Oxymoron? It seems that Corrupt and Practices are synonymous with Foreign.   Actually, it is a law from 1977 that is codified at 15 U.S.C. §§ 78dd-1, et seq.  and the relevant parts can be found at http://law.onecle.com/uscode/15/78dd-2.html for those of you who would rather look at more interesting stuff on the internet or read all of my amusing blog postings, here is a summary of the law.

From Wikipedia

The Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. § 78dd-1, et seq.) is a United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements under the Securities Exchange Act of 1934 and another concerning bribery of foreign officials.

If you would like an even simpler explanation of the salient points of the FCPA, go to the Professor.  http://www.fcpaprofessor.com/fcpa-101 The FCPA Professor is Michael Kohler http://www.fcpaprofessor.com/about

While bean counters, accountants and financial compliance officers are very interested in the accounting transparency requirements under the 1934 Act, company executives and board members who operate internationally and their lawyers should be quite concerned with those provisions specifically related to the bribery of foreign officials especially given the renewed enthusiasm of the U.S. Justice Department to investigate, prosecute and collect fines.

I usually think that lawyers who scare clients into worrying a lot about the FCPA are no better than insurance salespeople – using fear to make people pay for their services, but, recently with the renewed energy and larger budget of the U.S. Justice Department in enforcing the FCPA perhaps I should give my fellow sharks a break.  I don’t try to scare my clients but, I do inform them about the FCPA and advise them to be cognizant of the above rules when doing business here in the Jungle, primarily because once you engage in using red envelopes “hong bao” to accomplish your business objectives, the requests for more and more will never end and then you are stuck having committed a crime and your recipient will almost always keep going to the well for more.  It is a slippery slope to head down.

Now, I have been in the Jungle for awhile and I also spent my formative years in U.S. State and Federal government contracting, I know how it really works in both places, and it is not much different.  While I don’t tell my clients it is okay to grease a little now and then, I do tell them that specific scenarios require red envelopes and it is the unfortunate reality of doing business in developing countries where corruption is not an anomaly and is woven through their cultural fabric.  If you don’t believe me, you can draw your own conclusion from one of the inhabitants http://www.nytimes.com/2012/05/09/opinion/no-roads-are-straight-here.html?_r=2&ref=global-home In a purely hypothetical situation, if they are going to engage in any gift giving or reciprocal favors that they should be very discreet and very careful and understand all of the consequences.

So, in light of the recent allegations coming out of Mexico concerning Wal Mart and their multi-year bribery campaign, and the propensity of the U.S. Government to use enforcement of the FCPA as an election year tactic to show how strong they are against the big bad Chinese, I thought it useful to set forth the reality of doing business in the Jungle and to point out some of the specific legal and non legal consequences.  Following is a summary of the FCPA.  Good luck in complying, especially in the Jungle.

Who does the law apply to?  Any U.S. individual who is a citizen, resident, national and any business entity organized under the laws of the United States or having a principal place of business in the U.S.  I suspect that this and other liability issues is what drove Halliburton to move it’s corporate headquarters to Dubai in 2007.  It also applies to any company that is publicly listed on the Nasdaq or NYSE or other U.S. securities markets.  Basically it applies to everyone, even yours truly.

U.S. “issuers” and “domestic concerns” must obey the FCPA, even when acting outside the country. An “issuer” is any company that has securities registered in the United States or is otherwise required to file periodic reports with the SEC. “Domestic concerns” is a broader category, encompassing any individual who is a citizen, national, or resident of the United States. The category of “domestic concerns” also includes any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship with its principal place of business in the United States or organized under the laws of a state of the United States or a territory, possession, or commonwealth of the united States.

This basically means that U.S. corporations and nationals can be held liable for bribes paid to foreign officials even if no actions or decisions take place within the United States.

Who can be found guilty of a FCPA violation?

Other than Wal Mart (whose troubles are set forth below in a Reuters article), a person or organization is guilty of violating the law if the government can prove the existence of:

1) a payment, offer, authorization, or promise to pay money or anything of value

2) to a foreign government official (including a party official or manager of a state-owned concern), or to any other person, knowing that the payment or promise will be passed on to a foreign official

3) with a corrupt motive

4) for the purpose of (a) influencing any act or decision

of that person, (b) inducing such person to do or omit any action in violation of his lawful duty, (c) securing an improper advantage, or (d) inducing such person to use his influence to affect an official act or decision

5) in order to assist in obtaining or retaining business for or with, or directing any business to, any person.

Oops, sounds like most of the business deals that occur in the Jungle, S. E. Asia, Central Asia, and beyond would trap most unsuspecting businesspeople.

While corrupt practices go hand in hand with corruption, especially in developing countries, the change in leadership in China will have an impact on the identification and punishment of corruption in the future.  The U.S. governments enforcement agencies can only reach so far in investigating and prosecuting violators of the FCPA, however, we believe that China will continue it’s efforts to promote stability and fairness throughout their economic system by rooting out corruption.  We also believe that the U.S. government will continue to attempt to balance the playing field by enforcing the dubious regulations of the FCPA against aggressive U.S. companies, nationals and others.

For those of you who are not connected to the U.S. in any way, you might be interested to know that Britain has a similar law http://caruso-associates.com/2010/06/

(Reuters) – Wal-Mart Stores Inc lost $10 billion of its market value on Monday on concerns that a bribery investigation in Mexico could be very costly and hinder its plans to grow.

In a sign that the problem was widening for the world’s largest retailer, two U.S. lawmakers said they were launching their own investigation into allegations in a New York Times article that Wal-Mart de Mexico had engaged in a multi-year campaign of bribery to build its business. In Mexico, the front-running presidential candidate, Enrique Pena Nieto, and lawmakers also called on local authorities to investigate.

If the allegations are true, Wal-Mart may have violated the U.S. Foreign Corrupt Practices Act (FCPA), which forbids bribes to foreign government officials, as well as run afoul of Sarbanes-Oxley rules that require corporate gatekeepers to report material violations of securities laws.

Legal and retail experts also raised concerns about Wal-Mart Chief Executive Mike Duke and former CEO Lee Scott, who were among senior executives allegedly aware of the situation, according to the Times. Scott still sits on the company’s board.

Two Democratic U.S. lawmakers, Elijah Cummings and Henry Waxman, said they were launching an investigation into the matter and sent a letter to Duke requesting a meeting.

The Times report “raises significant questions about the actions of top company officials in the United States who reportedly tried to disregard substantial evidence of abuse,” Cummings and Waxman said in a statement.

Shares of Wal-Mart de Mexico, which is 69 percent-owned by Wal-Mart and known as Walmex, fell 12 percent to 37.89 pesos ($2.88). The drop wiped out a 12 percent year-to-date gain in the second-most-weighted stock on Mexico’s IPC index.

Shares of Wal-Mart fell 4.7 percent to $59.54, wiping some $10 billion off their market value and more than erasing this year’s gains. The stock is a component of the Dow Jones industrials index, which ended 0.8 percent lower.

The news raised concerns that Wal-Mart, the world’s largest retailer, may have trouble expanding into new markets.

“Entering additional countries is a cornerstone of Wal-Mart’s growth strategy,” Consumer Edge Research analyst Faye Landes wrote in a research note. “We can foresee the authorities in some key countries, notably India, becoming dramatically less welcoming to Wal-Mart following the release of the allegations.”

The New York Times reported on Saturday that a senior Wal-Mart lawyer received an email from a former Walmex executive in September 2005 that described how the Mexican company had paid bribes to obtain permits to build stores in the country.

According to the Times, Wal-Mart sent investigators to Mexico City and found a paper trail of suspect payments totaling more than $24 million. But the company’s leaders shut down the probe and did not notify U.S. or Mexican law enforcement officials until after the newspaper informed Wal-Mart that it was looking into the issue, the Times reported.

