How to Get Your China Consulting Practice Compliant?

Posted by Reading Time: 8 minutes

By Chris Devonshire-Ellis 

Some Western media have gone into overdrive concerning the visits by Chinese authorities to what have loosely been described as ‘consulting companies’ in China, with some suggestions of a ‘crack down’ or harassment towards foreign investors in the country. Some experienced perspective is perhaps needed here to provide an overall assessment of what is actually happening, and how to react if your own China business receives a visit.

The current situation

Thus far, several US companies have been widely reported as having received visits from Chinese authorities. All have been described as being in the consulting field. The largest of these, Bain, Capvision and Mintz all describe in their global scope of business as being involved in due diligence, investigations and research. Some of their website marketing material is non-China compliant in terms of mentioning investigations into fraud, corruption and individuals. While all are globally respected reputable businesses, there are aspects of their work that while conforming to US investigative practice, can be problematic in China.

Why have US consultancies been reviewed?

There are two common denominators in play here, one being that these are US businesses, and the other that they are consulting practices. While US media is portraying in part that US businesses are being targeted, this is a rather too obvious approach. The real issue is that the US has placed sanctions on certain Chinese nationals and businesses in terms of alleged human rights concerns in Xinjiang Province, accusations that China denies.

Nevertheless, US laws can punish US businesses that have partnerships or include sanctioned individuals or companies from China within their supply chains. For example, Bain, in particular, focus on providing supply chain due diligence issues.

This has tended to create a situation where it is US-based consulting firms that have become more exposed to being caught up in compliance checks in China, as it is US law that is creating conflicts with China’s own laws as regards personal security and information as opposed to threats from any other countries. The EU, however, should also be monitoring matters as well as the EU has also made sanctions threats against certain Chinese individuals and companies. However, as this is specifically a reaction to China-based investigations by American companies following US sanctions regulations, as such, China’s behavior cannot really be described as general actions against American investors per se.

It is a reaction against very specific US laws that are creating conflicts within supply chains and personal investigations in China. US investors not involved in such activities, nor business investors from other countries should be impacted by this particular issue.

Consulting in China

All foreign investors in China must abide by their agreed scope of business and the relevant Chinese laws. In terms of ‘consulting’, this has always been a rather ambiguous phrase as it is so broad in definition. Indeed, it was precisely for this reason that the term was inadmissible in China as a ‘scope of business’ for many years.

This ambiguity has created such misunderstandings and a lack of clarity; the permission of the term ‘consulting’ has become loose in the scope of business definition, while the laws concerning personal data and investigative practices in China have conversely been tightened. What may be implied on the business license may not actually be in strict legal compliance. If unsure, professional advice should be requested to clarify boundaries.

Meanwhile, at the same time, the scope of permitted investigative practice in the US has been liberalized. A quick glance at the Mintz Group website is telling: it contains references to services that are quite aggressive in terms of marketing and would be illegal in China. This has created an American corporate environment that is not necessarily compatible with conducting business in the PRC.

Crossing red lines

Bringing a corporate service line that is acceptable in the United States or elsewhere can be a huge issue in China and other countries as security concerns multiply in times of global stresses. However, there are some well-known red lines.

Personal security laws and other data intelligence regulations have been updated. Consulting firms should be careful about how they operate, and especially in terms of the collection of certain due diligence and financial investigations in China.

What type of consulting your business is involved in, and how this complies with China’s own laws should be very well understood by the company management. Not all consulting practices engage in investigative work, but those that do may face examinations and some questioning as to the nature of their activities.

What foreign-invested consulting practices in China should do

It is possible that Chinese authorities may decide to conduct checks on certain foreign consulting practices in China to ensure they are in compliance. If so, this may involve an unannounced visit to your business to check on your operations.

In fact, this is not an uncommon occurrence, despite the Western media reports about this. The handling of these checks in a calm, professional manner and to deal with the possibility should be considered and an action plan put in place. It should be remembered that such visits are typically compliance checks and not accusations of wrongdoing. Some foreigners can jump to the wrong conclusions as to the purpose of the visit and react negatively. This is a mistake.

Preparation

The appearance at your China business, unannounced, of several uniformed PSB or other officers can be challenging. It is wise to discuss with staff beforehand what to do in this eventuality, in order that they are prepared. That will take some of the ‘surprise’ aspect away should your business receive a visit. It is important to note that many of these visits are purely checks and do not imply any wrongdoing. However, there are sensible preparations one can take.

Documentation

Firstly, visiting officials will want to see your business license, which should be on display prominently in the main office entrance. Other documents may also be required, perhaps company accounts, the sales ledger and other documentation both official and internal. This could include the checking of employees ID, expatriate visas, and possibly other documentation. They should sign for receipt of these. In some cases, computer equipment may be temporarily confiscated. Usually, a request for the Legal Representative to conduct an interview is made. It is important that these checks are conducted and assisted with, in a professional corporate manner. Obstruction of officials carrying out their duties will prolong and aggravate the situation. Stay calm. Let them conduct their duties, be polite and helpful. The visit will conclude with a few words of compliance advise, and quite possibly a request to see the Legally Responsible Person.

