Shanghai Surprise! - part one

Investing in overseas property, in countries like China, creates additional risks for the investor not only because of the geographical distance involved and the different laws and regulations but also because of the increased reliance that is necessarily placed on the promoter and manager of the investment opportunity. This file reveals what happens when the promoter and manager becomes tempted by corruption, engages in unscrupulous and unethical behaviour and takes advantage of credulous and gullible investors back home. 

Transcript

Simon 0:03

Welcome back to Fraud Files. My name is Simon, and I'm the interviewer on this podcast, which brings you real life case files and forensic insights into a number of white collar frauds, financial crimes and misdemeanours that your host Edward has personally encountered, and in some cases brought to light, during his financial, corporate and business career. He shines the spotlight on both the frauds and the perpetrators. So Edward, in this podcast, we are heading East, is that right? Yes, we are. These files are gonna take us to China. I'm going to be delving into the financial crimes and corruption that, investors are more likely to experience really, and going to be more exposed to when they make a decision to invest in foreign real estate outside of their home jurisdiction. You know, and particularly far-flung places like China. Do you have experience of doing business and investing in China. Yes, I do. I think it's important for the listeners to have an appreciation of what it's like to do business in China and, to give a context to the environment in which these, frauds. And I have a number of frauds that I'm going to be discussing, in this episode and subsequent episodes. A context, uh, to the environment in which these frauds take place. And, I think it's sort of, you know, where East meets west, if you can put it like that. And you know, you've got the very high regulatory environment in the west. Which doesn't really exist or is only really coming into play now in the East. And often there's a collision and, and a metamorphosis that sort of takes place, when Western businessmen arrive in China, Where for them it's like, uh, frontier Land or the Wild West. And unfortunately, this often leads to, promoters of real estate projects, who are bringing investors, to overseas places like China. It often leads to temptation, if you wanna put it that way. And, often they then become sort of opportunistic perpetrators of, um, of frauds. Let me put it as simply as that. And, um, so this is what I'm going to be recounting, in, in these sections of the podcast. So how does an accountant, come to do business in China? Good question. So after I finished my career with the large public accounting firms, I moved into industry where I worked initially in a number of trading and, and property companies, which were operating internationally. And I developed an experience and an expertise, I would say over many years doing business in mainland China. I started out setting up businesses, in China whose, principle activities were the manufacturing of consumer goods in Chinese factories. And, importing and distributing those goods to large retailers and store groups in my home markets. So I traveled to China frequently, and I became accustomed to its culture and business practices. So you were manufacturing in China? Yes, for many years, large volumes, uh, many of the factories where my goods were being produced were located. Long distances outside of the main cities and towns. So I spent many hours in the back of cars operated by our local trading partners, going to visit factories to inspect the production lines, on which, the goods for my customers were being produced. So how did the investing in China come about? Well, as I became more and more comfortable doing business in China I began to seek out other investment opportunities. And I came to realize at that time that there was a great need for foreign capital to finance the, uh, the tremendous growth that China was experiencing. You have to remember, at that time, China was going through rapid urbanization and there really was a very big increase in the housing needs of a rapidly expanding middle class. So I started to specialize in originating. Managing and providing advice on investment opportunities, in China for clients. What sort of clients and what sort of investment opportunities? Uh, my clients included institutions, corporate entities, and, uh, high net worth individuals. In order to build my presence in China on the ground, I, I did extensive networking, um, on the ground in China, building up my contacts in the real estate sector. And, uh, having identified a number of suitable projects, I brought clients to invest in a number of investments in China, including direct investments in property. In first tier cities. So that's the major cities like Shanghai. And also to invest through structured real estate funds, uh, large scale funds, focusing on large scale, very large scale residential development projects in first and second tier cities, uh, throughout China. So, my, clients, would, get a piece of the action, so to speak, in, in some of these very large funds, which were, working alongside and doing joint ventures with, large local Chinese, real estate developers. And, so I was working with a number of established and leading partners in China to source suitable opportunities for my clients. What I would say is that doing business in China relies heavily on establishing relationships, and this is embodied in the Chinese word, guangxi. Can you spell that for us? Sure Guangxi, that's G-U-A-N-X-I. Guangxi is a Chinese concept for a