Wal-Mart said it was deeply concerned about the matter and began an investigation into its FCPA compliance last fall. It said it disclosed the probe to the U.S. Department of Justice and the Securities and Exchange Commission, and declined to give any more details or to make executives available for comment.

A source familiar with the matter said the Justice Department has been conducting a criminal investigation into the bribery matter for months.

In a memo entitled “Integrity” sent to Wal-Mart employees on Monday, Duke said the company takes compliance with FCPA “very seriously, and we will not tolerate violations anywhere or at any level of the company.” The memo included a link to Wal-Mart’s global ethics office website and phone hotline.

“My firm expectation is that Wal-Mart will always follow the law, but my expectation also goes far beyond following the law. We will do what’s right – not just what is legal – and our actions will show the utmost integrity at all times,” he said.

EXPENSIVE AND EXTENSIVE

In Mexico, Enrique Pena Nieto, the favorite candidate to succeed conservative President Felipe Calderon, joined some opposition lawmakers in calling for the government to launch an investigation. Mexico’s attorney general Marisela Morales said her office would act promptly if asked to do so by the Ministry of Finance or Ministry of the Economy.

“If licenses were given out where they shouldn’t have been, there’s fraud not only in the cities where that happened, but also there could have been fiscal fraud,” Francisco Javier Castellon of the Party of the Democratic Revolution (PRD) was quoted as saying in the newspaper Rumbo de Mexico.

Bribery and corruption are pervasive in Mexico, where the justice system is weak and lower-level public sector workers earn relatively low salaries. A study last year by Transparency International showed that Mexican companies were perceived to be the third-most likely behind those in China and Russia to pay bribes abroad.

Still, the country has been taking steps to turn around this image and an anti-corruption law was recently passed by Mexico’s lower house that would give the country new powers to fine companies for corruption.

BMO Capital Markets analyst Wayne Hood said in a research note that Wal-Mart’s growth could be hurt both domestically and abroad by the bribery allegations. “Articles like this will be used against the company by activists and competitors when it attempts to open stores in the U.S. and abroad,” Hood wrote in a note on Monday.

Others said the share drop could actually provide a buying opportunity, given that Wal-Mart shares had been trading near a 52-week high on optimism over the recovery in its U.S. business. Options market activity also suggested a bullish bias on Wal-Mart stock.

Citigroup analysts said in a note that, after discussions with Wal-Mart, it believed that the retailer would conduct a “thorough and transparent” review and said any pressure on the stock was “an enhanced buying opportunity.”

The California State Teachers’ Retirement System (CalSTRS), which holds over 5.5 million shares of Wal-Mart Stores, will keep its exposure to the retail giant until it finds out what happened, CalSTRS’s director of corporate governance, Anne Sheehan, told Reuters.

WALMEX RESULTS DISAPPOINT

Some hedge fund managers said Walmex was the more attractive target for short sellers.

Walmex said on Monday that it does not believe the allegations will hurt its business.

After the market close, Walmex’s first-quarter earnings missed analysts’ expectations. Executives on a pre-recorded call did not mention the bribery probe.

“This investigation shocked investors,” said Gerardo Roman, head of trading at Mexico City brokerage Actinver. “Walmex had been considered an extremely ethical company. It was a safe haven for investors,” he added, noting that the stock reached historic highs two weeks ago.

Lawyers said Wal-Mart could face shareholder lawsuits accusing the company of securities fraud for having inflated its stock price by misleading investors about its FCPA compliance. Cosmetics maker Avon Products Inc faces similar lawsuits over its activities in China.

Wal-Mart executives and directors, like their Avon counterparts, could face “derivative” lawsuits accusing them of covering up or turning a blind eye to the alleged bribes.

These lawsuits seek to force executives, or their insurers, to pay money directly to Wal-Mart for breaching or ignoring their duties, and for the company to tighten internal controls.

Shareholders could also use the power of the ballot box. At Wal-Mart’s June 1 annual meeting, they could vote out directors they deem responsible for allowing the bribery, including the four independent directors who comprise the audit committee.

Nearly 50 percent of Wal-Mart’s shares are owned by the family of deceased founder Sam Walton, which may mute the power of other shareholders.

($1 = 13.17 pesos)

Given that China is one of the only places in the world that has had double digit growth in GDP (except for this year which is still 8%), it has a burgeoning and spend crazy middle class, a developing legal system and excellent infrastructure, everyone should want to bring their products and services into this market.  It’s not that easy.  For many products, and services there are taxes.  China does not have a national sales tax on retail items like other countries and so it imposes import duties, value added taxes and consumption taxes which the importer, wholesaler or retailer must add to the price the consumer pays.  It’s all hidden, but, believe me they can be quite steep.  For example, the total duty on imported wine, which is the only wine worth drinking in China, is between 41 and 50% which can make many products cost prohibitive when compared to quality – the value is just not there.

And people think China is cheap!  I would offer that in the major cities in China, cost of living is higher than most cities in the U.S. and Europe and inflation has not stopped in the 10 years that we have been advising clients in China.  China aint cheap anymore, but, the domestic market where they don’t mind paying higher prices on quality items (that aren’t fake) is enormous and growing.

So, until the central government decides to either scrap it’s antiquated and cumbersome Value Added Tax “V.A.T.” system, which we don’t see that happening for a long time as too many people would lose a lot of money, or they lower the import duties and consumption taxes on imported products – there might be other ways to import products that are in high demand in China.

China and Hong Kong operate under a one country two systems arrangement that has been in place since the turnover in 1999.  Despite obvious cultural differences and the fact that there is a border crossing, most of us who do business in South China consider the two as one.  In fact, there is a treaty between Hong Kong and China which many people don’t know about that allows for Hong Kong companies and professionals to operate in China and also a few other things such as the duty free import of Hong Kong made products.  Below is a summary of the CEPA rules pertaining to importation of Hong Kong products which could provide a solution to the high import duties in China.

In order to enjoy zero tariffs under the Closer Economic Partnership Agreement (CEPA), goods exported from Hong Kong to Mainland China must fulfill the rules of origin and show evidence of being “made in Hong Kong.”

The execution of the rules of origin is detailed in the “Customs Provisions of the People’s Republic of China on Executing the Rules of Origin for Trade in Goods under the Mainland/Hong Kong Closer Economic Partnership Arrangement (haiguanshuling No.106, hereinafter refers as ‘Provisions’),” which was promulgated in December 2003 and came in effect from January 1, 2004. Under the Provisions, “Hong Kong” as the origin of goods shall be determined according to the following principles:

1. Goods entirely obtained in Hong Kong

2. Goods “substantially manufactured” in Hong Kong if not entirely obtained in Hong Kong Goods entirely obtained in Hong Kong According to the Provisions, goods entirely obtained in Hong Kong include:

• Minerals exploited or extracted in Hong Kong
• Plants or related products collected in Hong Kong
• Animals born and raised up in Hong Kong and their related products
• Animals hunted in Hong Kong
• Fish and other sea products caught by ships with Hong Kong licenses and regional flags and their related products
• Waste disposal for recycling from and collected in Hong Kong
• Waste and scrap for recycling resulting from manufacturing in Hong Kong
• Products made out of waste disposal or waste and scrap mentioned above Substantial processing, transformation, or manufacturing The criteria of determining whether the products are “substantially manufactured, transformed, or processed” in Hong Kong should include the following:

Manufacturing or processing operations.  The goods should be endowed with essential characteristics after principal manufacturing or processing operations in Hong Kong.

Change of tariff number.  Change of tariff number refers to a change of the four-digit tariff numbers and taxation categories after the manufacturing or processing operation of non-Hong Kong materials in Hong Kong. Moreover, no further manufacturing or processing should happen outside Hong Kong.

