Logistics are hampering fraud investigation as operations and chief executives are based in China
TORONTO—The RCMP investigation into fraud allegations against Sino-Forest Corp. will face significant hurdles because the Toronto-listed timberland company’s key people and operations are in China.
Although the company has offices in suburban Toronto, almost all of Sino-Forest’s operations and senior executives are in Hong Kong and mainland China, where it owns timberlands and manufacturing plants.
“We’re going to really have a test of how effective Canada’s laws are extraterritorially,” said Richard Powers, a professor of business law at the University of Toronto. “A lot of the focus of this investigation and possibly any charges that come out of it will be based in China.”
Richard Leblanc, a business law professor at York University’s Osgoode Hall law school, said the RCMP can’t just go over to China and arrest executives and bring them back to Canada for trial if charges are laid.
“It is likely the executives would resist on the basis of a lack of jurisdiction,” he said.
The Ontario Securities Commission (OSC) has confirmed it called in the police as it continued its own investigation into allegations Sino-Forest overstated the value of its assets and revenue.
The OSC and a special committee of the company’s board launched investigations earlier this year after fraud allegations were leveled in June by short-seller Muddy Waters Research.
While none of the allegations have been proved, the analyst who first made them hasn’t wavered.
“We believe Sino-Forest has engaged in fraudulent activity and we welcome any investigations by Canadian authorities,” said Carson Block, Muddy Waters research director.
Sino-Forest issued a brief statement early Friday saying it could not comment on the RCMP investigation.
Sin-Forest spokeswoman Sarah Rivers said the firm’s independent committee “is in the latter stages of its own extensive examination” into the allegations raised by Waters, saying the company “will respond fully by year end” and that it is co-operating with the OSC and RCMP investigations.
A Sino-Forest board member who was involved in the company’s internal probe resigned last week.
The OSC filed a cease trade order against the company in August.
Allan Chan has since resigned as chairman and CEO, but remains founding chairman emeritus, while Sino-Forest has suspended vice-president of finance George Ho, vice-president of corporate planning and banking Alfred Hung and Simon Yeung, a vice-president at a Sino-Forest subsidiary. The company has also curtailed senior vice-president of development and operations Albert Ip’s responsibilities.
Sino-Forest is one of a number of Chinese companies listed on the Toronto Stock Exchange (TSX) facing allegations of fraud.
Earlier this week, the OSC extended a cease trade order against Chinese shoe manufacturer Zungui Haixi Corp. While the company is investigated.
The regulator stopped trading in September after Ernst & Young LLP suspended an audit of Zungui and advised the company’s audit committee that an independent investigation of financial results was warranted.