The Australian Financial Review. When Australian law firm Mallison Stephen Shak merged with China's king and Wood in twenty twelve, it broke new ground.
So Kate WM is the first international firm headquartered in Asia. So the future for US is aligned with very much the emergence of Asia, including China.
Shi Jimping was just coming to power, and while the two countries' political and legal systems were vastly different, most lawyers, politicians and business people believe China would continue to open up.
To the world.
One person who was there right from the start was Chinese lawyer Rupert Lee. He was integral to the merging negotiations and would go on to become the firm's chief operating officer its third most senior executive. But late last year,
Rupert Lee was out. His sudden departure led Financial Review journalist Max Shanahan to start digging around, and what he discovered among court files in Beijing, allegedly corrupt wind farm deals in Montenegro and a controversial legal conference in Russia, has raised serious questions about how Kingenwood Mallison's manages risk and conflicts across its jurisdictions.
Kingwood Mallisons has no independent directors who might pull them up and say, you know, hold on what deals we being exposed to? Why is Rupert who's on our global board worrying eight million Hong Kong dollars from the firm? When's he going to pay it? Buck?
Welcome to the Finn. I'm Lisa Murray. This week Max Shanahan on kwm's China experiment and whether it can last. It's Thursday, June nineteenth. Hi, Max, thanks for coming on the podcast, Lisa, thanks for having me. KM has been operating as a global law firm since twenty twelve. What made you decide to start looking into the merged firm and how it works now?
Oh, well, I've always been interested in how the mergers worked. It's a merge between an Australian and a Chinese law firm. They're such radically different legal systems it must be really difficult to bridge those systems. How are they pulling it off?
If they are pulling it off? And so the way this sort of all came about was I'd written a story about the global chief executive retiring Soe Kench and then I started to hear about this guy Rupert Lee, who was the global chief operating officer, heard that he was leaving as well, and I'd planned to write a
story about it. But then last October one of the international legal trade publications reported that not only was he leaving the firm, Kingwood Mallison's was suing him for eight million Hong Kong dollars, and so that sort of set off all sorts of red flags.
So he started looking into Rupert Lee.
Yeah, so it turned out that he got himself into quite a bit of legal and financial trouble. So obviously there was some sort of falling out, and katiewm had sued Rupert Lee for taking an eight million Hong Kong doll alone from the Hong Kong partnership. So it got to the points where we had to try and track him down. By this time he'd left the firm, he
was sort of difficult to get in touch with. So we sent someone around to his place in Hong Kong, in quite a nice neighborhood on Hong Kong Islands, and we dropped a list of questions under his door. A few days went by and I managed to track down a phone number and I gave him a call and he said he'd received our questions and he was going to send me a response.
So before we delve into Rupert Lee's financial and legal problems and how he responded to your questions, let's go right back to the start. Why did Mallisons and King and Would decide to merge in the first place.
So Mallison's has always been one of the top firms in Australia. It was founded almost two hundred years ago. Two of the current High Court bench did time at Mallison's. There's sort of high profile business people and war directors like Nicola Wakefield Evans for example. They're sort of smattering of kind of conservative politicians that have come out of there.
And so it's a place that if you go through law school and you get a clerk shup at Mallison's, you're sort of set up for a good career if you stay in the firm all through the connections you get you can go on to arrange different careers in the bar or in business. And so the context of the merger is about fifteen years ago a lot of Mallison's rivals in Australia were doing deals to tie up with UK firms to add some sort of global element
to their business. So Free Hills, an Australian law firm, did a tie up with Herbert Smith Allen's, one of their big rivals with Link Leaders, a UK firm and Mallison's had tried the other few times but nothing really came to pass, so they started to talk to China.
Mm hmm.
Chinese President Hu Jintao arrived at the White House to an elaborate welcome ceremony. The two leaders spent most of their time talking about the economy, both repeatedly uttering the word.
Of the day cooperation, cooperation.
And at this time China's economy was really booming and it was the next big thing. Trade between Australia and China was really expanding at a rapid base.
Well it was because of the continuing demand from China, largely that Australia's economy managed to fare better than most developed countries during last year's global financial crisis.
It was opening up its economy and everyone thought this growth and liberalization would just continue as it was.
The pilot Free Trade Zone allows foreign competitors' access to China's highly protected services sector. The government is promising to cut through the red tape for businesses opening here and give investors tax benefits.
The merger was eventually done into the last few months of the Hugean Taoer era, and there was a new leader, Xijimping, who was meant to continue on this liberalization.
However, it is widely hoped that his new government will take some drastically needed reforms in order to get the country's economy back on track and to fight the ever growing problem of corruption.
