By Grace Li
HONG KONG (Reuters) - Hong Kong has come under fire for a plan to restrict public access to corporate data, with investors and media groups worried it will block early warning of accounting scandals like the one that cost Caterpillar Inc
Hong Kong is proposing changes to corporate laws that would block residential addresses and full identity card numbers of company directors from public view at the Companies Registry website, citing the need to maintain privacy of individuals.
Critics say it would hinder due diligence of companies by prospective investors and hurt the city's reputation as an open and transparent business centre.
As a major investment hub for mainland China, Hong Kong has become a popular place for Chinese to set up companies and conduct business, in some cases to obscure their assets through a complex web of shell companies and directorships.
"For people doing due diligence for investment, including people like Caterpillar, as potential buyers if they want to double-check things looking at company filings, they are going to find it harder in future," said David Webb, a Hong Kong-based shareholder activist.
"Obviously the more the government interferes ... it will make it harder to do business here."
Caterpillar, the world's largest maker of tractors and excavators, took a $580 million charge last week as a result of "accounting misconduct" at a unit of a Chinese mining equipment company it bought last year.
Caterpillar purchased ERA Mining Machinery Ltd and its subsidiary Siwei last June. ERA had been publicly traded in Hong Kong, doing business through Siwei, which is known for making equipment to support roofs in mines.
The U.S. multinational said an ongoing investigation launched after the deal closed "determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar's acquisition of Siwei."
Siwei has not commented.
The Hong Kong Journalists Association has launched a petition opposing the government proposal to block access to corporate data, scheduled to take effect early next year, saying it will be hampered from exposing "illegal or immoral activities".
The Hong Kong Association of Banks has also expressed concern over the move.
Chan Ka-keung, head of the Financial Services and the Treasury Bureau, which proposed the changes, said on Wednesday the bureau would continue to discuss the rules with the city's privacy commissioner to eliminate public concern.
The bureau has said a public consultation was conducted between late 2009 and early 2010 and most respondents preferred protecting personal data.
"Where necessary, law enforcement agencies can access the protected information through the Companies Registry. There will be no implications to our enforcement work on this front," the bureau said in an e-mail to Reuters, addressing concerns that anti-money laundering work might be affected.
Angelina Kwan, a former director of enforcement at Hong Kong's Securities and Futures Commission, shrugged off concerns saying the move was good from a privacy point of view.
Critics, however, say the fact that some Chinese use aliases makes it difficult to trace the true identity of people, providing a case for maintaining access to personal details.
"It's actually going to hurt the honest businessman who has nothing to hide, and who is very prepared to allow potential business partners to carry out due diligence," said Violet Ho of risk consultant Kroll Advisory Solutions, adding there was a risk of fraud going undetected if the changes went ahead.
"Now you will be in a situation where you can't immediately exclude any of the say 2,000 companies associated with the Chinese equivalent of a John Smith, and you have to do a lot of manual work that is basically unnecessary."
Ho said the proposed law would impact any investor - private equity companies, M&A investors and even banks.
Nearly 3.5 million searches of records were conducted through the registry's electronic search services in 2012, up nearly 8 percent from 2011. The registry has more than a million local companies, many of which are connected to Chinese businesses or investors.
"Chinese mainland investors and large corporations in Hong Kong are among the supporters of the amendment to withhold the information. Why? Because those so-called big bosses don't like their residential addresses to be shown to the public nor their true identity," said Democratic lawmaker James To.
(Additional reporting by Stephen Aldred and Donny Kwok, Writing by Anne Marie Roantree; Editing by Raju Gopalakrishnan)