Made up in China

China: China has had fake eggs, fake baby milk...and now fake university degrees. The country's best-paid executive has been accused by online media of falsifying his academic qualifications - inventing one and buying another. China's rapid growth may not be to blame, but it probably makes investors more complacent about the risks.

Executive fraud is a bigger problem than low-level corner-cutting. Directors are supposed to set standards for others to follow. Tang Jun, the former head of Microsoft China and Nasdaq-listed gaming company Shanda, was exposed for not really having a PhD degree from Nagoya University in Japan, as Shanda's prospectus suggested. He was later revealed to have bought a PhD diploma from the unaccredited University of Pacific Western.

Fraud has always been a problem in China, but investors must be more vigilant than ever. China's capital markets are the world's busiest this year, but as volumes increase, size and track record gets smaller. Over 160 companies have floated in 2010 in Shenzhen alone.

Banks who bring companies to market have some responsibility to spot false information. Underwriters used to rely on the so-called "level one" search - a quick trawl on Google. They now also add "level two" - hiring private investigators such as Kroll.

But asking appropriately tough questions is not always easy. High growth has made Chinese issuers more bold. Rivalry is fierce, with aggressive local underwriters facing off against ambitious foreign sponsors. Make trouble, and it is easy to get bumped off a hot deal.

Regulators in Hong Kong are at least getting tougher. Deloitte & Touche Corporate Finance sat out listings in Hong Kong for nine months in 2006 to settle the regulator's claim it didn't do enough due diligence on an initial public offering. Two bankers at the investment banking arm of Bank of China were jailed in 2008 for defrauding investors. If underwriters are found to have hidden the truth, they can lose their licence.

But most cases don't go so far. More often, the risks to underwriters of being associated with less-than-honest clients are reputational. Investor lawsuits are rare. The most underwriters face is a private scolding or public reprimand. That may smart, but when fees are coming in thick and fast, new mandates may matter more. As usual, investors are the ones who have to do the homework.