SEC de-clawed by China state secrets law

ACCOUNTING SCANDALS in China have left US investors vulnerable because laws to protect them have fallen foul of Chinese state secret regulations.

Companies listing on the US stock exchange, often through reverse mergers that skirt the scrutiny of an initial public offering, have seen a slew of auditor resignations and accounting problems, with around 25 since March and others in Canada, Reuters reports.

US laws designed to protect investors, including the Sarbanes-Oxley Act, have been pulled up short as evidence gathering clashed with state secret laws; the two countries have no extradition treaty either.

Furthermore, accounting firms are reluctant to hand over their records because they fear violating Chinese laws, according to experts.

Sanctions available to the US regulator, the Securities and Exchange Commission, include suspending trading or revoking companies' registrations. Occasionally, more severe penalties are imposed, such as the $34m fine handed down to China Energy Savings Technology for a stock manipulation scheme.

A deterrent written into the Sarbanes-Oxley Act makes it a felony for executives to certify false financial statements; it applies also to companies that sell securities in the country. However, the lack of extradition treaty means few Chinese executives think the law has teeth.