US must understand other countries have laws too The US Securities and Exchange Commission recently moved to sue the Chinese affiliates of the big four accounting firms for not sharing details of their audits of Chinese companies. From the US perspective this was a reasonable response to the perceived opacity of Chinese companies listed on US exchanges. Allegations of fraud at companies such as Sino-Forest have led to a wave of auditor resignations this year. But the SEC move will strain a bilateral relationship with China that is already on the rocks. The issue is not only one of law or accounting but a wider one of sovereignty. US rules, which require accountants to share audit documents from foreign countries, conflict directly with China's, which bar the practice. If the regulators of both countries continue to assert their own rules, companies and investors caught in between will be hurt in the process. By creating a situation where Chinese companies will be forced to delist, the SEC risks depriving US citizens of lucrative opportunities to invest in fast-growing companies. The US economy may also suffer in the long term if it earns a reputation for legal hostility to Chinese companies. This push to exert US sovereignty by insisting that its laws should take precedence over those of other countries is not new. The US Foreign Account Tax Compliant Act of 2010 required Swiss banks to share details of accounts held by Americans, in violation of Switzerland's own bank secrecy laws, which date back to 1934. Many Swiss banks retaliated by closing American customers" accounts or limiting the availability of new products. That made it difficult for Americans to open bank accounts or take out mortgages in countries where Swiss banks dominate. While a few bad eggs were certainly caught for tax evasion, many more innocent Americans suffered as a result. Worse, relations between the two countries took a dive. On a recent trip to Zurich and Bern hosted by the American Swiss Foundation, I found many Swiss still resentful. They accused the US of hypocrisy, arguing that many wealthy Latin Americans use US banks to hide their wealth but that America would resist pressure on its lenders to share confidential information with foreign governments. Collateral damage on relations is incalculable but we know it must be material. The move by the SEC against Chinese companies might prompt China to retaliate against US companies. We have seen how quickly Japanese car sales in China took a nose dive as tensions flared over the disputed Senkaku, or Diaoyu, islands. Corporate America would not thank its government for risking access to China's growing middle-class market. Obviously the US must honour its laws and treat everyone equally under them. However, two problems arise. First, laws themselves can be flawed. Some US laws have the effect of reducing competition so that large companies, which may have helped influence their passage, can maintain dominant positions on their turf. The Sarbanes-Oxley act, for example, imposed such onerous requirements that many young companies chose not to access public markets. Second, regulators often have their own agendas. For instance, regulators may be tempted to punish small companies so that they can achieve quick recognition for being tough, while leaving larger companies alone. It is curious that the SEC is choosing to go after Chinese companies when the regulator so conspicuously failed to prosecute the Wall Street firms, or their auditors, responsible for the financial crisis. Again, the ones who lose out are the entrepreneurs, investors and society at large, while the privileged few benefit. Rather than pick fights with everyone, US regulators should learn to see the wood from the trees. As the world gets smaller, we must all make a greater effort to get along with each other. Understanding and respecting each other's laws would be a good place to start. It is inevitable that at times the legal principles of two countries will clash. But in these cases a diplomatic solution ought to be the first course of action, rather than naming and shaming. The action of the SEC, in this case, risks causing unnecessary damage to innocent bystanders in the short and long run. The writer, a former hedge fund partner, is author of "What the US can learn from China"