* Foreign couple's firm did work for GlaxoSmithKline, other
* Unclear why they have been detained
* Other corporate investigators informally questioned -
* Foreign investigators nervous, cutting back on email use
* China investigating people for crimes over use of
By Alexandra Harney
SHANGHAI, July 31 The detention by Chinese
authorities of a British corporate investigator and his American
wife in the wake of a corruption probe into pharmaceutical giant
GlaxoSmithKline has had a chilling effect on other risk
consultants working in China.
It's unclear why Peter Humphrey and Yu Yingzeng, whose firm
ChinaWhys has done work for GSK and other drugmakers, were
detained. But corporate investigators said they were concerned
about the repercussions for the industry.
Multinationals, banks and investors rely on corporate
investigators for information about potential partners and
investments in China, where a lack of transparency is a hurdle
to doing business. Restrictions in the flow of such background
information could potentially leave foreign investors exposed to
greater risk in the world's second-largest economy.
ChinaWhys offers "discreet risk mitigation solutions,
internal process audits, due diligence and commercial
investigation services", according to the firm's website.
"(Humphrey's) detention is really disturbing. It gives me an
uneasy feeling that people who, on the face of it, are trying to
help companies and individuals navigate their way around the
system are being targeted," said Gary Miller, litigation partner
and head of the fraud group at London law firm Mishcon de Reya.
Mike Vermillion, senior director of third party risk
management solutions at Oregon-based consultancy Navex Global,
called the detentions chilling.
"I am certainly not getting on a plane to China next week,"
Two sources with direct knowledge of the matter have said
Humphrey and Yu were detained by Chinese authorities in Shanghai
on July 10. They did not specify who was holding the couple.
A Shanghai police spokesman said police there had neither
detained nor had any contact with Humphrey. He said Humphrey's
case was being handled by Beijing. Police in the capital
declined to comment.
British diplomats have said they were giving consular
assistance to a Briton detained in Shanghai but have declined to
provide further details. U.S. diplomats have said the same thing
about a detained American. Reuters has not been able to
determine if the couple have a lawyer.
OTHER INVESTIGATORS QUESTIONED
Their detention has not been an isolated case.
Two industry executives said investigators from other
companies were being "invited for tea" by Shanghai authorities,
a euphemism for informal questioning in China.
Some investigators, worried they are under surveillance,
have scaled back their use of email. Some declined to speak to
reporters over the phone, afraid that authorities were listening
in to their conversations.
Several investigators said that they had become more
cautious about which projects to accept, avoiding any the
government might see as sensitive.
Investigators said they had also heard of people requesting
reassignment to Hong Kong, which has a separate legal system to
mainland China. These movements could not be confirmed.
A series of incidents in recent years has highlighted
China's growing willingness to investigate, detain and prosecute
people for crimes involving the use of information for
Corporate investigators first came under China's microscope
last year after a spate of accounting scandals at U.S.-listed
Chinese firms that led to forced delistings, shareholder
lawsuits and investigations by overseas regulators.
Many of the scandals followed reports by short-sellers who
accused the firms of financial irregularities.
Some corporate investigators in China had worked with
short-sellers and hedge funds doing research on those companies,
said Paul Gillis, professor at Peking University's Guanghua
School of Management. It is unclear if the recent detentions are
related to that work. Short-sellers borrow shares, sell them in
the expectation that their price will fall and then buy them
back at a lower price.
"I know there's been a great deal of unhappiness with the
activities of short sellers ... That's been one of the things
that China has been quite irritated about," said Gillis.
Jon Carnes, a U.S.-based short-seller who attacked several
Chinese companies between 2010 and 2011 using the pseudonym
Alfred Little, has said one of his Chinese researchers had been
jailed in China.
INDUSTRY HAS GROWN RAPIDLY
The corporate investigations business has expanded rapidly
in China in recent years in response to concern about compliance
issues, in the wake of increased enforcement of the U.S. Foreign
Corrupt Practices Act (FCPA) and a surge in international deals
involving Chinese firms.
The big four international accounting firms -- KPMG
, PriceWaterhouseCoopers, Deloitte
and Ernst & Young, along with companies such as
Control Risks, FTI Consulting and Kroll are among the largest
operating in China.
Investigators say the industry has also grown to include
hundreds of small companies and individual operators as well,
including ChinaWhys, a consultancy founded by Humphrey in 2003.
Humphrey is a former journalist who worked for Reuters for 16
years until 1998.
British drugmaker GSK has declined to comment on the work
ChinaWhys did for the firm except to say that Humphrey is not,
nor has he ever been, an employee.
GSK is in crisis in China after police this month accused it
of funnelling up to 3 billion yuan ($489 million) to travel
agencies to facilitate bribes to doctors and officials. The
company, Britain's biggest pharmaceutical maker, has said some
of its Chinese executives appeared to have broken the law.
With the investigation industry's expansion in China,
particularly among smaller firms, came an illegal trade in
private information, including bank, telephone, and even hukou
or household registration records, investigators said. Some
investigators claimed they could place moles inside companies.
"Parts of the investigations industry in China were flying
very close to the sun from a legal standpoint for a very long
time," said Velisarios Kattoulas, chief executive of Poseidon
Group, a risk management consultancy active in China.
Starting as early as late last year, police began
questioning hundreds of people involved in the trade of
protected information, according to several investigators.
At least one small investigations company in China closed
down as a result, investigators said. It was not clear if this
firm was run by expatriates or locals.
LEGAL GREY AREA
Investigators concede some parts of their work stray into a
legal grey area in China. Private investigations are prohibited
under a 1993 Ministry of Public Security notice, though this,
like other laws and regulations in China, has only been
One Chinese lawyer who works with investigation companies
said that because they cannot get business licences as private
investigators, such firms often register as "business advisors".
This can leave them in a legally precarious situation.
"The negative part of this is that the government can get
you whenever they want," this lawyer said.
It is not only corporate investigators who have fallen foul
of Chinese law on the commercial use of information.
In December 2012, a Chinese court sentenced four former
executives from a Shanghai unit of Dun & Bradstreet, a
global business information firm, to prison for illegally buying
information about Chinese consumers. Dun & Bradstreet said in
May last year it was shutting the unit.
The scrutiny on corporate investigators comes as China
prepares to reopen its equity markets to initial public
offerings after unofficially halting IPOs last October as part
of a crackdown on fraud.
It is unclear if any investigators were caught up in that
At the same time, the government has been tightening access
to corporate records. Last summer, it began restricting the
availability of corporate filings to China's main business
registry, the Administration of Industry and Commerce. These
restrictions are still in force, investigators say.