Fifteen years after China’s entry into the WTO, many attractive business opportunities remain relatively closed to foreign investors, including telecoms, banking, publishing, insurance, and transportation. These “closures” make it difficult for Chinese businesses to raise foreign capital and leads them to create schemes to evade China’s regulations. These schemes are then sold to foreign investors eager to share in the China dream.
The problem with these schemes is that they often involve evading Chinese law. When the China lawyers at my firm warn against participating in such schemes, our clients sometimes become frustrated with us for having blocked them from attaining their China fortune. They have trouble believing that their proposed investment is in fact illegal, based on the following two reasons:
1. They cite to us other foreign investors that have invested in China under the same type of scheme. Our response is to agree that Chinese regulators often (most of the time?) look the other way when it comes to allowing foreign money to enter China to participate in an illegal scheme.
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But we then ask them if can name ONE of these foreign investors that repatriated its investment funds from China with a reasonable profit. Nobody has provided us with a single verifiable example. When foreign investors seek to cash out of an illegal investment, the Chinese regulators discover (again?) the irregularities and block the remittance of equity or profit.
The rule on all of this is very simple: it is easy to get money into China illegally, but it is nearly impossible to get the money from those illegal investments out. My law firm probably averages a call a month from an American company blocked from expatriating illegally invested funds from China.
2. They tell us that a large and prosperous Chinese company (sometimes even a national or regional government-owned enterprise) is promoting the scheme and it therefore cannot be illegal. This reasoning is a trap.
First off, many times when foreigners believe that a high-level entity is involved, it isn’t. We have seen many instances where one or more government or large company employees work independently to convince foreign investors of a nonexistent government or big-company connection. Other times, there is no government or big-company connection whatsoever and the claim to one is itself a scam.
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My law firm was recently contacted by a U.S. securities firm regarding a scheme for trading China A shares on the Shanghai stock market. When we informed this U.S. company that foreign entities are not permitted to trade China A shares in Shanghai, they pointed out that the company seeking to garner their investment is one of China’s largest securities brokers and a state-owned entity to boot. We stuck to our guns. A few weeks ago, the Chairman of the Board of Citic Securities (a massive state-owned Chinese securities firm) was arrested along with seven of the company’s top executives, for, among other things, promoting illegal trading schemes.
If an investment is illegal in China, don’t do it; if you cannot make money in China by complying with Chinese law, invest elsewhere. Do not believe those who claim that the Chinese government will “look the other way,” because it doesn’t when you try to get your money out.
Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at [email protected].