The US Department of Justice is investigating accounting irregularities at Chinese companies listed on US stock exchanges, said an official with the US Securities and Exchange Commission (SEC), suggesting criminal charges may be brought in addition to civil proceedings.
“There are parts of the justice department that are actively engaged in this area,” Robert Khuzami, director of enforcement at the SEC, said in an interview conducted on Tuesday and published on Thursday.
A number of federal prosecutors around the US were taking part in the investigation, he told Reuters, but declined to name them.
Involvement of US attorneys general in various locations adds investigative firepower to the SEC and the FBI, which are also probing the accounting methods of certain US-listed Chinese companies.
“I think that you will see greater [Department of Justice] involvement as time goes on,” Khuzami said when asked if criminal charges would be filed in the investigation.
A former federal prosecutor, he declined to elaborate on which Chinese companies or auditors were being scrutinized by the department.
An SEC review of accounting problems at foreign-based stock issuers sharpened its focus earlier this year when dozens of China-based companies began disclosing auditor resignations or book-keeping irregularities.
For example, Deloitte Touche Tohmatsu CPA Ltd in May resigned as auditor of Chinese software company Longtop Financial Technologies Ltd (東南融通), saying it had found falsified financial records and bank balance confirmations.
Accounting experts and lawyers said the department’s involvement showed how determined US authorities are to tackle the problems, but added the lack of an extradition treaty with China would make it tough to secure criminal convictions.
“I can’t see that China is going to turn anyone over for prosecution, so what this may end up doing is highlighting the difficulty of enforcing the US securities laws with respect to US-listed Chinese companies,” said Paul Gillis, visiting professor of accounting at Peking University’s Guanghua School of Management.
A Hong Kong-based lawyer, who has advised a number of Chinese companies involved in US investigations, added that US criminal prosecutors tend to have difficulty obtaining evidence from their Chinese counterparts.
“The Department of Justice will face as many hurdles as all the other US authorities. I don’t think they are in any better position than the SEC when it comes to gathering evidence and taking action,” he said.
The lawyer declined to be named as he is not authorized to speak to media.
Shares of some Chinese companies listed in the US fell on Thursday after Khuzami’s statements became public.
Among them, Focus Media (分眾傳媒) dived 18 percent, Sohu.com Inc (搜狐) closed 4.7 percent lower, Baidu Inc (百度) fell 9.2 percent, China Sky One Medical Inc (中國天一醫藥) declined 3.8 percent and Sina Corp (新浪) ended down 9.7 percent.
The SEC has struggled to gain access to documents it needs in the investigation because strict Chinese laws have made auditors reluctant to turn them over.
The FBI has an embedded agent in an SEC working group on Chinese companies that enter the stock market through so-called reverse mergers with US shell companies.
Officials from the SEC and the Public Company Accounting Oversight Board are scheduled to meet with their Chinese counterparts in Washington this month for a second round of talks on joint inspections of auditing firms in China.
“Not having proper accounting and reliable audit review for publicly traded companies with operations in China is just not acceptable. We have to find a path to resolution of this issue,” Khuzami said. “It is ... a big issue for us.”
Last month, the SEC sought a federal court order to force the Shanghai arm of Deloitte to turn over its work papers regarding Longtop Financial.
The results of the Deloitte subpoena enforcement action will be closely watched by other auditing companies, Khuzami said.
The federal government is also pursuing other options to ensure better accounting practices at US-listed companies based in China, he said.
“Obviously, the results here will inform the conduct of others that are similarly situated. In that sense, it’s going to be instructive,” Khuzami said. “At the same time, we’re not a one-trick pony: There are other efforts to reach resolution of these issues. We continue to work closely with our regulatory counterparts in China and in other countries to find a path to resolution.”
The Department of Justice declined comment for this story, saying it does not confirm or deny investigations.
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