Ad valorem percentage.  Ad valorem percentage is the ratio between the total value of raw materials, components, labor and product development that are fully acquired in Hong Kong, and the FOB value of the finished product for export.

• Ad valorem percentage = (Value of raw materials + value of components + labor costs + product development costs) ÷ (FOB value of finished product for export) Products with an ad valorem percentage equal to or greater than 30 percent, and with the last manufacturing or processing procedures completed in Hong Kong, shall be regarded as “substantial processing.” The following stipulations apply:

• Calculation of the above “ad valorem percentage” should be consistent with generally accepted accounting standards and with the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
• “Product development” refers to product development conducted in Hong Kong for the purposes of producing or processing the exporting goods. Incurred expenses for development shall be related to the exporting goods, including the costs for self-developing of the producers and processors, as well as the costs for the developing of consigned natural or legal person. The expenses also includes fees for purchasing designs, patents, patented technologies, trademarks or copyrights processed by a natural or legal person in Hong Kong. The concerned value should be clearly identifiable under generally accepted accounting standards and the provisions of “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.”
• If raw materials or components originating from Mainland China are used and they constitute part of the export products in Hong Kong, when calculating the ad valorem percentage of the export product, the raw materials or components from Mainland China should be deemed to be originating from Hong Kong. The ad valorem percentage of the export product should be greater than or equal to 30 percent, and greater than or equal to 15 percent excluding the price of the raw materials or components from mainland. Other criteria The “other criteria” refer to other criteria agreed by authorities of both Mainland China and Hong Kong in determining the origin of the products, besides the three above-mentioned criteria.

Mixed criteria. The “mixed criteria” means that two or more of the above-mentioned criteria are used in determining the origin of the products. Manufacturing or processing for the purpose of transporting or storing the goods, facilitating the packaging of the goods, or better packaging and displaying the goods is not considered as “substantial processing, transformation, or manufacturing.”

Simple diluting, blending, packaging, bottling, desiccation, assembling, sorting or decorating will not be regarded as “substantial processing, transformation, or manufacturing.”

Package, packaging materials, containers and accessories, spare parts, tools and explanatory materials accompanying the goods should be ignored in determining the origin of the goods.

Well, the movie was cool, and I am not the conspiracy theory type of person, but when you read articles like the one listed below from Reuters, it makes you think.  As an international attorney who advises businesses and business people from all over the world, and who regularly recommends Hong Kong as the easiest and most tax friendly jurisdictions in the world, it makes it more difficult when I read this kind of article.  It also makes me a bit suspicious of the intentions of government and the impact on any successful businessperson not named Warren Buffet, who just wants to save as much money as he can for his family and his future.

For all of you Yanks who bank in Hong Kong and use HSBC you might want to reconsider and switch to an international bank that isn’t concerned with the U.S. market.  While I can’t recommend any, they are out there and have good internet banking and services, just like HSBC.  You see, HSBC can no longer afford to maintain the accounts of U.S. citizens living abroad because of the onerous reporting requirements of FACTA and other U.S. laws concerning money laundering and support of terrorism, which many believe were only enacted to catch Americans legally avoiding onerous tax reporting burdens in the U.S.  Now, with this recent trumped up charge by the Fed in New York, which looks suspiciously like an attempt to protect U.S. banks, it might be time for Yanks to switch the banks.  Please see the below article from Reuters and draw your own conclusions as commenting on this matter could be harmful to my health.

(Reuters) – In April 2003, the Federal Reserve Bank of New York and New York state bank regulators cracked the whip on HSBC Bank USA, ordering it to do a better job of policing itself for suspicious money flows. Staff in the bank’s anti-money laundering division, according to a person who worked there at the time, flew into a “panic.”

The U.S. unit of London-based HSBC Holdings Plc quickly rallied. It hired a tough federal prosecutor to oversee anti-money laundering efforts. It installed monitoring systems for operations that had grown unwieldy during the bank’s U.S. expansion. The aim, as HSBC said in an agreement with regulators at the time, was to “ensure that the bank fully addresses all deficiencies in the bank’s anti-money laundering policies and procedures.”

Nearly a decade later, the effort has failed to satisfy law-enforcement officials.  The extent of that failure is laid out in confidential documents reviewed by Reuters that originate from investigations of HSBC’s U.S. operations by two U.S. Attorneys’ offices.

These documents allege that from 2005, the bank violated the Bank Secrecy Act and other anti-money laundering laws on a massive scale. HSBC did so, they say, by not adequately reviewing hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.

In some of the documents, prosecutors allege that HSBC intentionally flouted the law. The bank created an operation that was a “systemically flawed sham paper-product designed solely to make it appear that the Bank has complied” with the Bank Secrecy Act and is able to detect money laundering, wrote William J. Ihlenfeld II, U.S. Attorney for the Northern District of West Virginia, in a draft of a 2010 letter addressed to Justice Department officials.

In that letter, Ihlenfeld compared HSBC unfavorably to Riggs Bank. In 2004 and 2005, that scandal-plagued Washington bank was fined a total of $41 million after it was found to have violated anti-money laundering laws, and it was acquired by PNC Financial Services.

“HSBC is to Riggs, as a nuclear waste dump is to a municipal land fill,” Ihlenfeld wrote. The allegations laid out in the Ihlenfeld letter and other documents couldn’t be confirmed. It is possible that subsequent inquiries have led investigators to alter their views of what went on inside HSBC’s compliance operation.

As they are, the documents reviewed by Reuters, combined with regulatory filings, court documents and interviews with current and former HSBC employees, paint a damning portrait of a bank allegedly unable, and unwilling, to police itself or its clients.

HSBC’s U.S. anti-money laundering division – the people charged with ensuring that the bank toes the line of regulators and law enforcement – has experienced high turnover among executives. Since 2005, at least half a dozen overseers have come and gone. Compliance staff also encountered pushback from bankers eager to maintain relationships with lucrative clients whose dealings raised red flags.

In the Miami office – an important center for HSBC’s private-banking and retail operations – a longtime private banker was fired for alleged sexual harassment after he warned compliance officers that clients were engaged in shady dealings.

In one email exchange submitted as evidence in that case, employees debated whether the bank should help a Miami client get around U.S. sanctions by moving the client’s business to HSBC’s Hong Kong office. “I believe that the best outcome would be for the customer to open a relationship with Hong Kong just for leters (sic) of credit purposes. He travels there all the time,” private banker Antonio Suarez wrote in a 2008 email. Suarez has since left the bank and couldn’t be reached for comment.

UNDER THE RADAR

The revelations come as HSBC confronts multiple investigations into its internal policing abilities. The Justice Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Manhattan district attorney, the Office of Foreign Assets Control and the Senate Permanent Subcommittee on Investigations are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions, the bank said in a February regulatory filing.

“We continue to cooperate with officials in a number of ongoing investigations,” HSBC spokesman Robert Sherman said. “The details of those investigations are confidential, and therefore we will not comment on specific allegations.” HSBC said in its February filing that it was likely to face criminal or civil charges related to the probes.

A successful case against HSBC could result in an onerous fine and represent one of the most significant money laundering cases ever brought against an international bank. It also would draw unaccustomed attention to the challenges governments — and financial institutions — face in monitoring the trillions of dollars flowing through banks’ back-office operations, flows essential to the daily functioning of the global financial system.

“Disguised in the trillions of dollars that is transferred between banks each day, banks in the U.S. are used to funnel massive amounts of illicit funds,” Jennifer Shasky Calvery, head of the Justice Department’s Asset Forfeiture and Money Laundering Section, said in congressional testimony on organized crime in February.

