FORTUNE, November 25, 1996 



The Graft Busters at the ICAC have Made the Colony One of the World's Great Business Cities. Can They Still Thrive Under China?




ot too many years ago Hong Kong was a corruption-ridden colonial enclave. Today it's a leading international financial center with a reputation for integrity. And tomorrow? That question is on a lot of business people's minds just months before the British colony becomes an administrative region of China, where business dealings are notoriously graft-prone. 

The answer will depend heavily on the future of an obscure but powerful law-enforcement agency known as the ICAC, the Independent Commission Against Corruption. For more than two decades, ICAC's investigators have busted syndicates of dirty cops, hounded venal public officials, and deterred local entrepreneurs from bribing their way through the system. Perhaps more than any other single institution, the ICAC has ensured that Hong Kong has been a good place to do business.  

But the ICAC is the most unusual of criminal justice organizations. It combines the anti-corruption and white-collar- crime functions of the U.S. Justice and Treasury departments-- with a few characteristics of a secret police agency thrown in. It can rifle through bank accounts and execute search warrants-- although legislation passed in July will soon require it to obtain a court order first. It can tap phones at will, and under chilling gag rules, news reporters can be prosecuted for disclosing details of an investigation. But the elite force of 800 British-trained graft busters also has a public side, running a major prevention and education campaign that does everything from running ethics classes for toddlers to producing a Dragnet-style TV show that dramatizes ICAC cases--and ranks among the most popular programs in Hong Kong. 

Though the ICAC has performed effectively as the territory's secret weapon so far, it's now facing a serious debate about its future. Here's the dilemma: With the Chinese takeover approaching, Hong Kong needs a strong ICAC more than ever to shore up investor confidence. At the same time the agency's sweeping powers raise concerns that it could become vulnerable to unhealthy manipulation by Beijing. Even if China's promise of political autonomy for Hong Kong is honored, an increasingly porous border will expose the territory to the mainland plague of graft. Cross-border corruption is already rising alarmingly. Can ICAC adapt itself to the new political order after 1997 and still maintain its integrity? 

It won't be easy. "They've been given draconian powers," says defense lawyer Kevin Egan, a former prosecutor who was once investigated, and cleared, by the ICAC. "Given that the whole regime will change after 1997, there's greater potential for these draconian powers' being abused." The agency has already been accused of using its powers to conduct covert surveillance of political figures by whistle blower Alex Tsui, who was fired as deputy director of operations at ICAC two years ago. Tsui's charges were brushed aside after a legislative inquiry, but they did lead to public pressure for greater transparency at the agency, including pending legislation requiring ICAC to get court approval for those phone taps. 

"The general public is worried about Chinese companies related to the top leadership in Beijing," says James To, a democracy advocate and head of the Legislative Council's legal panel, which has nonbinding policy oversight of ICAC. "The worst-case scenario is that the ICAC wouldn't have the authority to investigate these companies." Currently the sole check on the agency is Hong Kong's beleaguered governor, Chris Patten, who appoints the commissioner. Much of ICAC's future clout will depend on the political will of Patten's successor, the "chief executive" who will be named this year by a committee heavily influenced by Beijing. 

Still, few think that further limiting ICAC's power is the answer. Says Jeffrey Muir, an executive for a North American consumer products company who has worked in Hong Kong for 21 years: "From an international business point of view, there's a recognition that there are problems with the ICAC's transparency, but there's also a reluctance to see its powers reduced because that would send the wrong signals." Adds Tony Kwok, ICAC's deputy commissioner: "This is one of the cleanest cities to do business in because the government is prepared to commit major resources to stop corruption and protect investors. Hong Kong is not dead because of ICAC." 

Among business people, support for the agency remains strong. Industrialist Raymond Ch'ien, head of the $ 420-million-a-year Lam Soon Hong Kong Group, says he and other executives would "rather have an authority with significant power during the transition. It's very important to uphold the rule of law." 


hat about fears that the ICAC's powers may step on civil rights? "Anybody who can afford a lawyer can hide behind the (Hong Kong) bill of rights," says Elsie Tu, known here as the Mother of Anti-corruption. "I would rather the crooks were arrested and the victims given justice." The opinion of Tu, 83, carries extra weight since it was her crusade against corruption in the late 1960s that led to ICAC's creation. Tu, a former British missionary, represented the Kowloon slums on the city council at the time, and her constituents complained of such indignities as being forced to bribe the postman to receive mail and pay off garbage collectors to have their trash taken away. 

From its start targeting crooked cops in 1974, ICAC has grown into a $ 65-million-a-year agency whose influence stretches from the boardroom to the romper room. In fact, ICAC spends 10% of its budget on education, including that thriving TV program and a slew of slick commercials. The agency also educates children as young as 3 on the sins of bribery with storytelling, games, and cartoons about ethics. 

Perhaps the best publicity for ICAC has come from its high-profile bribery arrests, including members of Hong Kong's business and political elite. Consider the sordid case of Warwick Reid, a New Zealand lawyer charged in 1989 with taking some $ 1.6 million in bribes to drop cases while he served as the colony's No. 2-ranked criminal prosecutor. He pleaded guilty to a lesser charge. ICAC also haunted tycoon George Tan Soon-gin for 11 years before he finally got sent to prison in September in the $ 238 million Carrian fraud case. In February, Chen Po-sum, vice chairman of the Hong Kong stock exchange, was arrested on charges she took nearly $ 200,000 in bribes in connection with transferring seats on the trading floor. She has pleaded not guilty. 

Such cases grab headlines, but the ICAC's greatest challenge today is the more subtle menace of cross-border corruption, perpetrated by nefarious business networks extending from Hong Kong into the Chinese heartland. Although the overall number of corruption reports has leveled off after peaking in 1994 at 3,312, according to ICAC statistics, a 40% increase in reports of cross-border corruption during the first six months of this year marks a disturbing trend, agency officials say. ICAC's first ethnic Chinese commissioner, Michael Leung, made a splash when he disclosed in August that Hong Kong officials were suspected of conducting business with counterparts on the mainland using triad gangsters as intermediaries in smuggling, drug trafficking, and prostitution. The big news was the sophisticated modus operandi: The Hong Kong suspects are nominal "investors" in joint ventures in China and allegedly receive laundered payoffs in the form of dividends and capital gains. 

Whether Leung will even be around to crack down on such crimes once China takes over remains to be seen; his term expires in January, and it's not clear whether the chief executive will appoint his own commissioner. Also a question mark is who would prosecute such cross-border offenders after 1997, when Hong Kong will enter the uncharted landscape of "one country, two systems." The two systems treat corruption very differently: In Hong Kong the maximum penalty is 14 years in prison, while China can give offenders a bullet to the back of the head. 

But the most pressing question is whether corruption will be pursued as vigorously and as even-handedly once China takes over. Tony Kwok, who will continue to run the ICAC's daily operations after the handover, insists that "the first of July will be just another day--business as usual." Whether Hong Kong will be able to conduct its other business as usual depends heavily on that being the case.