Your China Risk Factors in These Tense Times

China is (again) in the midst of a concerted government crackdown against foreign companies doing business in China. And if that is not bad enough, if your country has been deemed by China to have disrespected it by speaking out against forced labor or enhancing diplomatic relations with Taiwan, your own expatriate staff themselves may be picked up and detained by Chinese authorities.

All of this has led many of our clients to ask themselves (and my law firm’s China lawyers): “Are we at risk, and if so, how much risk?” Our quick answer is always, “yes, but your degree of risk really just depends.”

The degree of risk depends on all sorts of factors, including the following:

1. How does the Chinese government categorize/view your China business’s industry? If your China business is in a restricted industry or one in which China’s citizenry has major concerns (food and medicine are classic examples), your risk is almost automatically relatively high. If your China business is in an industry that requires you to joint venture with a Chinese partner, your risk is also almost automatically high. Ditto if your business is in an industry the Chinese government views as its own province, such as SAAS, cloud computing, the internet, publishing, and telecom.

2. Do the Chinese people consider your industry to be their government’s responsibility? Health care and education immediately spring to mind and we have had a number of our clients in those two areas subjected to intense government scrutiny for activities that probably would have been ignored in other industries.

3. Does your China business rely on cleverly written contracts designed to get around China law? Chinese courts generally do not look kindly on companies that do this. As noted by one of our China lawyers in this China business publication, “Chinese law contains a clause that deems all contracts concealing illegal intentions in a lawful form; to be invalid.” If your China business relies on legally invalid your risks are high. If you are in China via a VIE (quasi alliteration intended) you have been warned.  See China VIEs. Avoid, Avoid, Avoid.

4. Do you know what your Chinese staff are doing? Nearly every instance where our lawyers have been called on to help a foreign company in trouble in China has in one way or another involved that foreign company’s own employee. Oftentimes the problem stems from a local employee doing things the “China way” without fully grasping that the Chinese government will judge your foreign company on a “foreign standard.”  Other times it is the local employee who reports you out of anger or revenge.

5. Are you trusting your Chinese lawyer more than you should? Your Chinese lawyer owes loyalty to the Chinese government, not to you or to your company. This means you are always at risk of your own lawyer reporting you to the government. Second, when your Chinese staff are the primary communicators with your Chinese lawyers, important details often get lost in translation. This can occur for a variety of reasons.  One is because your Chinese staff does not have the legal expertise to understand what is important. Another is that they sometimes will deliberately not communicate matters that might go against their own interests or those of their fellow employees. We have even been involved with matters where the Chinese lawyer and the Chinese staff intentionally kept things from the foreign company because they all made a lot more money by doing so. The most egregious example our law firm has seen was a good-sized foreign company that for years believed it was registered as a WFOE in China and paying all taxes owed until it learned that its Managing Director and its lawyer both owned $8 million condos in Hong Kong.

6. What is the culture of your China business? Are you relying on “strategic” relationships to work around the letter or intent of China’s laws? Have you conducted sufficient due diligence on those with whom you are doing business? Are things happening at your company that make you uncomfortable? Do you feel like things are happening at your company behind your back? If you answered “yes” to one or more of these, you are probably at high risk.

7. Do you and your foreign employees have an exit strategy if things get worse? See How to Prepare for the Worst in China and Why You Should.

I suggest you ask the above questions now, not later.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.