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Chinese Jigsaw Puzzle

The People’s Republic of China’s (PRC) rapid economic expansion and growing global influence have made it a favored target of investors. Paralleling that ascension is a rise in security threats, including fraud, organized crime, kidnapping, and theft. That’s made security a growth industry as well.

“Security services have been growing fast in China in the last five to 10 years,” said Patrick Huipeng Wang, head of Security Nokia Investment Co. Ltd.’s China branch, speaking at the ASIS International conference in Singapore. “Now in each city there are security companies, most under police control.”

The southern city of Shenzhen, an industrial hotbed that is a short train ride from Hong Kong, is credited as being the birthplace of security companies on the mainland.

Wang said the number of security guards in the capital city Beijing—site of the 2008 Olympics—has reached 230,000. Corporate security forces have also grown, he said, after being introduced by multinational companies that have invested in China in the last five to 10 years.

The pioneers who pushed for corporate security were the hoteliers and high-value product industrialists, Wang said. Today, managers of security companies and teams are mainly locals who are former military, police, and hotel security officials; before, these types of service priorities were dominated by western expatriates and foreigners from other Asian countries and areas.

A hot area for security companies is executive protection, Wang said. “The market is developing fast—we have a lot of new millionaires,” as a result of opportunities in this burgeoning field, he told the audience.

Among the prime targets for kidnappers and extortionists are the rich, entertainment and sports stars, CEOs, and government officials, Wang said.

Another service that has grown in China is that of investigators. Private investigators began their operations in the PRC about a decade ago and now number more than 1,000—even though they have to operate under the guise of business consultants, because their practice is illegal in China, Wang said. They deal chiefly with intellectual rights protection, background investigations, divorce proceedings, and debt claims, he said.

Crime has risen despite the security services on offer. Jack Chu, president of RA Consultants Ltd., said the official number of reported crimes in the PRC was nearly five million in 2004, 7.5 percent higher than 2003. “But the real crime figure is higher,” Chu said at the same ASIS International conference. Eighty percent of the total reported crimes involve theft and robbery, while there were just over 3,500 kidnapping cases, he told attendees. There was also a 10 percent jump in cases involving murder, bombing, or arson in the first six months of 2005. “China has a lot of opportunity, but risks exist everywhere,” he said.

Chu rattled off a litany of problems encountered by businesses operating in the mammoth country, including false information provided by partners, employees, managers, and vendors; kickbacks taken by managers; a lack of security management skills; violations of intellectual property rights; and counterfeiting. Among the most worrisome threats in the PRC are kidnapping, urban crime, labor unrest, the resistance of state-owned enterprises to foreign ownership, and corruption.

Solutions are hard to come by. “There is no silver bullet for the problems in China,” Richard O’Neill, senior director for PICA Corporation in the Asia/Pacific region, said during his presentation at the conference.

Companies and investors can follow some simple steps to curb their exposure to the myriad hazards in the marketplace, said Chu. For example, corporations can do background checks on potential partners to verify information provided and determine whether they are who they claim to be.

“The company registration, or the company, may not even exist,” Chu said. He said the checks should dig deep to find out the industry reputation of the proposed partner, the history of its business dealings, and profiles of its management team.

Once established on the mainland, companies should also be careful when hiring individuals, making sure they come clean on their educational background, work experience, identity numbers, and past relationships, Chu said. Close scrutiny should reveal any prior bank or commercial fraud, money laundering, or insurance problems, he said.

To head off any operational problems once the company is up and running in the PRC, management should ask for regular reports from security managers, human resource managers, and finance and sales managers, Chu said. He recommended reporting any crime to law enforcement entities but also seeking advice from private security consultants. “Solid evidence is required” as part of the reports, he warned.

Foreign companies operating in the PRC have certain advantages through their international links, effective service channels, and easy communication with globally spoken English, Chu said. But they also face high costs and a lack of local knowledge and support that makes them vulnerable when they are hiring local subcontractors to perform services, he said. That applies as well to the hiring of local security personnel, whose ranks are growing but still thin.

“Changes are happening, but there is a need for high-level security professionals,” said Wang.