In response to Reuters inquiries about the investigations, Gary Peterson, chief compliance officer of HSBC’s U.S. bank operations, said: “Since joining HSBC in 2010, I’ve been proud to lead an AML (anti-money laundering) team that has vastly increased investments in people, systems and expertise. We are continuously seeking to strengthen our core AML mission: to detect and deter money laundering and terrorist financing – and our efforts are showing results.”

To date, the only enforcement action detailing any anti-money laundering shortcomings at HSBC was a 2010 consent order from the Office of the Comptroller of the Currency, the Treasury agency that is HSBC’s chief regulator. The OCC, calling HSBC’s compliance program “ineffective,” told the bank to conduct a review to identify suspicious activity. This “look-back” was expected to yield a report to HSBC and regulators. The status of the report isn’t known. A spokesman for the OCC declined to comment.

The West Virginia U.S. Attorney’s probe of HSBC, which ran from 2008 until at least 2010, originated in a case against a local pain doctor who allegedly used HSBC accounts to launder ill-gotten gains from Medicare fraud. Over time, the U.S. Attorney’s office began to discern that, as Ihlenfeld wrote in his letter, the doctor’s case was just “the tip of the iceberg” in terms of the volume of suspicious money sluicing through HSBC.

The U.S. attorney for the Eastern District of New York in Brooklyn – one of the most powerful prosecutors outside of Justice Department headquarters in Washington – has conducted a parallel investigation, in collaboration with the Justice Department’s money laundering section.

Specifics on the investigations have until now been cloaked in secrecy. The documents reviewed by Reuters for the first time fill in some of the details. Taken together, they depict apparent anti-money laundering lapses of extraordinary breadth. Among them, according to the documents:

* The bank understaffed its anti-money laundering compliance division and hired “gullible, poorly trained, and otherwise incompetent personnel.” In 2009, the OCC deemed a senior compliance official at HSBC to be incompetent – the same executive in charge of implementing a new anti-money laundering system.

* HSBC failed to review thousands of internal anti-money laundering alerts and generate legally required suspicious activity reports, or SARs, on transactions picked up by the bank’s internal monitoring system. SARs are important because they are sent to U.S. law enforcement and scrutinized for leads to criminal activity. In May 2010, the bank’s backlog of alerts was nearly 50,000 and “growing exponentially each month,” according to one of the documents.

* Hundreds of billions of dollars moved unchecked each year through various bank operations because of lax due diligence and monitoring of accounts with foreign correspondent banks, which are financial institutions that rely on U.S. banks for processing services. The bank maintained accounts with “high risk” affiliates such as “casas de cambios” – Mexican foreign-exchange dealers – widely suspected of laundering drug-trafficking proceeds, and some Mexican and South American banks.

* In some instances, “management intentionally decided” not to review alerts of suspicious activity. An investigation summary also says, “There appear to be instances where Bank employees are misrepresenting” data sent to senior managers, and where management altered risk ratings on certain clients so that suspect transactions didn’t set off alarms.

Sherman, the HSBC spokesman, said the bank cleared the backlog of alerts and has remained current. Sherman also said the bank “regularly reviews risk ratings. We have revised and strengthened our country risk rating review policies.”

Spokesmen for the U.S. Attorney in Wheeling, West Virginia, and for the U.S. Attorney in Brooklyn declined to comment. The Justice Department in Washington also declined to comment, citing “an ongoing investigation into this matter.”

THE MIAMI CONNECTION

HSBC was born in 1865 as the Hongkong and Shanghai Banking Corp in the then-British colony of Hong Kong. It had little presence in the U.S. market until its purchase in the 1980s of Marine Midland Banks Inc based in Buffalo, New York.

Now the fifth-largest bank in the world in terms of market value, HSBC had $2.6 trillion in assets at the end of 2011 and operations in 85 countries and territories. Its North American business, which includes HSBC Bank USA and a consumer finance unit, accounts for about 5 percent of HSBC’s profit.

In 1999, HSBC’s U.S. unit paid $10 billion to buy Republic New York Corp and a European affiliate, banks controlled by Lebanese financier Edmond Safra. The deal doubled HSBC’s private bank to 55,000 clients with $120 billion in assets and broadened business in New York, Florida, Latin America and Europe.

The purchase also yielded one of the world’s biggest banknote businesses, an operation that handles bulk cash exchanges between central banks and large commercial banks. In 2003, HSBC plunged into the U.S. market for subprime lending, paying $14 billion for Household International Inc.

By then, all banks faced U.S. regulatory pressure aimed at stopping shady money flows. In the wake of the September 11, 2001, attacks, the Patriot Act took effect, attempting, among other things, to choke off terrorist financing by strengthening requirements that banks look for and report suspicious activity. In recent years, U.S. law enforcement added an emphasis on money tied to the illegal drug trade.

When the 2003 order came down from regulators for HSBC to improve its anti-money laundering efforts, the bank had no centrally organized means of monitoring the movement of money across borders. That’s when it hired Teresa Pesce. Pesce came from the high-profile U.S. Attorney’s office in Manhattan, where she made a name for herself as a tough prosecutor overseeing money laundering prosecutions.

Pesce “knew the ropes,” according to a person who worked in compliance at the time, and the sense among many staffers was that a “savior was here.” One of her first initiatives was to order the installation of the Customer Account Monitoring Program, or CAMP, a technology system designed to filter suspicious retail transactions across HSBC’s U.S. operations.

In 2006, regulators lifted their 2003 order, according to people familiar with the situation.

Pesce left the bank in 2007 to run KPMG LLP’s anti-money laundering consulting business. A lawyer for Pesce declined to comment.

Despite Pesce’s efforts, problems with HSBC’s program persisted. In 2009, the OCC determined that Lesley Midzain, a compliance executive with little direct experience running anti-money laundering programs, was incompetent. She was in charge of the installation of a monitoring program to replace Pesce’s CAMP system, which the OCC had determined was “inadequate to support the volume, scope and nature of international money transfer transactions,” according to the documents reviewed by Reuters.

“Ms. Midzain is an experienced compliance professional who worked tirelessly to improve the (anti-money-laundering) systems and processes already in place when she began her assignment in April 2008,” said a spokesman for Midzain.

The former compliance-division staffer said that in the Miami office in particular, with millions of dollars from Mexico, Brazil, Argentina and other countries flowing through the Premier private-banking business for wealthy clients, “it was a nightmare to figure out what was going on down there.”

Those observations mesh with allegations in a 2010 lawsuit against HSBC brought by Tomas Benitez, a longtime private banker in South Florida who had worked at Republic Bank. Benitez alleged that HSBC fired him in January 2009 after he warned colleagues that clients had violated U.S. restrictions on trade with Iran and Cuba.

HSBC said in a court filing that it fired Benitez for alleged sexual harassment – allegations Benitez denied.

In court documents, Benitez alleged that during an audit meeting in 2008, an unidentified federal bank examiner told HSBC employees that a client referred to only as “CM” “had multiple affiliations whose ties to Iran and Cuba were part of their ordinary course of business.”

At a follow-up meeting, the account was discussed because of indications its owner “was funneling large amounts of funds in and out, with no apparent business purpose,” Benitez alleged. He told Clara Hurtado, director of anti-money laundering compliance at HSBC’s private bank in Miami, that the account had ties to Iran and Cuba and “as a result, it should not be maintained,” according to the lawsuit.

After the meeting, Benitez alleged, another banker said “he would not allow Benitez’s word and suspicions to defeat a million-dollar-plus account relationship.” The account wasn’t terminated, Benitez alleged.

Hurtado declined to comment. She left HSBC in 2009, according to her LinkedIn account.

