The emergence in China of social intermediary organizations such as PR companies, law firms and auction houses may have helped fuel corruption, according to a report by the Chinese Academy of Social Sciences (CASS).
The report, A Study of Corruption in Social Intermediary Organizations and Related Countermeasures says it has become common for government officials to use legal documents issued by accounting and valuation firms and others to cover up misconduct. What is worse, the intermediary organizations themselves are increasingly becoming directly involved in corruption, says CASS researcher Lin Yueqin, author of the report.
Intermediary organizations may act as conduits for bribes in the form of cash, securities or other financial incentives. PR companies and events organizers may pass on bribes from manufacturers to buyers of, for example, telecommunication equipment and medical devices. Auction houses and bidding agencies may bribe officials to get favored treatment. Lawyers and law firms bribe judges to guarantee a win for their clients.
The report says some intermediary organizations are the brains behind money laundering. They can supply superficially legal materials such as contracts and property transfer documents. They can also assist in setting up bank accounts. According to the International Monetary Fund, 200 to 300 billion yuan (about US$30 to 44 billion) is laundered annually in China, in large part in collaboration with intermediary organizations.
Valuation agencies can assist the theft of state property by company bosses by setting artificially low valuations prior to privatization, often revaluing the property immediately afterwards at an artificially high price so that it can be used as security for bank loans. Bidding agencies manipulate bidding processes to facilitate embezzlement. Nearly all embezzlement cases in recent years have involved trickery carried out by intermediary organizations, the report says.
Agencies also help companies get a stock exchange listing by assisting them in the production of false and misleading prospectuses, allowing them to fleece shareholders. In recent years, several accounting firms have been discovered taking part in such corporate frauds across China.
The report says one reason such organizations are so corrupt is their ambiguous status as semi-state, semi-private entities. Some are straightforwardly government agencies such as trade promotion committees, industry and commerce committees and trade organizations. Others are semi-official. Government status can help cloak misdeeds and shelter organizations from punishment, and there is mounting evidence that official and semi-official assessment companies are hotbeds of misconduct.
The law regulating the behavior of such bodies is also weak, according to the report.
The report recommends that social intermediary organizations, especially those involved in sensitive areas such as land transactions and corporate listings, should be completely separated from government and that measures should be taken to guarantee their independence and freedom from interference.
Additionally, the report says regulation of the sector should be beefed up substantially with additional legislation where necessary providing for severe fines and restitution of damages in cases where misconduct is discovered.
(China.org.cn by Pang Li, February 5, 2009)