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Sino-Forest and local affiliate Sino-Panel China headquarters in Guangzhou, southern China on June 29, 2011.

Adam Dean for The Globe and Mail/adam dean The Globe and Mail

They spent $35-million, took five months and produced a 111-page report.

But by its own admission, the Sino-Forest Corp. special committee charged with probing the company's murky dealings in China still has an incomplete grasp of how the company operates.

The committee's investigators were hired to probe the allegations of massive fraud levelled in June by a short-seller against what was once Canada's biggest publicly traded forestry company. Their report, in the eyes of the company, dismissed some of the most damning allegations, while revealing some "shortcomings."

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Indeed, the probe's findings hinge on some important caveats, summed up in a single sentence on page 9 of the report, which came out last week: "Throughout its process, the [committee]has encountered numerous challenges in its attempts to implement a robust independent process which would yield reliable results."

The obstacles faced by the investigative committee highlight how challenging it is to find definitive answers to the many questions swirling around Sino-Forest's business practices. The company's lack of transparency and its reliance on elusive local partners – coupled with the vagaries of the Chinese business environment – tripped up the committee, whose independence has been openly questioned by the Ontario Securities Commission and others. The RCMP and OSC probes now under way are likely to face the same hurdles, and may learn little more than the special committee.

"The company is using a lot of informal structures that essentially mean there's no way to prove the ownership [of forestry assets]" said Paul Gillis, a professor of accounting at Beijing University and a former partner at PricewaterhouseCoopers. "They're really saying 'Trust us.' "

The barriers have also been a big part of Sino-Forest's defence since it came under attack from short-seller Muddy Waters LLC in June. Much of management's response has essentially boiled down to: This is China. Don't look for the same kind of records and transparency you'd expect in a Western business environment.

There is no central registry of who owns how much of the country's forests, meaning that no one can easily confirm or disprove what the company says. Some records of who owns the rights to which forests are kept at the provincial level, while others are only available at the county or municipal forestry bureaus. Some of those Sino-Forest bought land rights from have detailed contracts explaining the price and terms of use, while others have only vague documents marked with the thumbprints of illiterate villagers.

As the report says: "Title to standing timber, when not held in conjunction with a land use right, cannot be definitively proven by reference to a government-maintained register."

Sino-Forest either can't or won't fill in the blanks. The committee's report complains of "incomplete or inadequate record creation and retention practices" and notes "data on some servers in China appearing to have been deleted on an irregular basis, and there is no backup system." The company gave shifting answers to some of the questions raised by The Globe and Mail's field investigations, at one point giving three different responses to a written question about its holdings in Yunnan province.

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Which will leave investors – if and when Sino-Forest stock resumes trading – having to decide whether or not they trust the company's own figures. The company has not made it easy for them to do so: In response to Muddy Waters' accusations, Sino-Forest has only released documentation pertaining to some of its holdings in one of the 11 Chinese provinces in which it operates. Enough to counter some errors in Muddy Waters' initial report, but nowhere near enough information to clear the air.

The report also sheds little new light on the most troubling part of Sino-Forest's business model: its reliance on what it calls "authorized intermediaries" – local partners that Muddy Waters (and sources interviewed by The Globe and Mail during its own months-long investigation) suggest may not be arms-length from the company itself.

Business in China is indeed different. Many of those who spoke to The Globe and Mail during its reporting in Yunnan, Hunan and Guangdong provinces were unsurprised to hear that Sino-Forest had been accused of exaggerating its holdings, trading with linked business and withholding taxes. The initial response many gave was akin to a shrug. Business in China often works like an outdoor market –sellers are expected to exaggerate the value of their wares in order to make the sale. Buyers are supposed to know this and proceed with caution.

The committee reported finding evidence of bribes being given to government officials, as well local Forestry Bureau employees who either concurrently or subsequently drew salaries from Sino-Forest. In Canada, that sort of stuff lands on the desk of the RCMP. In China, it is just as illegal – but also how business is often done.

Sino-Forest's argument that it can't be more open about its business model because it would be giving up a competitive advantage in China "is probably a fair statement," Prof. Gillis said. "The question is if it's appropriate for a company that operates in this manner to be listed on the Toronto Stock Exchange."

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