Sino-Forest is a Wholly-Owned Foreign Enterprise that harvests, processes, and sells wood from leased or owned tree plantations in various Chinese provinces. Its international management hails from Hong Kong, China, and Canada. Sino-Forest trades on the Toronto Exchange, is audited by Ernst & Young, and its glossy annual reports boast of master agreements, huge markets, a plantation strategy, and possible a billion dollar loan from Chinese banks.
If you want to invest in China, Sino-Forest appears (or appeared) to be among your best bets.
Sino-Forest?s compelling story generated a market capitalization of six billion dollars and a share price that rose from $10 to $23 while stocks were collapsing worldwide.
That was then. A critical report sent the share price tumbling eighty percent, trading has been suspended for possible violations of security laws, and the Canadian Mounties are investigating for fraud. The company?s outside directors hired PriceWaterhouseCoopers to investigate.
The investment community finally got a clear picture of how business is done in China, did not like what it saw, and dumped the stock. It?s as simple as that.
Among the laundry list of Sino-Forest?s suspect business practices are:
1. Sino-Forest uses informal leasing agreements with government forestry agencies rather than clearly defined legal arrangements based on legislative mandates.
2. Chinese regional forestry officials asked Sino-Forest to keep leasing and sales agreements confidential. If asked by third parties, they would deny having issued them in order to avoid sanctions for exceeding their authority.
3. Sino-Forest management introduced a person to auditors as the vice-chief of the forestry bureau of Hunan province, who was no longer in that position but was a paid consultant.
4. Sino-Forest runs its business through 58 holding companies incorporated in the British Virgin Islands. They are unwilling to release their financial records.
5. Auditors have been able to examine only 28 of the 267 bank accounts the company has in mainland China.
The Sino-Forest case reveals that business is done in China through informal agreements with state or party officials, who grant access to licenses, resources, and markets only if they are paid under the table. There can be no official records of these payments. Auditors are not allowed to see bank accounts, and transactions are muddied by a proliferation of shadowy intermediaries, which are likely owned by state and party officials or their families.
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