US-China commission warns of fraud risk

WASHINGTON, DC – The US-China Economic and Security Review Commission has recommended to US Congress increased controls over Chinese sovereign wealth funds, to reduce insider fraud risk.

National security questions have been raised by recent injections of Chinese capital into the US economy in the form of sovereign wealth funds; increasingly becoming a political rather than economic debate.

“The US economy must remain open for investment. I think we all agree on that. However, some observers have questioned whether one nation’s sovereign investments could lead to influence over key industries, access to technology, or influence over another nation’s policies,” said the Commission’s chairman, Larry Wortzel, to Congress.

Sovereign wealth funds could have access to government officials and information that is not available to other investors.

“We are concerned that some sovereign wealth funds, or persons associated with them such as some hedge funds, might undermine market integrity by engaging in insider trading or other market abuses,” said Linda Chatman Thomsen, director in the division of enforcement at the SEC.

“We are concerned that if the government from which we seek assistance is also controlling the entity under investigation, the nature and extent of co-operation could be compromised,” said Thomsen.

Sovereign wealth funds have invested $44.3 billion in US banks, brokers and financial firms since 2006, according to consultancy Federal Financial Analytics.

The SEC has already highlighted Chinese insider-trading risks. On February 5 it said it had settled with a former Dow Jones board member and three other Hong Kong residents accused of insider trading and illegal tipping before news of an unsolicited buyout offer by News Corporation sent Dow Jones shares soaring last year.