"HONG KONG -- Foreign companies in China are walking a tightrope between their need for business intelligence to comply with proliferating U.S. sanctions and mounting concerns about the risks of carrying out the due diligence required for business on the ground.
Authorities recently questioned staff at consulting firm Bain & Co.'s Shanghai office and detained the Beijing-based workers for U.S. due-diligence company Mintz Group. The news has put companies that conduct due diligence and business intelligence in China on heightened alert, with details about the visits scant and uncertainty swirling around what triggered them.
Consultants and lawyers advising on doing business in China say they are working to address growing concerns about what the moves by Chinese authorities mean, and where the boundaries are when it comes to operations in China.
Many have been fielding questions and drafting memos on what China's expanded anti-espionage law -- updated last week to tighten state control over a wider swath of data and digital activities -- means for their clients.
Current and former employees working in the field said it isn't evident that a sector-wide crackdown is under way. One lawyer at an international law firm said he told clients in recent days that it was business as usual for general due-diligence work on corporate deals or basic compliance screenings such as making sure counterparties aren't sanctioned.
Companies hired to perform checks on financial transactions such as mergers and initial public offerings don't appear to have come under pressure.
Another company whose Shanghai office was recently visited by police, Capvision, specializes in a different type of information-gathering work known as expert-network consulting, in which a client pays for access to experts in an industry.
The work performed by such consulting and due-diligence firms covers a wide range, from checks into investment targets or counterparties to financial and corporate firms, to forensic accounting, to background checks on new hires.
A company wishing to launch a joint venture with a local partner might hire a due-diligence firm to scour records for lawsuits or past malfeasance. A garment manufacturer working with a new supplier could hire a due-diligence firm to ensure compliance with U.S. laws, while a law firm working on an IPO would hire a firm to make sure the client meets listing requirements.
"These reports are absolutely essential for anyone getting any kind of signoff," said Ian Barclay, managing partner at the investigations and due-diligence firm Wallbrook. "If you're a board, you can't do a JV in China or buy a company, if you're a private-equity firm you can't go to your investment committee, without this work stream," he said.
Checks might also involve tasks such as mining databases and retrieving legal and corporate records. In China, a mounting concern is that checks might veer into more sensitive areas, such as suppliers linked to China's Xinjiang region, where allegations of forced labor have prompted sanctions by the U.S. and other countries.
The growing legal burden on U.S. and other foreign companies to verify every link in their supply chains and trace affiliates of their business partners comes as Chinese authorities increase pressure on the firms that gather such information and restrict foreign access to databases. Both trends mean more risks for companies, their investors and employees.
Chinese leaders have signaled the country is open for business following the end of pandemic restrictions. But foreign companies on the ground say they are navigating a tighter web of U.S. sanctions and rising tensions between Washington and Beijing.
China's regulators asked state-owned enterprises and companies listed in the mainland to ramp up security checks when choosing accounting firms to audit their financials in a directive Thursday. Those companies should review their auditors' ability to manage information security and insert separate clauses to prevent leaks by controlling sensitive information effectively, the regulators said.
A U.S. law from late 2021 that blocked many imports from Xinjiang is drawing demands from lawmakers for tougher enforcement. Washington's restrictions on high-end chip exports to China and the rapidly expanding number of Chinese firms under export controls have added to the workload on compliance.
China's State Council Information Office didn't respond to a fax requesting comment about whether the work performed by consulting and due-diligence firms is under greater scrutiny.
When asked Friday about the police visit to Bain and the possibility that other foreign firms might receive similar visits, a spokeswoman for China's Foreign Ministry said, "We are committed to fostering a market-oriented, law-based and world-class business environment." She added: "All companies in China must operate in accordance with the law."
On Monday, U.S. lawmakers urged the Securities and Exchange Commission to require fast-fashion company Shein, founded in China and now based in Singapore, to prove that it doesn't use forced labor by Uyghurs as a condition for its possible IPO in the U.S. Shein said its suppliers are based in regions such as Brazil, southern China and Turkey and that none are in Xinjiang. "We have zero tolerance for forced labor," the company said." [1]
1. Beijing's Scrutiny Has Foreign Firms in Bind. Yu, Elaine ; Strumpf, Dan.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 05 May 2023: B.1.
Komentarų nėra:
Rašyti komentarą