohost.com/login.aspx?direct=true&db=bth&AN=24797837&site=bsi-live



J. Ralph Byington, PhD, CPA, is the dean, Timmerman Chair in Enterprise Development, and professor ofaccounting at the University of South Carolina–Aiken. His publications include over 100 journal articles,book chapters, newsletter items, and proceedings. He is active with the accounting profession, presentingnumerous professional programs at the national, regional, and local levels. He has presented over 250 pro-fessional programs to business executives, CEOs, CFOs, state CPA societies, student organizations, andfirms in Georgia, Louisiana, Mississippi, Texas, New York, California, Illinois, Massachusetts, Florida,Arkansas, and Washington, D.C. Jo Ann McGee, DBA, is an associate professor in the Department ofAccounting and Business Law at Louisiana State University in Shreveport. She has presented professionalprograms and published in the accounting area of expertise in protection against white-collar crime andethical behavior in company reporting.

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