Six of the world's largest financial institutions have bought shares in a Chinese wig manufacturer that could be barred from the United States, its biggest market, because it uses forced labour to make some of its products. Deutsche Bank, HSBC, ING, Merrill Lynch, Morgan Stanley and UBS have all bought Shanghai-listed A shares in Henan Rebecca Hair Products, China's largest wig maker, through the qualified foreign institutional investor (QFII) scheme, according to the mainland company's half-year financial statement. The banks are all among Henan Rebecca's top 10 shareholders.
Their presence on the company's share register highlights some of the unique pitfalls overseas investors face as foreign capital pours into China's capital markets. This is especially true for big international banks, which often buy shares on behalf of clients.
On Saturday, guards at Henan No3 Labour Re-education Camp and the Xuchang County Labour Re-education Camp told the South China Morning Post that inmates were employed in making half-finished products for Henan Rebecca.
Workers at Henan Rebecca also confirmed that low-skilled processing work was done by inmates in the two camps and their output sent to the Shanghai-listed firm for finishing into wigs, weaves and toupees for export to the US, Europe and Africa.
Under international law, work done by inmates in China's "re-education through labour" system is classed as forced labour because inmates cannot choose not to work and are usually not paid, according to Human Rights in China and the China Labour Bulletin.
"Labour re-education camps are for citizens who haven't been given the benefit of a court trial and are under what is regarded by international law as arbitrary detention and it is not permissible under UN or [International Labour Organisation] standards for them to be forced to work," said Robin Munro, the bulletin's research director.
"The fact they are being made to produce hair products for sale in western markets brings the whole issue of forced labour in China very close to home for western consumers."
The US negotiated a memorandum of understanding with China on prison labour in 1992 and a further co-operation agreement in 1994 in which China agreed to block exports of prison-made goods to America.
Henan Rebecca exported 281 million yuan worth of wigs, weaves and toupees to the US in the first half of this year, accounting for about 70 per cent of its total sales.
In an interview at the factory, company officials said profits rose 37 per cent in the first half to 37.7 million yuan from a year earlier, partly due to "increased labour efficiency".
According to Li Kunting, Henan Rebecca's international department head, the company employs 8,200 workers but only 6,000 of them are full-time employees and the rest are "part-time contractors". Company officials would neither confirm nor deny that Henan Rebecca uses prison labour.
All of the banks named as shareholders in Henan Rebecca declined to comment and indicated they could not disclose whether they owned proprietary shares in the company directly or hold them on behalf of clients. Most QFII trading is done on the behalf of clients.
The Chinese government recently lifted the QFII limit from US$4 billion to US$10 billion and foreign investors increased their investments in publicly traded mainland companies by 58 per cent in the second quarter.
"Accounts have become more accurate and companies more transparent in the A-share market but there are obviously still significant risks involved for foreign investors," Standard Chartered economist Stephen Green said.
A quick internet search for the Henan wig maker brings up more than 1,000 hits mentioning forced-labour accusations by Falun Gong practitioners who were allegedly incarcerated in the Henan labour re-education camps. This raises the question of how much due diligence was carried out by investors before buying shares.
"Different firms have different thresholds," said Alan Tsoi, a deputy managing partner at Deloitte Touche Tohmatsu in Beijing. "But generally, if an investment is less than US$10 million, the big foreign investors won't bother to hire professionals to check corporate governance or perform due diligence."
In a telephone interview, the Washington-based chairman of the US-China Economic and Security Commission said he would demand an investigation by US customs, which can block imports of prison-made goods.
"This is a totally illegal operation," said Richard D'Amato, whose commission reports to the Senate. "We have very strong clear laws on our books that anything made using forced labour will not be allowed into the United States.
"We find this kind of situation outrageous and illegal and we will go to the executive branch and ask them to investigate this immediately and curtail any imports by that company based on their confirmation that this is a forced-labour situation.
"Everyone who is investing in these sorts of companies needs to know that their investments are not going to work."