Legal representative

If the Legal Representative is available, they will be asked to discuss whatever the issue is with the authorities. It may be just a few questions to clarify the exact nature of the business operations. If the Legal Representative is not available, a trusted manager may take their place. Questions should be answered honestly and backed up with any supporting documentation. It is important to note that such visits are generally to ensure the business operations are in compliance. This is why a line of questioning takes place.

It can be the case that the PSB insist upon a meeting with the Legal Representative. That may involve a foreign national, if the responsible person, flying in to attend such a meeting. Generally speaking, it is a good idea to comply, although US lawyers may not agree.

The crux of the matter here is this: if the business has been operating within the scope of Chinese law, the Legal Representative has nothing to fear. By dint of showing up, although it can be intimating, this implies honesty and cooperation. Should the Legal Representative refuse, this implies there may be something to hide.

There are non-compliance repercussions to such requests. Should there be suspicions of wrongdoing, the non-appearance of the Legal Representative could result in the office being closed and business operations suspended as investigations may not be concluded.

It may be possible to request meetings take place via Zoom, although generally the authorities prefer to have someone physically present. It may be pertinent to reassign the Legal Representative role to a trusted manager to fulfil these obligations. This is the time for the Legal Representative to stand up and be counted. The position is the bridge between the Company and the Chinese authorities and is the point person of contact. They will be expected to cooperate.

Managing the legally responsible person

This individual as I mentioned is the bridge between the Chinese authorities and the Company. It is important that this individual is fully aware of this and is prepared to fulfil this role. If they are not, they should be removed from the position and an alternative candidate found. It should be noted that Chinese nationals may also fulfil this role, even within foreign invested businesses. Doing so is useful, as any good candidate should have local language skills making it simpler and easier to understand and comply with any requests from Chinese officials. A mature, trusted and capable individual would be the best approach – someone who can converse professionally with the PSB. It makes matters easier.

Changing the Legally Responsible Person requires amendments to the company business license and is best carried out by a professional firm familiar with the procedures in both Chinese and English languages.

Objectives

Calm and professional assistance should be given to officials conducting their duties. Provided no deliberate attempts to break Chinese regulations has occurred, then any local-level investigation will rapidly reach a conclusion. It is not unusual for advice over certain aspects of the business operations or a reminder to remain in compliance be given. If so, this should be accepted with understanding, and the matter will be drawn to a close.

Serious breaches

If serious breaches of the law have taken place and the company has engaged in acts that break Chinese laws, it is wise for the foreign investor to contact a China based advisory firm to make contingency preparations and for them to liaise with the foreign investors’ corporate council. Such breaches tend to be bespoke problems and require very specific understandings, meaning it is hard to provide any examples. Obviously, whatever the problem is needs to be uncovered, and dialogue with the authorities undertaken to repair this. With MNCs, some damage limitation and even PR could be required. Whichever the situation, what happens next requires managing and cooperation. Professional advice in China should be sought.

Nothing new

It should also be remembered that the targeting of a specific industry is nothing new. About 18 years ago, market research firms faced similar issues in China, with many receiving PSB visits. This was because many had been mapping Chinese consumerism and trends, however in less wealthy provinces at the time, questions such as “do you own a tv / microwave / washing machine / air conditioner” were considered insensitive as the poorer elements of Chinese society back then were not able to afford such items and the Chinese government felt such questions could create problems. Foreign Market Research firms faced visits to ensure they understood the directive and would not engage in such behavior. The issue blew over after a few months, but it would be a couple of years before asking such questions of Chinese consumers would be permissible again.

Conclusion

The current media has overplayed the issue concerning the US companies affected. It remains to be seen if any further actions will follow, while resisting the temptation to press the panic button. The law will follow its own, well-trodden path and should be respected.

We recommend full compliance with officials visiting the business and planning ahead for this, just in case. This lessens the nerves if employees are prepared, and documentation made ready and available in advance. The role of the Legally Responsible Person here is key – the suitability of the individual currently holding this role in China should be reviewed and their capability to take on the role fully understood by all parties. If necessary, changes can be made.

With the spotlight on American consulting businesses in China at present, it is prudent to be prepared. That means fully understanding the business activities and their relationship to the rule of law in China, keeping the company in China compliant, and having a professional plan of action in place to deal with visits from Chinese officials.

Chris Devonshire-Ellis is the Chairman (and Legally Responsible Person) of Dezan Shira & Associates in China and has been so since 1992. For compliance and other advisory issues in China, please email the firm at china@dezshira.com

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About Us

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.