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* Foreign couple's firm did work for GlaxoSmithKline, otherdrugmakers
* Unclear why they have been detained
* Other corporate investigators informally questioned -sources
* Foreign investigators nervous, cutting back on email use
* China investigating people for crimes over use ofinformation
By Alexandra Harney
SHANGHAI, July 31 (Reuters) - The detention by Chineseauthorities of a British corporate investigator and his Americanwife in the wake of a corruption probe into pharmaceutical giantGlaxoSmithKline has had a chilling effect on other riskconsultants working in China.
It's unclear why Peter Humphrey and Yu Yingzeng, whose firmChinaWhys has done work for GSK and other drugmakers, weredetained. But corporate investigators said they were concernedabout the repercussions for the industry.
Multinationals, banks and investors rely on corporateinvestigators for information about potential partners andinvestments in China, where a lack of transparency is a hurdleto doing business. Restrictions in the flow of such backgroundinformation could potentially leave foreign investors exposed togreater risk in the world's second-largest economy.
ChinaWhys offers "discreet risk mitigation solutions,internal process audits, due diligence and commercialinvestigation services", according to the firm's website.
"(Humphrey's) detention is really disturbing. It gives me anuneasy feeling that people who, on the face of it, are trying tohelp companies and individuals navigate their way around thesystem are being targeted," said Gary Miller, litigation partnerand head of the fraud group at London law firm Mishcon de Reya.
Mike Vermillion, senior director of third party riskmanagement solutions at Oregon-based consultancy Navex Global,called the detentions chilling.
"I am certainly not getting on a plane to China next week,"Vermillion said.
Two sources with direct knowledge of the matter have saidHumphrey and Yu were detained by Chinese authorities in Shanghaion July 10. They did not specify who was holding the couple.
A Shanghai police spokesman said police there had neitherdetained nor had any contact with Humphrey. He said Humphrey'scase was being handled by Beijing. Police in the capitaldeclined to comment.
British diplomats have said they were giving consularassistance to a Briton detained in Shanghai but have declined toprovide further details. U.S. diplomats have said the same thingabout a detained American. Reuters has not been able todetermine if the couple have a lawyer.
OTHER INVESTIGATORS QUESTIONED
Their detention has not been an isolated case.
Two industry executives said investigators from othercompanies were being "invited for tea" by Shanghai authorities,a euphemism for informal questioning in China.
Some investigators, worried they are under surveillance,have scaled back their use of email. Some declined to speak toreporters over the phone, afraid that authorities were listeningin to their conversations.
Several investigators said that they had become morecautious about which projects to accept, avoiding any thegovernment might see as sensitive.
Investigators said they had also heard of people requestingreassignment to Hong Kong, which has a separate legal system tomainland China. These movements could not be confirmed.
A series of incidents in recent years has highlightedChina's growing willingness to investigate, detain and prosecutepeople for crimes involving the use of information forcommercial purposes.
Corporate investigators first came under China's microscopelast year after a spate of accounting scandals at U.S.-listedChinese firms that led to forced delistings, shareholderlawsuits and investigations by overseas regulators.
Many of the scandals followed reports by short-sellers whoaccused the firms of financial irregularities.
Some corporate investigators in China had worked withshort-sellers and hedge funds doing research on those companies,said Paul Gillis, professor at Peking University's GuanghuaSchool of Management. It is unclear if the recent detentions arerelated to that work. Short-sellers borrow shares, sell them inthe expectation that their price will fall and then buy themback at a lower price.
"I know there's been a great deal of unhappiness with theactivities of short sellers ... That's been one of the thingsthat China has been quite irritated about," said Gillis.
Jon Carnes, a U.S.-based short-seller who attacked severalChinese companies between 2010 and 2011 using the pseudonymAlfred Little, has said one of his Chinese researchers had beenjailed in China.
INDUSTRY HAS GROWN RAPIDLY
The corporate investigations business has expanded rapidlyin China in recent years in response to concern about complianceissues, in the wake of increased enforcement of the U.S. ForeignCorrupt Practices Act (FCPA) and a surge in international dealsinvolving Chinese firms.
The big four international accounting firms -- KPMG, PriceWaterhouseCoopers, Deloitte and Ernst & Young, along with companies such asControl Risks, FTI Consulting and Kroll are among the largestoperating in China.
Investigators say the industry has also grown to includehundreds of small companies and individual operators as well,including ChinaWhys, a consultancy founded by Humphrey in 2003.Humphrey is a former journalist who worked for Reuters for 16years until 1998.
British drugmaker GSK has declined to comment on the workChinaWhys did for the firm except to say that Humphrey is not,nor has he ever been, an employee.
GSK is in crisis in China after police this month accused itof funnelling up to 3 billion yuan ($489 million) to travelagencies to facilitate bribes to doctors and officials. Thecompany, Britain's biggest pharmaceutical maker, has said someof its Chinese executives appeared to have broken the law.
With the investigation industry's expansion in China,particularly among smaller firms, came an illegal trade inprivate information, including bank, telephone, and even hukouor household registration records, investigators said. Someinvestigators claimed they could place moles inside companies.
"Parts of the investigations industry in China were flyingvery close to the sun from a legal standpoint for a very longtime," said Velisarios Kattoulas, chief executive of PoseidonGroup, a risk management consultancy active in China.
Starting as early as late last year, police beganquestioning hundreds of people involved in the trade ofprotected information, according to several investigators.
At least one small investigations company in China closeddown as a result, investigators said. It was not clear if thisfirm was run by expatriates or locals.
LEGAL GREY AREA
Investigators concede some parts of their work stray into alegal grey area in China. Private investigations are prohibitedunder a 1993 Ministry of Public Security notice, though this,like other laws and regulations in China, has only beenselectively enforced.
One Chinese lawyer who works with investigation companiessaid that because they cannot get business licences as privateinvestigators, such firms often register as "business advisors".This can leave them in a legally precarious situation.
"The negative part of this is that the government can getyou whenever they want," this lawyer said.
It is not only corporate investigators who have fallen foulof Chinese law on the commercial use of information.
In December 2012, a Chinese court sentenced four formerexecutives from a Shanghai unit of Dun & Bradstreet, aglobal business information firm, to prison for illegally buyinginformation about Chinese consumers. Dun & Bradstreet said inMay last year it was shutting the unit.
The scrutiny on corporate investigators comes as Chinaprepares to reopen its equity markets to initial publicofferings after unofficially halting IPOs last October as partof a crackdown on fraud.
It is unclear if any investigators were caught up in thatcrackdown.
At the same time, the government has been tightening accessto corporate records. Last summer, it began restricting theavailability of corporate filings to China's main businessregistry, the Administration of Industry and Commerce. Theserestrictions are still in force, investigators say.
