The Dangers of Shady Deals

Here's something that -- if you're an investor -- should keep you up at night: You find a promising stock and spend weeks doing due diligence. Convinced you stand to make money, you buy shares.

Then ...

WHAMMO! Some previously undisclosed ethical or financial shenanigan comes to light and you're out some, most, or, in the worst case, all of your investment.

Don't think it can't happen
This type of stuff happens in our public markets. Before Sarbanes-Oxley (SOX), we had Enron, Tyco (NYSE: TYC), and HealthSouth (NYSE: HLS). And even since SOX there have been accounting and options backdating issues that have caused companies such as Apple Computer (Nasdaq: AAPL), Dell (Nasdaq: DELL), Research In Motion (Nasdaq: RIMM), and Rambus (Nasdaq: RMBS) to delay regulatory filings.

As investors, we weren't safe before SOX and we're certainly not safe after.

Yet this is happening in the United States. And while we can all cite ethical grievances against American business and government, the facts are that we are one of the more reliable countries in the world. According to Transparency International's 2006 Corruption Perception Index, the United States is one of the world's 20 least-corrupt countries.

Furthermore, American companies are the ninth least likely to bribe others in order to do business.

This is good news, right?
The good news is that American enterprise scores well -- on a relative basis -- when it comes to corruption.

But here's the bad news.

Over the past few years, American investors have been rushing headlong into foreign equities, hoping to make their fortunes abroad. Many are blindly buying "China" or buying "India" in the hopes of cashing in on globalization.

That's smart in some respects. After all, globalization is here to stay, and some of the world's best stocks have offered some pretty incredible returns.

But if you're investing in China and India, you should know this: Of the businesses in the world's 30 leading exporting countries, those in China and India are the most like to pay bribes. Moreover, China and India tied for a disconcerting 70th -- yes, 70th -- on the Corruption Perception Index.

In other words, you best be prepared for some blowups.

Avoid blowups
If this is scaring you, good. It scares me, too. This is precisely why Motley Fool senior analyst (and resident skeptic) Bill Mann recently launched Global Gains, a new stock-picking service to help more American investors find better foreign stocks.

After all, it's hard enough finding great investments when we have reasonably reliable financials. It gets that much harder when regulatory and accounting frameworks break down. And while many auditors have begun pushing for coherent international accounting standards, it will be some time before that comes to pass.

Consider yourself warned.

Interested in having the Global Gains team helpyou find foreign equities? Try the service free for 30 days. You can read up on the inaugural picks and see everything the team has to offer with no obligation to subscribe. Click here for more information.

Tim Hanson does not own shares of any company mentioned. Tyco and Dell are Inside Value recommendations. Dell is also a Stock Advisor pick. The Fool's disclosure policy is rockin' in the free world.