I was actually in China at the time in twenty twelve, and I remember that period. I remember the merger and everyone being so excited about it, and I also remember writing stories about China at the time opening up not just economically but politically. Everyone expected political reforms from Sheeting Ping, So there was a lot of optimism at the time.
And both firms saw a huge opportunity in this to capitalize on that sentiment, and so the dually ended up doing was with King and Wood, which is one of the top Chinese firms that was set up in the early nineties just as private law firms were first allowed in China, and from the start it wanted to really focus on doing international work and appealing to Western clients, so its name is a great example. There was no
King no Wood. They were just emulating this ideal of what an imagined kind of authoritative and well connected Western law firm looks like. At the time they merged, there were sort of roughly the same size between one hundred and fifty two hundred partners, and now the Chinese partnership
is double the size of the Australian partnership. And there's this great scene in a book that was written about the history of Kingwood Mallson's where these three senior Australian partners get on a plane to Beijing and then they turn up in their shirt sleeves and it's freezing cold, and they make their way to the Kingwood offices in this big tall building in Beijing, and they greeted in
this huge boardroom. There's only three of them, and on the other side there's eleven Chinese partners and this guy who was managing partner, as time Strooke Fuller, he leans across to his colleagues and he says, you know, I think we've undercooked this.
But despite the Mallison's delegation being completely out numbered, the talks went well, the two firms did end up eventually merging. Tell us about the deal, how did it actually work.
So the firm's structured as a Swiss Varian, which is this sort of structure that's not uncommon in these big international law firms, and it means that each member partnership in each country is financially separate, so things go badly in one part of the world, it doesn't bring the rest of the firm down with it. So what's different about Kingwood Mallison's is there's only three main partnerships as Australia,
China and Hong Kong, so that's a bit unique. But despite that, it's intended to present to the world as a single firm. It's pitched to clients as I think the line that uses where the top tier international firm for Asia from Asia. So the merger presented heaps of opportunities for the firm, but the different Australian and Chinese attitudes in some cases to governance and risk also through up lots of challenges.
What are some of the challenges you've confronted in putting together.
Such established firms from such different settings.
Yes, we don't have long enough for all of the challenges. It's a classic question.
In an interview about a decade ago then global managing partners to it full set as much.
Right from the start of Kingwood and Mallisons, this concept of merger of equals not a takeover of Australia of China or China of Australia. Everybody has an equal voice.
But he stressed that the two firms still shared these common values and the relationship was developing with speed and everything was going to plan.
I think every month and every year that goes by, people see the benefit of merging the firms.
And so while this varian structure isolates risk, it also has the effect of clouding visibility over each of the partner firms, particularly in the Mallison's case, when you have clients with big data protection of concerns, they want to know that their data isn't going to be shared with the Chinese part of the firm, So you have to erect these walls within the firm, which sort of compounds the existing walls between the partnerships. So that makes things
difficult to manage in some cases. So what it really means is that while each partnership leverages the brand the reputation and the international connections of KWM, in practice, little knowledge or transparency over what each part of the firm
is working on. So I spoke to a bunch of former partners and staff at KWM, some of whom were really closely involved in the merger, some of whom were there until quite recently, and they all said that there was always an awareness that there were transparency issues in the partnership. One former partner said they caught it within the firm the Great Wall of China, which he took to me, and the gap between what you understand is happening and what is actually happening in the Chinese partnership.
Another gave me an example. They were working with a major bank kill as a client and they had operations in Australia, Hong Kong and China, but they just couldn't find out which partner in the Chinese firm the client was using, so in the end they had to go and ask the client directly. So I was clearly problems with communication between the international elements and yeah, because of all these cybersecurity concerns that clients had, there were big
internal boundaries erected between the partnerships. They were on completely different document sharing systems. Even simple inform was difficult to obtain and it really was an environment that was conducive to any sort of corporation or collaboration and rupe.
At least job as chief operating officer was to oversee that cooperation between the Australian and Chinese lawyers. But it doesn't sound like there was much going on. Max. When did Lee's problems become a problem for KWM.