social network of relationships and connections built on mutual trust and obligation. So it's, to facilitate business and other deals. It's a system of reciprocal favors where personal and business relationships are intertwined, And having strong guangxi is considered essential for success in many Chinese business contexts. I. So building guangxi requires patience and investment in relationships outside of formal work settings. Did Shanghai become one of those places where you developed strong connections, or Guanxi, as you call it? Excuse my pronunciation! Uh, no problem. You actually say it very well. Yes, it did. I spent, a lot of time in Shanghai and I had a network of business partners there, and also a social network of local Chinese business people, entrepreneurs, as well as expats. My initial projects in Shanghai included selling high-end residential apartments off plan. To investors and then managing and renting out those investment properties, generating rental income for the investors. The property market in Shanghai and in China generally at that time was very good, and investors were able to obtain a very strong capital appreciation in the market value of their properties. So you were dealing in luxury apartments in Shanghai? One of the, main developments that I was promoting was a, a new development, uh, in, a central part of Shanghai just off, Nanan j she lu. So that's just do Nanjing Road West, and, well served by, public transport near to a lot of commercial. Businesses. I bought an apartment myself from the developers alongside my investors, first of all to show my commitment to the project. And secondly, because, uh, I knew it was going to be a good investment and, which turned out to be the case. You had good people working with you? I had a team of people on the ground in Shanghai that included real estate professionals and lawyers to handle the conveyancing. Acquiring property in China is not straightforward and it's essential to have the paperwork done correctly, so so as to facilitate the eventual repatriation of funds back to the investors. The funds being the, uh, rental income, and of course the, the proceeds when the investors eventually came to sell the apartments, everything was done by the book and all of my investors made good returns. When I realized that I had a strong team on the ground in Shanghai, I decided to set up a real estate agency business where I would handle the sale of apartments owned by a multitude of overseas investors who wanted to sell, and typically the buyers would be local Chinese. And this business was very active for a number of years, and I had a lot of very satisfied clients. You said earlier that for investors buying real estate in somewhere like China, it leaves them more likely to be exposed to financial crime and corruption. Can you elaborate on why you say that. Yes, because from my experience, generally overseas investors don't appreciate the specific characteristics of the Chinese property market, including things like the lack of transparency in the ownership or title of a property. As well, they get tempted by the promises of guaranteed returns. There's also pressure to invest quickly without doing proper due diligence and often dealing with unregulated or unknown developers. Also investors may often be faced with unclear or complex fee structures and the lack of local legal support or representation to take care of their interests on the ground. But primarily an investor becomes heavily reliant on the property promoter, often a promoter based in their home country. They become reliant because of the differences in the property laws and regulations, uh, the culture that, you know, that can be tricky to navigate. And generally the environment is different from what investors are used to. Plus, of course, the language barriers and other differences, which may communicating much more challenging. So as a result of all of this, there's a heightened risk related to compliance and financial crime. You know, because gaps in oversight and regulation can lead to misunderstandings, exploitation, or let's call it ethical lapses, as I'm gonna go on to describe later. And unfortunately, the potential for high returns can sometimes tempt investors to cut corners in the due diligence and the investment process. It can also leave the promoter or manager of a project in a position where they opportunistically can take advantage of loopholes and an investor base who are thousands of miles away, they don't come to the country, so they invest and they leave it with the promoter to take care of their interests. Oh, they hope so. So issues can definitely arise often to the cost of the unwitting overseas investor. And in this podcast I understand you're going to shine the spotlight on a number of specific frauds and alleged frauds that were perpetrated against overseas investors investing in the real estate sector in Shanghai. Suspected frauds that you had first hand experience of? That's right. I was called in as an expert witness because of my experience and knowledge of the real estate sector in China, particularly in Shanghai. I was an expert witness in a legal case being taken by a particular group of investors who, who were suing the promoter, manager for Secret Profits and other monies that he had allegedly embezzled from them. And you're going to give us the details of that legal case in part two of Shanghai Surprise! Yes, I'm going to go through some extraordinary details of an alleged fraud that was quite audacious, astonishing, and which contained a number of. Very significant deceptions. Well, I do hope all our listeners will join us again and tune in to part two of Shanghai Surprise! to hear all about it!