In an email exchange submitted as an exhibit in the lawsuit, Hurtado and other HSBC employees discussed whether the bank could help a Miami client avoid violating U.S. sanctions by issuing letters of credit for the client from the bank’s Hong Kong offices, according to Benitez’s lawsuit. “Clara, we are persuing (sic) another solutions……(anything but losing the account!!!),” Suarez, the private banker, wrote in an email. The banker suggested issuing the letters of credit through Hong Kong.

In January 2009, HSBC fired Benitez. In late 2010, a federal judge dismissed his case and demand for pay, saying there was no evidence of a connection between Benitez’s concerns about the accounts and the firing. The judge didn’t address Benitez’s allegations about illicit transactions.

Benitez’s Miami lawyer, Mark Raymond, declined to comment on his client’s behalf.

HSBC spokesman Sherman declined to comment on Benitez’s case. “It’s inappropriate to comment on unsubstantiated allegations in termination of employment cases,” he said.

OBVIOUS TO STOOGES

Around the time Benitez was sounding warnings in Miami, authorities were accelerating an investigation in West Virginia of Barton Adams, a pain clinic operator in the Ohio River town of Vienna. In 2008, the U.S. Attorney in Wheeling indicted Adams on 157 counts of alleged healthcare fraud and other crimes. They allege that Adams moved hundreds of thousands of dollars in Medicare fraud proceeds between a U.S. HSBC account and HSBC accounts in Canada, Hong Kong and the Philippines.

Adams has pleaded not guilty.

Now those of us who deal with the Jungle and it’s inhabitants and myriad dangers know that nefariousness on the part of the creatures that roam the Jungle is not an exception, and, when a company like Apple seems to have outsmarted one of the inhabitants and bought the trademark rights for a bargain it actually makes us happy to know that the little guy finally won one (even though Apple is not a little guy).

So, now it is not surprising to learn that Apple is being asked to settle a case that they seem to have settled a long time ago when they purchased the Trademark rights from Proview and government officials are on record that Proview is actually the owner of the iPad trademark.  Here is the latest on this matter with my comments.

Pressure on Apple to settle iPad case

Associated Press in Shanghai
Apr 25, 2012

Apple risks losing the right to use the iPad trademark in China, a senior official suggested yesterday, as a court in Guangdong was seeking to mediate a settlement between the global technology giant and a local company challenging its use of the iPad name. Yan Xiaohong, deputy director of the National Copyright Administration, said in Beijing that the central government regards Shenzhen Proview Technology as the rightful owner of the trademark for the popular tablet computers. The official’s remarks could add to pressure on Apple to find a solution to the stand-off.  You’re darn right this will add to the pressure on Apple to settle and I’m sure the comment was timed to support the Chinese company against the big American giant. (This probably wouldn’t be any different if this case were in the U.S. or the EU or any other country and the shoe was on the other foot)

Yan’s comments followed news that the Guangdong High Court is seeking to arrange a settlement in the case. In late February, the court began hearing Apple’s appeal against a lower court’s ruling that favoured Proview in the trademark dispute. They do like to mediate and settle cases here in the Jungle and they usually settle based more on fairness and harmoniousness and other factors, rather than strict legal interpretations.  Their concepts of fairness and harmoniousness will undoubtedly be markedly different than Apple’s.

“The dispute between Apple and Shenzhen Proview concerning the iPad trademark is going through the judicial process,” Yan said in a news conference carried on the internet. He added that “according to our government’s laws, Shenzhen Proview is still the lawful representative and user of the trademark”.  We’ve told everyone thousands of times, it’s first to file in China, not first to use.

Beijing has sought to showcase its determination to protect trademarks and other intellectual property, but with hundreds of thousands of workers employed in the assembly of Apple’s iPhones and iPads, the government is unlikely to want to disrupt the company’s production and marketing in China.

Ma Dongxiao, a lawyer for Proview, said the firm had expected all along to settle with Apple, with the key sticking point being the amount of money involved. “It is likely that we will settle out of court. The Guangdong High Court is helping to arrange it and the court also expects to do so.”  It’s only about money over here and rarely do we see win win settlements, somebody always loses and it is usually not the local company.

Court officials said they were not authorised to comment on the issue to foreign media.

“Given the wide implications of this case, we need to wait to see the final ruling of the court, which will decide the ownership rights for the trademark,” Yan said. He said commercial authorities that had received complaints about Apple’s use of the iPad trademark were collecting evidence. Chinese courts often try to mediate agreements out of court.  You can bet that the government will have a lot of influence on the settlement or resolution by the Appeals court as that is the way the system works here in the Jungle.

Proview, a financially troubled maker of computer displays and LED lights, says it registered the iPad trademark more than a decade ago. Apple says Proview sold its worldwide rights to the iPad trademark in 2009, though the registration was never transferred for China.

Apple had no new comment on the possibility of a settlement.

But, this posting is not about Baltimore or much else, it is about one of my favorite topics in the Jungle, fake and copy stuff.  I can’t stop myself from writing about this topic every time I come across another fake item.  The few of you that read my blog, thanks Mom, all know that copy salt is my all-time favorite.  If we were in Baltimore, they would call it a fake ambalance.  Article from China Daily, so you know it must be real and accurate and not made up, with my comments for my amusement and a picture thrown in just to show you how great they are at faking stuff.

Siren sounds on fake ambulances

By Xu Jingxi in Guangzhou (China Daily)

18 arrested on suspicion of taking patients without license.  Guangzhou police have arrested 18 people who were illegally transferring patients between hospitals and cities with fake ambulances.  Fake ambulance, fake EMT’s, I shouldn’t be astonished anymore when I read these stories.

The fake ambulances had been transformed from ordinary vans using red crosses, sirens and medical equipment including stretchers, oxygen bottles and first-aid kits containing stethoscopes and disposable rubber gloves.  They got that part right.  They are excellent copiers.

The Notorious Fake Ambalance

Guangzhou Daily cited a police officer surnamed Zhang from the police department of Yuexiu district in Guangzhou saying the suspects disguised themselves as doctors and nurses.  After leaving their day job operating a Styrofoam collecting push cart, Zhang Wei and his wife step into a phone booth and change into their EMT uniforms and patrol the streets hoping to cure their city of illness and injury. Zhang said the head of the group used to work in a hospital and she started running the illegal business in 2010 after discovering that local hospitals failed to meet patients’ needs for ambulances when they wanted to get transferred to another hospital or another city.  She used to work in a hospital, oh, that should be good enough.

The group fought violently with other gangs to take a bigger share of the market. The bloody conflicts attracted police attention and exposed the illegal industry, Zhang added.  Gangs control this service as well? Those enterprising gangs stepping in to meet market demand once again.

The owner of a Guangzhou-based company that rents fake ambulances – who would only be identified by the surname Song – started the business a year ago after seeing the great market potential for the service. “But we hire doctors and nurses working in hospitals, or at least medical college grads, to accompany the patient on the way if he or she makes the request and is willing to pay for it,” Song told China Daily.  Fake ambulances, fake ambulances, fake ambulances, I just like hearing it over and over again.

“These medical professionals love to get some extra income,” Song said.  “Who doesn’t” said Zhang Wei the push cart operator and his wife.

“Especially in big cities such as Beijing, Shanghai and Guangzhou, migrant workers who don’t have enough money to stay in large hospitals need vehicles to send them back to their hometowns,” said Song. “But most hospitals don’t have such services.”

China Daily asked three large hospitals in Guangzhou, and only one of the three, The First Affiliated Hospital of Guangzhou Medical University, seems to offer patients the service. “We have one ambulance to transfer patients between hospitals within Guangzhou and another one to transfer them between cities. It’s not enough,” said a worker surnamed Deng at the hospital who did not want to be identified.  He better hope no one else in the hospital is surnamed Deng.