Yeah, So it turns out that while he was global Chief operating Officer of the firm, which is quite a big job, he was also had this whole range of private business interests on the side, probably the most colorful of which is this payments company, which got caught up
in China's gambling crackdown in twenty twenty one. One of its employees was convicted for facilitating payments for an illegal aligning casino run by Sun City Group, which is quite well known in Australia for its junkets operation, which came up in inquiries into Crown and Star casinos. He was alleged to have been part of a group that helped channel funds to the chair of relisted company the chair
was also his business partner in a separate business. In twenty twenty three, he gets this huge three hundred and seventy million Hong Kong dollar money lenders claim from this mysterious, small little lender in Kowloon. He says, nothing to worry about there. Even if that is the case, it's sort of a unusual thing for a global law firm executive
to be caught up in. And then in February last year, he gets this bankruptcy petitioned from a financial firm in Hong Kong, and Rupert says Katoem actually helped him out here and they even opened a file for him, helped him. He says, security settlement in this bankruptcy claim. Kingwood Mouson's Australia completely denies that, which is a bit unusual. And the other unusual thing is that there's this just lack of agreement between Rupert and KWM about how he actually
came to leave the firm. So KWM Australia says that KWM China asked him to resign halfway through last year because of I presume all these financial business issues which are really piling up on top of each other Ruperts said that he actually left of his own cord and that he was retained as a business consultant at the firm until the end of last year, so there's a
bit of discordance between those two explanations. Naturally, all of this made me want to look further into what he was doing while I was still working for KIM, and I discovered that in twenty seventeen he became the director of this big state owned electricity company that was also quite a major client to Kingwood Mouson's and about a year before Lee joined the board of that firm, it had brought into a wind farm project in Montenegro that
is now the subject of corruption investigations in three separate countries.
Max, we're talking about King and Wood Mallison's, the first ever Sino Australian law firm, which has been operating for over a decade now. Your investigation has uncovered some real governance challenges for the firm and these were highlighted in a wind farm deal which its lawyers advised on in Montenegro. As you said, the deal is now the subject of corruption investigations in three separate countries. Tell us about the deal and how KWM was involved.
Yeah, So Kingwood Mallisons provided legal advice over the course of about three years for this wind farm project in Montenegro. It was a product of China's Belton Road initiative, which was the signature foreign policy of jijimping. It provided huge opportunities for legal work. So one of these projects took KWM to Malta, which is a small island in the Mediterranean.
It's a European Union member country and it sort of tried to leverage that to make its way in the world, tried to attract a lot of foreign investments through becoming a haven for offshore companies. Now rupidly had become a non executive director of this state owned company called shang Hi Electric Power in May twenty seventeen. It was a longtime client of Kingwood Mallison's and his appointment came in the same month that he was appointed as its global
chief operating Officer. So Shanghi Electric was involved in a range of deals in Southern Europe, including buying a third of Malta's state owned energy company and a Malta which was in a heap of debt at this point, and so in twenty sixteen, which is about a year before Lee joins the board. Shanghai Electric brought the rights to build this wind farm in Montenegro, which was done as a partnership with an A Malta. The law firm was
responsible for completing due diligence on the project. But the real problem with the deal was the price that Shanghai Electric paid for the wind farm. It forked out more than three times of value that the wind farm had garnered just a couple of months previously. And Kingwood Mallinson's was the law firm responsible for drafting the contracts which enabled that deal to go through. And there's never any
explanation about why that markup is paid. So Rupert Lee is not alleged to have broken any rules, ought to have been aware that the propriety of the deal had been caught into question. He only became a director after the price markup was paid, and he told me he was unaware that cato IM had even acted on the deal.
So max, are the investigations chiefly about that markup in price?
Yes, So there's three governments investigating the deal to try and find out why the Montenegro and the Maltese and the Spanish governments are all in on it, and Europoles involved as well. The allegations are that the price was inflated and some of the money eventually found its way to offshore accounts held by senior Maltese politicians, and it was also controversial because of the involvement of this Maltese
casino entrepreneur and property developer named Jorgen Fenick. Jorgen Fennick has been accused of all austrating the car bombing murder of an investigative journalist who was looking into the Missouri wind farm deal.
Carojuana Galitzia was the country's best known investigative journalist. She was killed on Monday in this car minutes after she left her home in Malta.
And another equally suspected deal involving the same characters.
Galizia ran a popular blog in which she highlighted the cases of suspected corruption in Malta. Once described as a one woman WikiLeaks, she famously led the Panama Paper's investigation into corruption in Malta.
And almost five million euros from the markup made its way to companies controlled by Fenik, so Jorgan Fenik was arrested on these charges related to the car bombing. In late twenty nineteen.
Police have now arrested one of the country's most prominent businessmen in connection to the case.
Organ Fenek, was detained by armed officers after his yachts was intercepted. As Walter's handling of the case has drawn international criticism.
He was released on bail in January this year and there's still no trial dates. Kingwood Mausons isn't alleged to have broken any rules or to have been aware of the potential corruption, and a lot of it happens downstream from its involvement, but I think it is something you'd probably ask questions about you. Why are we writing in this massive markup to this company no one's ever heard of?
But Kingwood Mallsons extends its relationship with Shanghai Electric and the Montenegro Deal, continuing to act as its legal advisor, and in twenty eighteen it secures the financing for the project to enable it to actually be constructed and go ahead.
