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« Venezuela state banker admits taking bribes from U.S. broker | Main | DOJ: Chats, emails, phone calls are evidence of compliance (or not) »
Tuesday
Nov192013

Could Muddy Waters face charges under China’s criminal law?

After a recent report by Muddy Waters Research called NQ Mobile “A 'Massive Fraud' Worth $0,” the Chinese target fought back, saying Muddy Waters’ accusations were out of the question.

NQ Mobile reportedly has brought a civil lawsuit against Muddy Waters in China. Can it also ask China prosecutors to file a criminal case under the “crime of damaging another person’s business credit or commodity reputation” (the “Crime of Damaging Business Credit”) against Muddy Waters, its reporter behind the short-selling report, or the executives of the U.S.-based publication?

A critical element of China's Crime of Damaging Business Credit is the “fabrication and spreading of stories.”  Article 221 of the Criminal Law says, “Whoever fabricates stories and spreads them to damage another person's business credit or commodity reputation, if heavy losses are caused to the person, or if there are other serious circumstances, shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention and shall also, or shall only, be fined.”

There's a "safe zone" in Article 8 of the Criminal Law which could protect Muddy Waters. It provides that,

This Law may be applicable to any foreigner who commits a crime outside the territory and territorial waters and space of the People's Republic of China against the State of the People's Republic of China or against any of its citizens, if for that crime this Law prescribes a minimum punishment of fixed-term imprisonment of not less than three years; however, this does not apply to a crime that is not punishable according to the laws of the place where it is committed (emphasis added). 

The maximum imprisonment for the Crime of Damaging Business Credit is two years or less than three years. So the "safe zone" prescribed in Article 8 of China’s Criminal Law probably applies to this case. In addition, lack of any criminal action against Muddy Waters in the United States probably indicates it didn't violate any federal or state criminal laws of the U.S. Therefore it seems safe to say Muddy Waters falls within the safe zone as provided by Article 8 of the Criminal Law.

NQ Mobile, however, could argue that the safe zone of Article 8 shouldn't protect Muddy Waters because NQ Mobile is a corporation and not an individual, and the safe zone protection specifically mentions offenses against "citizens" of China, which implies individuals and not corporate entities.

In another case that arose in late October, Chinese reporter Chen Yongzhou was detained for committing the Crime of Damaging Business Credit under Article 221 of the Criminal Law of China.

In that case, the “victim” was Changsha-based Zoomlion Heavy Industry Science and Technology.

Chen was detained, found guilty and eventually confessed to accepting bribes for fabricating stories, despite a public outcry over his detention.

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Henry Chen can be contacted here.