“So those patients who desire a timely transfer will turn to renting illegal ambulances,” said the worker. “But patients could be in great danger if they become ill on the way without being accompanied by medical professionals and qualified equipment.”

Song’s company has already assisted more than 2,300 patients.  Wow, that’s a lot, reminds me of the fake divorces. “The market for ambulances to carry patients between hospitals and cities is now dominated by privately owned small companies like us,” said Song. “But it isn’t true that we can earn big profits from doing this business.”

According to information from the just-dismantled group, it costs a patient 2,000 yuan ($317) to travel from downtown Guangzhou to Panyu district, the city’s suburban area. “However, we have to give part of the revenue to the doctors and nurses we hire and to the people in the hospital who help us get the business,” said Song.  Song revealed that medical workers and guards in the hospital will recommend a specific company’s service to the patients, and they certainly require payment.  ”Each group takes control of a specific hospital, handing out advertisements around wards,” said Song.  Song’s probably not real happy after the group was dismantled, probably feels the same way as Andy Summers and Stewart Copeland of the Police.

Han Zhipeng, a member of the Guangzhou Committee of Chinese People’s Political Consultative Conference, said the government needs to do more than just wipe out the gangs and the illegal ambulance rental companies. “The patients do need the service. Governments should consider subsidizing the hospitals to offer the service,” said Han. “If not, governments should put forward laws to regulate the ambulance rental market and clarify which government departments are in charge of the regulation.” “This is also a good solution to the lack of ambulance services in hospitals if the companies are able to offer qualified and safe services.”  Han Zhipeng has a point.

Lunch

The Chinese have a traditional way of greeting each other.  They say “chi fan le meiyou?”  This means, “have you eaten?”  They also say hello and how are you and long time no see and stuff like that, but, the traditional way to greet someone is by asking if they have eaten yet.  This is unusual to say the least and often misunderstood by foreigners in China.  There are many theories of where the greeting began and I won’t go into those – the most important thing is to understand how important eating is in the Chinese culture and psyche.

Many years ago, when I had been here for about a year and thought I knew a lot about China, I was driving through a district of Shenzhen (a city with 12 million + people) and it came to me why eating was everything in China.  It was about noon and we were weaving our way through the throngs of people leaving their offices/factories, and the cars, taxi’s, buses, three wheeled gasoline powered tricycle things, and every other contraption known to mankind.  Now, I wasn’t driving but I was in the passenger seat and my driver was in 5th gear going 30km per hour and the car was shaking and I kept wanting to reach over and downshift for him but I refrained and gritted my teeth until they started to disintegrate.  It didn’t help that I hadn’t had anything to eat since that awful cup of Chinese hotel coffee and greasy fried bread stick earlier that morning.   So, I tried to get into that Zen state that has gotten me through some of the most uncomfortable situations in my life and I looked out the window at the chaos that was unfolding around me.

Right when I was concentrating on my breathing, I looked down the road and thought I saw what looked like a buck naked cave man eating a coconut.  ”I have taken this Zen thing to a completely new level” “maybe I have finally achieved enlightenment” I thought to myself and looked away.  ”Can’t be a naked cave man, surely someone would have taken him away or thrown a shawl around him or given him a fig leaf.”  I looked back in the same direction just to see if I might have not imagined this and there he was, a completely naked cave man eating a coconut.  He looked exactly like Tom Hanks in that movie where he is stranded on the island with the volleyball – not the fat Tom Hanks but the one after he had been there for a few years.  As we approached, he was on the area that in most countries would be a sidewalk, but in China is actually a labyrinth of open manholes, electric scooters carrying propane, rickshaws loaded down with Styrofoam, dangling high tension wires and an assortment of other wonders and dangers. He was indeed naked and brown, obviously from not wearing any clothes, and his hair was matted and dread-locked, obviously from not having a haircut, and he was eating what looked like a coconut or some other thing with a hemp like exterior.  Now in Borneo or Sumatra I wouldn’t have been surprised to see this phenomenon, but in Shenzhen China at noon on a busy work day – I was shocked.

The cave man walked through the crowd and no one even paid any attention to him.  He just leisurely strolled along and the Chinese purposefully moved on their way to somewhere without noticing him.  I wondered what they were thinking: “naked man – hmm”", “naked man – gotta get back to work”, “naked man – time to eat”,  ”that coconut looks good – I’m hungry”, “what’s a cave man?”.  I asked the driver about the man and he said, “what naked man?”  I said, “that one right there in front of the car” and he said oh, and I’ll never forget what he said next and you shouldn’t either because it’s the moral of this story, he said “where do you want to eat?”  Well, I was hungry and I have been to many of the big cities in the world, but I have never seen a naked cave man walking down the street eating a coconut and I just couldn’t think about food right now.  I said, “that man is naked, don’t the police or someone come to take him away?”  He responded, “maybe he is crazy, now do you want Chinese food or McDonalds?”

I couldn’t let it go that quickly so I called a Chinese friend and told him what I had just seen, he said “he’s probably crazy, do you want to eat hotpot tonight?”  Unbelievable is all I could think and I said I would think about it and call him later.  We had passed the cave man and were rolling along in 5th gear when it hit me.  They are obsessed with eating.  Now I don’t know where it came from and don’t really concern myself with the roots of their hunger obsession, but I just then realized that eating consumes their mind and probably gets in the way of otherwise productive thought.

Having been in China for 7 years, it’s no longer a surprise to me when someone asks “have you eaten?”  I now respond with a yes or no and ask them if they have eaten.  I like to eat, especially big old Texas hamburgers and a good pizza and even some Chinese food, but it doesn’t consume most of my waking thoughts.  So I started to think about other things like productivity and creativity and rationality and how they apply in China and I keep coming back to the cave man and the people around him that were singly focused on something other than his being naked walking down the city street.  It has to be food.  They are always thinking about food.

I haven’t done any research with focus groups or control groups or any groups for that matter, but I have looked around and observed and I have reached the non scientific conclusion that the Chinese are more concerned about eating than anything else.  Even their obsession with money and saving face and smoking is far outweighed by eating.  For those of us China veterans we know that trying to accomplish anything from 11:00 a.m. until 2 is next to impossible.  I have even suggested that if anyone thinks about attacking China, they ought to do it during lunch because the Chinese will probably think, “look at that we are being attacked and overrun by aliens, where do you want to eat?”  Note to aliens, I have given you this pearl of wisdom without sending you a bill, please wait until I am out of the country.

So, if you are thinking about doing business in this huge and burgeoning market or have done business here for years, you should understand the customs and psyche of the people who are and control this market.  While they can do good work and are industrious and hard working and entrepreneurial and lots of other things that I won’t mention here, they are often distracted by some genetically coded obsession with eating.  Plan your meetings accordingly, schedule factory/supplier/partner meetings first thing in the morning or mid afternoon (after they have eaten and slept).   Bring candy and pass it out if you see their blood sugar meters dropping into the “your head looks like a bowl of noodles” zone.  Don’t get frustrated, instead try and understand the things that make them tick and adapt to their ways, which you will never change in 5,000 years and I believe you will be more successful in doing business in China.

You won’t believe this part, but several weeks later we were driving through a completely different district in Shenzhen and I had reached another conclusion that the other gears in the car didn’t actually work and that’s why we were in 5th all the time and who did we see – yes, the caveman.  Naked as a newborn (with brown skin and pubic hair and dreadlocks) and this time he was eating a banana!  A banana!!  Even Hollywood couldn’t script this.  Scene 2. Naked cave man walking down the street in Borneo, no let’s make it Shenzhen and he’s eating dumplings or noodles, no a banana, this way it looks like he pulled it right off the tree.  You’d think I wouldn’t be shocked but I was and I got excited and said to the driver, “look at that naked man he is the same one we saw two weeks ago isn’t he?”  He said, “what naked man, we never saw a naked man………… are you hungry, where do you want to eat?”

