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

Posted in Legal News

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?

  • http://www.ningboguide.com/ Craig

    Well, it’s more like Morgan Stanley would never have gotten the business anyway, if they didn’t pay. I notice that although a single employee was fired as a sacrificial lamb, Morgan Stanley doesn’t appear to be backing out of the deals.
    If Peterson speaks Shanghainese and was going there to get business, he would have probably been better off shutting his mouth about his language ability.

  • http://www.experiencenotlogic.com Will Lewis

    Bringing It All Back Home is the only Dylan album I own. That album is awesome. And so is this post. I could just read this for pleasure.
    So, the US doesn’t do death penalty or life in prison, but the claims that all FCPA cases, save for a single dismissal, that have gone to trial since 1991 end in conviction. Maximum sentence of five years. Few million in fines. Were the bonuses really worth it? Or are we gonna see plea bargains extend for implicating those beyond Mr. Kalsi? Oh no, it just hit me… Are TARP funds gonna be paying the institution’s FCPA fines?

  • http://www.allroadsleadtochina.com All Roads Lead to China

    Dan.
    Actually, I had a post on Morgan’s failed Shanghai properties last week. What I find amazing is that they (in their infinite wisdom) were snapping up properties that others would have never touched.
    One building cannot pass fire code because there is no direct street access.. it is a 60 floor building! Imagine what a headache that would have been anyway… 60 floors of people and no road to bring taxis in/ out.
    They had some real gems in the portfolio, and will have to let go of them to make the overall portfolio purchase attractive.
    R

  • Anonymous

    Actually, it’s more complicated than you think. One thing I’ve learned in this position is that the court of public opinion is even tougher than the law court.
    Nice song.
    Garth
    Editor’s Note: There is absolutely no evidence that this comment came from “Garth.” and it almost certainly did not. More than likely, this is a spoof. Just thought you should know.

  • http://www.foarp.blogspot.com FOARP

    Ever see the scene at the end of Casino where the aged and infirm Mafia bosses standing trial get together to discuss which of the witnesses to whack. The Camera pans around the table as eack of them says “Nah, he would never rat, he’s a good kid”, to which the last man says “but why take a chance?”
    Things like this have “Why take a chance?” all over them.

  • Old timer in Shanghai

    Most likely than not, Morgan Stanley’s management knew about the under-the-table deals and just looked the other way. I assumed the bribary amount was not small and there had to be accounting trace of the money. Nevertheless, Garth should know what’s coming even though probably everyone else is doing as well.

  • Anonymous

    R, the building has 50 floors, not 60, and it did pass fire code. Go look. There are tenants inside. The road access was delayed for 6 months until an entrance could be gotten from Tongren Lu. Through careful work with the government we did get that.
    That project isn’t a troubled one. But that’s not to say the whole project is without problems.
    Garth
    Editor’s Note: Again, I am very skeptical that the person signing this comment as “Garth” is really the same Garth in the post. So take this comment with a grain of salt, please.

  • Anonymous

    And by the way, I don’t speak Shanghaiese. Don’t believe half of what you read in the Chinese papers.
    Garth
    Editor’s Note. Again, no evidence that this comment from “Garth” is really from the same Garth in the post. I will add, however, that though I know many foreigners who speak Mandarin, I know almost none who speak Shanghaiese.

  • http://www.allroadsleadtochina.com All Roads Lead to China

    Garth (If that is your real name).
    Glad to see it pass code, and that there are now tenants, but that building was in Morgan’s hands for 2-3 years before tenants moved in…
    What is occupancy rate? What were the per sqm rates for those tenants who did move in?
    R

  • Sol Rosenberg

    “Consulting firms promise access to senior government officials and preferential treatment in bids for land and projects in exchange for large ‘consulting fees’”
    Are they talking about China or K Street?

  • Damjan

    I was involved at a decision making level of a Beijing restaurant business for almost two years from start up to WOFE. What I learned early on was “You cooperate to operate” and sometimes that meant treating police officers to dinner (whenever they come by dinner is free), other times it meant going on undercover stings to round up prostitutes,while even other times it required helping a judge import a hummer into China. In order to get the business off the ground, we felt like this was a must. Later, when the (now restaurantS) became a WOFE, and we didn’t have to pander to anyone anymore, the process just felt like a sort of rookie hazing that all entrepreneurs in our area of business had to go through. Indeed, every expat restaurant owner I knew in Beijing, had to cope with the same crap. The point being, what defines unnecessary risk is probably different from industry to industry, and even among players in the same industry but with different operating budgets.

  • yj

    Garth just fell victim to Morgan Stanley’s fower fighting.
    It’s not convinced that MS 50′s floor project was only occupied him alone. Why Mr. R you didn’t spoke out and find a way to self salvation before?
    What clear to Garth is he secceed a number of huge China based property projects.
    YJ