You also came across another example that exposed the different approaches of the Australian and Chinese partnerships. How did a KWM lawyer end up as a speaker at a contentious legal conference in Saint Petersburg the year after Russia invaded Ukraine.
So the senior kater and partner Tian Wenjing, who also worked on the Montenegro wind farm deal. In May twenty twenty three, she turns up at this big Saint Petersburg legal conference, which is organized by the Russian Ministry of Justice. So this wasn't just your run of the mill legal conference. There are a lot of boring panels about legal professional things, but the sort of keynote speakers at this event were the Russian Foreign Minister Sergey Lavrov and the Russian former
president dmitriy Medvedev. There were political panels, including one which is called the Russophobia twenty first century Nazism. Most gollingly, probably there was a panel which promoted the forced relocation of Ukrainian orphans into Russia. This is the subject of an international Criminal Court arrest warrant. That panel was headed by two Russian cabinet ministers. Tian Wenjing she appeared on two panels.
It is my honor to talk about Chinese approach from a perspective of chalish.
Lawyer alongside representatives of these major Russian state owners enterprises.
I never could expect to witness such changes that were observing currently.
One of which was the United Shipbuilding Corporation, whose representative was actually leading the panel.
I'm very optimistic about the current situation Russia in now is it undergoing the period of changes.
This is the company which builds the majority of Russia's naval fleet and it's sanctioned by the Australian government. Spoke about opportunities arising from other global law firms exits from Russia and the growing market for Russian companies to arbitrate disputes in Hong Kong and China. The program for one of her panels referred to unfriendly countries such as Australia, which were continuing to strengthen their sanctions policies against Russia
and Belarus. And a result of all the Western sanctions on Russia, which has isolated from the global financial system and then forced big Western companies to pull out of the country. That's opened up a lot of opportunities for Chinese companies, and it's natural that Chinese lawyers would follow that business. It's quite a lucrative source of business. But this kind of shows the intensions at the heart of
this Kingwood Malson's relationship. On its Australian website, the firm is advising clients on how to comply with Western sanctions on Russia, including on its energy sector. On its Chinese website, Tian co author and article with this chief executive of a Russian energy plant company on how to actually invest in the Russian energy sector, and this guy has eventually a couple of months later a sanctioned.
The very different approaches.
Yeah, kind of acting at cross purposes and pulling in very different directions.
So then a final question Max, can KWM continue as a Sino Australian firm or do these different approaches to governance and risk management start to affect its brand and reputation so much that it could force a rethink on the merger.
So this whole merger was based on on a bit of a punt, which is a rare thing for law firms, that China's growth was going to continue as it was, It's economy and politics was going to continue to liberalize, but none of that came to pass. So the original sort of thesis for the merger isn't there anymore. But even if the Australian Partnership wanted to leave the firm,
there are a few things holding it back. So the Hong Kong Partnership, which was the only actual combination between Australian and Chinese lawyers, has become a really profitable part of the firm. And probably the most inconvenient thing is that there's a sort of penalty clause in the merger agreement. So if the Australian Partnership were to pull out, then it would have to give up the Hong Kong Partnership,
which is probably something it doesn't want to do. So all of this, I think kind of shines a light on law firm governance, which probably isn't the most exciting topic, but when you consider it in light of what's happened to the big accounting and consulting firms who have the same private partnership structure, law firms have really got out
of this whole post PEC tax leaks upheaval unscathed. Kingod Mallison's has no independent directors who might pull them up and say, you know, hold on what deals were being exposed to. Why is Rupert who's on our global board borrowing eight million Hong Kong dollars from the firm, when's he going to pay it back? And also they don't
publish accounts. There's no sort of transparency. Despite being a global organization, as they say, having almost two hundred partners in Australia, they'd be bringing in hundreds of millions of dollars in revenue. But the end of the day, it's kind of a branding issue, all right. They advertise themselves as this single global law firm will connect you with Asia, where the law firm for Asia for the Asian century.
But also we have no idea what's going on in our Chinese partnership, and the firm can't even speak as one entity. I mean, when the going is good, it's Kingwood Mallisons, the global law firm. But when you start to ask questions, it's where Kingwood Mallison's Australia, Kingwood Mallisons Hong Kong and Kingwood Mallison's China. So I think that's something that it has to deal with.
Thanks Max, Thanks Lissen, Thank you for listening to The finn. I'm Lisa Murray with Financial Review reporter Maxim Shanahan joining the podcast today. The Finn is produced by Alex Gau with assistance from Mandy Coolan. Fiona Buffini is head of Premium Content. Our theme is by Alex Goo. If you like the show and want to hear more, follow us wherever you get your podcasts, and consider rating and reviewing
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