Now, I remember locusts when they invaded back in the 1970′s and we chased them with tennis rackets and smacked them into oblivion.  One flew in my mother’s hair and to this day she is deathly afraid of the “little buggers”.  While they don’t look anything like mainlanders there is some comparison in their numbers.  I’ll leave the row to the Hong Kongers and mainlanders for now.

There is another infestation that has not received much press lately and that is the infestation of the dreaded Fa Luk 律师 – Lawyers, which actually might look like locusts.  Now for those of you who actually read my blog (and I hope my mother doesn’t read this one) you know that I like to point out the inferiority of my colleagues who are still “practising” law in Hong Kong and China, when after 17 years I am actually not “practising” anymore but honing my craft every day.  As you also know, I have actually been in Hong Kong and China for 10 years and have seen most of the challenges that my clients and others face here in the Jungle.  While the newly arriving lawyers and firms into Hong Kong are filled with young, green and recently hatched locusts, they are indeed a plague and hopefully they are not “practising” on your behalf.

As always, the below article from the South China Morning Post for your reading pleasure with my comments so that you know what is really going on.

Ranks of foreign lawyers double

IPOs and economic pact with mainland drive surge in overseas lawyers in recent years – they now account for 10pc of those practising in HK

The number of foreign lawyers practising in Hong Kong has doubled over the past seven years. Their arrival has been driven by strong demand for legal services, both from the mainland and from the financial sector for initial public offerings.

The number of foreign lawyers was 777 in 2005, 1,041 in 2007, 1,203 in 2009 and 1,431 at present. The number of foreign law firms has also increased: 36 in 2005, 56 in 2007, 70 in 2009 and 72 now.

Foreign lawyers may practise only the law of their home jurisdiction; they can advise Hong Kong clients on foreign law to help them set up businesses or resolve disputes abroad.  Foreign lawyers can also advise foreign (non Hong Kong) clients on doing business in Hong Kong or anywhere else for that matter.  For clarification, Hong Kong has a British legal system which classifies lawyers as Solicitors and Barristers.  Barristers are specialized and mainly litigate as they are the only ones allowed to appear in court and argue on behalf of a client.

Those who wish to practise Hong Kong law There’s that word again must sit a localisation exam, and 700 – about 10 per cent of all local solicitors – have done so, according to Junius Ho Kwan-yiu, president of the Law Society.

Some local lawyers, who asked not to be named, expressed concern about competition from their foreign counterparts. “Clients involved in major lawsuits usually look for international law firms or expatriate lawyers, instead of small local firms,” one said.  It’s just like everywhere in the world, if you are good and maintain good relationships with your clients and provide good service, competition won’t ever be a problem.  In fact, while there are plenty of lawyers in Hong Kong, I haven’t met very many good ones although I am still looking.

In Singapore’s Parliament last month, lawmaker Hri Kumar said “international law firms dominate nearly every area of law” in Hong Kong, according to Bloomberg. Rotterdam-based Loyens & Loeff, which advises on international tax structuring and mergers and acquisitions, opened a Hong Kong office last month. This month, London-based Berwin Leighton Paisner did the same, setting its sights on work in several sectors on the mainland.  Which they will send in their recently hatched locusts who studied Mandarin in University and expect them to advise clients on complex matters without any knowledge of how it really works in the Jungle – good luck.

The Closer Economic Partnership Arrangement (Cepa) between Hong Kong and the mainland allows certain lawyers qualified to practise locally to do so across the border.

“Some local firms are enjoying the benefits Cepa brings, but not a lot of them are,” Ho said.

Sixty-three of the 100 biggest global law firms have offices in Hong Kong, the Law Society said. Among them, 42 practise as local firms. “They then enjoy the advantages of Cepa and enter the mainland … where the goldmine is,” Ho said.  CEPA is an interesting Treaty and allows Hong Kong companies to operate in China, it was recently amended to allow Hong Kong professionals – accountants, lawyers and others to operate in China without a license, however, they are limited in their scope of advisement and cannot appear in court without a Chinese licensed lawyer.

The number of foreign lawyers sitting the annual Overseas Lawyers Qualification Examination has been on the rise since 2009: between 200 and 300 of them try to qualify as local lawyers every year.  Those who pass are no longer considered foreign lawyers.

Each year for the past five years, about 22 per cent of all the lawyers admitted to the bar in Hong Kong have qualified by taking the exam.

While Ho says the competition is getting fiercer, he denies it poses a threat to local lawyers.  “There’s no such thing as an indigenous right among us professionals,” he said. “There’s only whether you are capable or not.”  Right on my brother Lawyer Ho!

Local solicitor Lau Kar-wah, who has practised law for about 20 years, focusing on personal injury claims, said “areas like mergers and acquisitions and other big financial deals are indeed dominated by big global firms, but that doesn’t really hurt local lawyers’ business, because we focus on different areas”.  Lawyer Lau got it right, local issues and litigation in Hong Kong are best performed by the Hong Kong experts, just as in any other jurisdiction in the world.  Complex international corporate matters should also be handled by the experts with experience in both international and local law and an understanding of the application of law, customs and behavioral patterns.

In the skits Schneider gives the people nicknames, like the Great Randino (Randy) and Stevemeister (Steve) and says “making copies”.

For those of you who read my blog and actually get all the way to the bottom, you know that I am a big fan of copy products in China and that copy salt is my all-time favorite simply because it must cost more to make copy salt than real salt – think about it.  Copy eggs, which I saw one the other day, is another favorite.  So when I read this below article from the South China Morning Post concerning the making of copy trucks in China, I thought, what would happen if Schneider was posted outside of these factories and every time the boss came into work he said “The Chenmeister, the Chenimator, making copies!”

As usual the article reprinted below with my comments for my amusement.

Sham car factories still busy in Hubei

Repeated crackdowns fail to stop proliferation of illegal vehicle manufacturers thanks to help from parts makers and government agencies

Mandy Zuo SCMP

The black market for illegally pieced-together vehicles in Hubei province thrives, despite repeated crackdown orders, due to the support of local manufacturers and oversight agencies, state media said.

Illegal car factories remained widespread in the province’s Shiyan city – a major source of car parts – CCTV reported in a story timed to run in advance of yesterday’s World Consumer Rights Day.  They remain widespread everywhere.  If they can copy it they will and it is in fact what they do best in the jungle.

In the city’s Bailang Economic and Technical Development Zone alone, about 30 factories provide vehicles that are pieced together with car parts made on site, one factory owner was quoted as saying.   Chen Guojin , the owner of a factory going by the name Jieyao Industry and Trade, was quoted as saying that his factory produced an average of 200 to 300 pieced-together vehicles a year, adding that his business was “small-scale” because of fierce competition.   It took merely four hours to piece together a truck, an undercover investigation by the broadcaster found.

One type of truck produced by the illegal factory was an imitation of a model made by DongFeng Motor, a leading light-duty-vehicle maker whose headquarters are in Wuhan , Hubei’s provincial capital.

Although the illegal factory claimed its truck was capable of carrying an 80-tonne payload, while being much cheaper than DongFeng’s truck, the illegally made vehicle was found to have problems as soon as it was rolled off the assembly line – it had a power-steering leak and its exhaust pipe did not fit.  Small problems indeed.  Imagine what copy salt tastes like.

All of the shady factories promised certificates of authenticity with the vehicles, as well as access to license plates.  Chen said it was an open secret that such certificates could be purchased from legal vehicle manufacturers. So, you are saying that the copy factories purchase the certificates and plates from the legal manufacturers?  It can’t be true, these things don’t happen in the world.

