"HONG KONG -- Capvision's founders brought a lucrative business model to China: matching investors and other clients with inside sources who were paid up to $10,000 an hour for industry intelligence.
Now, in targeting what claims to be China's biggest "expert network" consulting company, authorities threaten not just Capvision but a whole supply chain of information that overseas investors, Chinese banks and foreign businesses depend on.
Cameras rolling, authorities recently raided several Capvision offices and broadcast details of the sweep in a 15-minute segment that aired on state-run television earlier this week. Some experts who were paid to give information to Capvision clients shared state secrets, according to the report, including one former employee at a state-owned enterprise who was sentenced to six years in prison, and another who worked in defense.
The unusually public nature of the investigation reinforced a message from Beijing that has been growing in volume in recent months: Information about China is a valuable resource and a matter of national security, and revealing it to foreigners could land you in jail.
Capvision CEO Xu Rujie said the company had a duty to uphold its responsibilities as the industry's leading player, according to a screenshot of a Monday post on his WeChat account reviewed by The Wall Street Journal. Shortly after the broadcast, Capvision posted a statement online in China saying it would resolutely abide by the country's national-security regulations.
On Wednesday, the company posted a statement on WeChat saying it established a new compliance committee composed of three top executives, including Mr. Xu.
A person at Capvision's Hong Kong office declined to comment further when reached by phone. Calls to its mainland office number went unanswered, as did emails seeking comment.
According to a draft share-sale document from the company and interviews with current and former workers and clients in the industry, Capvision's main function is to connect clients with sources who have expertise on specific topics, or who work in industries or companies the client is interested in. Capvision would then typically host a conference call, with neither side knowing the other's identity.
Companies that have tapped Capvision's services include investors such as China International Fund Management, a wealth-management company then owned by JPMorgan Chase and state-owned partner Shanghai Trust; and ICBC Credit Suisse Asset Management, co-owned by Chinese and Swiss banks, according to a 2021 court document.
The Capvision raids follow similar incidents in which authorities paid visits to consultants that specialize in information gathering and count foreign businesses as clients.
Mintz Group's China business was closed after authorities raided its Beijing office in March and detained its entire staff of five -- all Chinese nationals. The same month, a Japanese pharmaceutical executive was detained on suspicion of spying, and in April U.S. consulting firm Bain & Co. said police questioned staff at its Shanghai office.
Chinese authorities have tightened access to a range of information that outsiders have long relied on, including corporate-registry filings, patents, procurement documents and others.
Coming in the wake of the expansion of China's anti-espionage law, the moves heightened concerns among foreign executives that business activities once considered normal are increasingly off-limits.
"It would be helpful if the authorities would more clearly delineate the areas in which companies can or cannot conduct such due diligence," said Eric Zheng, president of the American Chamber of Commerce in Shanghai.
Capvision's co-founders, veterans of Bain and investment bank Morgan Stanley in China, launched the company in 2006 in Shanghai, according to Capvision's website. At the time, the expert-network business had been pioneered by U.S. companies such as Gerson Lehrman Group, but investor appetite in China for information during a period of rapid growth allowed them to quickly scale the business there.
The expert-networking business walks a legal tightrope. Current and former consultants and employees of companies in the sector say firms supplying experts impose strict compliance protocols to make sure consultants don't reveal confidential information.
Robert Guterma, Capvision's former head of compliance in Shanghai, said he followed standards set by Western rivals in setting up the company's compliance program and hired a top New York law firm to design it. But he said the corporate culture on the ground in China may not have prized compliance as highly as Western competitors did.
"Compliance as a formalized business concept and dedicated function within companies is still relatively new in China," said Mr. Guterma, now CEO of the China Project, a New York news and information provider. "China has a long way to go to embed the policies, processes, and individual discretion of compliance into the culture and DNA of its companies."
Capvision didn't respond to questions about its compliance culture.
At its peak, Capvision built a lucrative business that claimed to be the fifth-largest by revenue in its field globally and the largest in China, with a stable of almost 400,000 sources from companies, academia and elsewhere in its network as recently as 2021, according to the company's draft initial-public-offering prospectus filed in February last year.
It said revenue was almost $100 million for the first nine months of 2021.
The company had more than 1,400 clients, over half of them in finance, the prospectus shows. The rest included consulting firms and companies in sectors ranging from technology to healthcare to autos. Hourly rates paid to consultants topped out at $10,000 an hour, the document disclosed, though most were paid less than 1,500 yuan an hour, about $215.
Capvision opened offices across China, including in Beijing, Shanghai, Suzhou and Hong Kong. Although it billed itself as a global company, with another head office in New York and a presence in Germany and other countries, current and former executives in the expert-network consulting industry say the company's focus, and its main source of revenue, was always China.
The prospectus noted risks that would later prove prescient, warning investors that any failure to comply with government rules or obligations "could damage our reputation, discourage new and existing clients and experts from using our service or result in fines or other penalties by government agencies and private claims or litigation."" [1]
1. 'Expert Networks' in China Face Scrutiny. Strumpf, Dan;
Cheng, Selina.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 12 May 2023: B.1.
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