The support of local supervisory departments has been another contributor to the booming market, the report said.  During an investigation by the broadcaster in Hebei province some years ago, a journalist set up a camera at a market that had workshops making the illegal vehicles, then took another camera on an interview to the local industrial and commerce bureau.  After the reporter asked bureau officials to go on camera to discuss the problem of illegally pieced-together vehicles, the camera at the market picked up a voice warning workers to cease production because the media was coming.  And local officials are involved?  Really?  Should be a warning to all of you considering JV’s or WFOE’s in small towns where the rule of law is still developing.

Ma Guangyuan , a commentator with a PhD in economics, said loose regulations were to blame for the thriving market of illegally made vehicles.  If violators faced jail time or large fines, he said, the problem would be less widespread.

The profit chain involves the buyer, the illegal factories, the legal manufacturers and the watchdog, but public safety was the only thing that had not benefited from the market, Ma said.  That Ma Guangyuan, he really got it right this time.

Chen Jianbin , founder of Qctsw, a website devoted to complaints from car owners, said the owner of an illegally pieced-together vehicle had nowhere to turn to if he had an accident in it. Do you think the guy who bought the new car at 50% less than the market value would know that it was a copy?  He knew.  Caveat Emptor should apply here.

“Factories assume you know the risks of buying such vehicles beforehand and you have to assume all the liability yourself when something bad happens,” he said, adding that the illegally made vehicles are mostly trucks and purchasers are mostly farmers who need them to transport goods.

Apple’s arguments have been weak in this case, especially knowing that they should be extra prepared when addressing Chinese courts against a local company.  They contend of course that they were under the impression that they had purchased these patents in 2006, and that their lack of Chinese language skills has left them without the proper trademarks.  There is evidence that Apple’s attorneys uncovered the separate Chinese trademarks in 2006 after closing the $55,000 deal for the rest of the global trademarks, but rejected the then $10 million asking price.  Now, after having launched iPad sales at their 4 China Apple Stores and 1,000 Chinese resellers, Apple’s strategy was to sue Proview for the iPad rights.  Unfortunately, China operates under a first to file, not first to use, trademark basis.  This protects Proview’s ownership of the iPad name even if they haven’t brought a product called the iPad to market in the 10 years since they registered the trademark.  Chinese courts found in favor of Proview and Apple is currently appealing.  Poorly handled is an understatement.  Some are wondering why Proview would have sold the international trademarks to Apple for a measly $55,000, but at the time, Proview thought they were dealing with a small British company called IP Applications Development (IPAD), not knowing that IPAD was a wholly owned subsidiary of Apple Inc.  The sneaky tactics seemed to be played on both sides, and in this case Apple has been outplayed.

The latest developments show just what Apple is up against.  After winning the case in December and verifying their ownership, Proview filed a $1.3billion countersuit for trademark infringement that has since increased to $1.6bln.  That number may have been set excessively high to attract press, but Proview does mean business.  It is rumored that Proview is struggling financially, making a prolonged legal battle in Apple’s interest.  Rather than wait for the outcome of the appeal, Proview has taken to the offense.  This week Proview convinced the local Administration for Industry and Commerce in Shijiazhuang to seize iPads from the shelves of resellers across the city.  The resulting press led Apple resellers across the country to take down iPad advertisements and hide remaining stock for fear of having their own confiscated.  While the Apple stores in Shanghai and Beijing, as well as Apple’s online store continue to operate as usual, the uncertain future for resellers will likely hurt orders, as they fear future inventory seizures.  Proview has announced that they intend to pull iPads from shelves in 30 more cities across China, and on Wednesday succeeded in having iPads in Zhengzhou at least sealed if not seized.  Proview can legally resell the seized iPads domestically for now to fund their legal battle.  Proview admits that it is unlikely they will be able to convince customs officials to seize exports or halt production at Foxconn, but the latest jab should encourage Apple to reach a settlement.  It is rumored that an iPad 3 will soon be released, China is an important market to maintain sales figures for iPad 2s in order to avoid steep discounts on excess inventory when the iPad 3s come out.

As we frequently remind the readers of these blogs, it is crucial to register your patents and trademarks separately in China, as international patents will not hold up.  Let this be a reminder that failure to do so could end up costing you in bad press, halted sales and shipments, and in the worst case up to $1.5 billion.

Where the streets are not always paved with gold

YANGTZE BRIEFING Jan 21, 2012

Foreigners flocking to Shanghai are increasingly less affluent or experienced – and that can spell trouble Shanghai’s international community has been buzzing with gossip about an expat scandal. Scores of unsuspecting tenants are complaining they have been swindled out of large sums of cash after their Canadian landlord skipped town with their deposits.

Ryan Fedoruk is alleged to have run out over Christmas on 80 people who gave him a total of 340,000 yuan (HK$417,800) in down payments and advance rent on rooms in 30 apartments he was subletting. The real landlords have thrown the victims out onto the street, claiming rent had been unpaid for months.

Shanghai police are looking into the claims, but were initially reluctant to pursue the case due to a lack of evidence. According to local media, most of the victims had no formal contracts, just handwritten notes detailing their deposits and due dates for the rent. The apparent swindle says much about the trusting nature (call it gullibility, if you like) of emigre societies, and the swiftly changing face of this metropolis.

Shanghai’s expatriate community is growing rapidly. At the end of 2010 (the most recent figures available), there were more than 162,000 foreign residents in the city – up more than 60 per cent on the figure just five years before.

That may be well under 1 per cent of the general population, but foreign numbers are concentrated in specific pockets. Walk down tree-lined streets in the gentrified French Concession, and at times white faces outnumber locals.  But that increase in sheer numbers masks another change. There may be more foreigners, but they are increasingly less affluent, experienced and connected.

A decade or so ago, if you met a foreigner in Shanghai, the chances were they would be a senior executive preparing for a company’s push into the mainland market, or consolidating their manufacturing base. Five years ago, spouses and children were coming in tow as well.

Today, it is just as likely that a random foreigner is a fresh graduate teaching English at a kindergarten on a tourist visa. Shanghai was once considered a hardship posting – an opinion that held true right up to a few years ago – but it is increasingly becoming known as a party posting. Young graduates are flocking from all corners of the globe, looking for experience and opportunity in China, just as multinationals are downsizing their commitments in terms of overseas staff and localising management.

Overseas companies that have been on the mainland for a decent period now have well-established internal structures, and no longer need to bring in so much home-grown talent to knock things into shape. That trend accelerated a couple of years ago when the global financial crisis caused accountants the world over to review the cost of big expatriate packages.

Interestingly, during the same period a slew of other businesses seem to have belatedly woken up to the emergence of the mainland economy and, in a panic, raced to establish a China base – for little reason other than because they heard everyone else was going.  Where before they would have sent one of their most seasoned senior managers, many now seem to be trying to do this on the cheap. Wide-eyed, junior executives (single, naturally, saving the company a fortune in housing and international school fees) can be seen bumbling around the city, attempting to implement a fuzzy and barely thought through China brief. And then there are those fresh graduates coming on spec, looking for a chance to make it.

The suggestion of going to the mainland – even just for a short backpacking jaunt – used to raise eyebrows in the West, clearly marked out as something only the most adventurous of travellers would contemplate. Those days are gone – the path to China’s door is now well-trampled. Tales of the country being awash with rich opportunities, coupled with gloomy job prospects back home, are an attractive lure, and innocent

Whittingtons are arriving looking for the streets of gold. Many arrive with little knowledge of the country or the language, and don’t seem to think that strange. It’s little wonder that the predatory instincts of some less scrupulous types are tingling.

The Fedoruk case isn’t surprising because of its scale or the deviousness of the alleged deceit. The real surprise is that these things don’t happen more often.