The Harsh New Reality Of Doing Business In China
A treacherous era for foreign companies doing business in China has begun, underlining the importance that companies thoroughly vet their operations, information technology and the people working for them.
The hydra-headed threat began to take shape in July when the National Development and Reform Commission (NDRC) demanded that 30 multinational corporations undergo “self-criticism” for unfairly dominating markets. In mid-August, the State Administration of Industry and Commerce (SAIC) launched probes of alleged business wrongdoing. Then, on August 28, the Politburo of the ruling Communist Party of China weighed in, launching a five-year-long program to root out commercial corruption. Chinese authorities had previously tended to target individuals or small groups. Now targets are more broadly based. Foreign executives face a host of new risks such as the possibility of hefty fines or criminal prosecution for activities they never condoned or even knew about.
The operating conditions typical in China complicate matters further. Contacts generally emanate from a cosseted network of personal friends and family. Keeping several sets of books is common. Bribery and gift giving are common. Evolving laws against corruption and collecting and distributing data are open to loose interpretations.
So, what do you do if authorities are knocking on your door? And short of that, how can you prepare for the day that knock might come?
If the firm is the subject of an investigation or faces charges, the first step is to confront reality. Executives must assume that their internal communications are compromised. Government raids from several different agencies may sweep across many offices. Investigators may demand extensive documents that are difficult to collect quickly.
In such cases, the companies must seek immediate help from domestic Chinese law firms and outside consultants. A wise strategy, however, is to approach the new regulatory environment pro-actively before something happens, even if it never does.
This means conducting a fresh assessment of compliance in light of the new realities. Even companies that have done the legwork necessary to comply with U.S. Federal Corrupt Practices Act and/or the United Kingdom Bribery Act could be vulnerable. The new environment, after all, is dictated by Chinese authorities, not the U.S. Congress of UK Parliament.
To help understand a company’s true situation, executives may want to consider vetting operations and personnel through a malfeasance paradigm – we at Control Risks use the model known as “the Fraud Triangle.”
First, there must be an opportunity for collusion because of weak internal controls. Who is to know if no one is watching? Secondly, employees may rationalize that self-dealing is acceptable because, perhaps, they did not get a promotion. Lastly, there should be pressure to take action, such the desire for money to pay for a car, a vacation or a child’s college tuition.
Working through the triangle presents its own problems. In Asia, gift giving is a common feature of business and blurs lines of what is too much. Financial standing and accounting documents can also be difficult to assess.
Legal technology can be management’s ace-in-the-hole. Corporations can scour internal China-based email servers for signs of trouble. More difficult is inspecting privately owned laptops, phones or personal assistant devices. Companies are unlikely to obtain access to the personal devices that Chinese employees, like their counterparts elsewhere, use interchangeably with corporate-supplied equipment for business communications.
Doing data-centric surveys can be problematic in other ways. Given the vagueness of privacy and state secrecy rules on data, firms should consider hiring a domestic Chinese law firm. International firms tend to be more familiar with corporate law than local reality and they are not qualified to advise on Chinese law.
Navigating China’s data laws is perilous, especially when it deals with moving data out of the country. What is considered open economic information elsewhere may be deemed a “state secret.” Moving such information out of the country can bring massive fines or worse. Even transferring it from the mainland to Hong Kong or Macau can trigger problems. Simply being in possession of such sensitive data can be incriminating.
Social media is a favored way of communicating business information privately. Facebook is not a likely domestic venue because it not accessible on mainland China. More likely to be used are such domestic webmail sites such as 163.com, instant messenger services such as QQ or social sites such as Sina Weibo and Tencent Weibo. Users may think they had permanently deleted tale-telling communications, but they may have set traps for themselves by being too candid or careless.
In short, China’s rules are changing, and in many ways, hardening. The solutions, like the problems, must be based in China to avoid falling afoul of new regulations.
Control Risk maintains forensic laboratories in Hong Kong and Shanghai, a full-time forensic staff and a large network of local and international law firms as well as notaries. Data centers are available in Hong Kong, Shanghai and Shenzhen. Using the latter two helps avoid issues with taking sensitive data out of the country. For sensitive issues, At times we will erect a data center on a company site on the mainland for this precise purpose.
A new reality is dawning in China. It is aggressive and ruthless. The only way to deal with it is to be aware and prepared – and to be in China.
YIQI Network,a chinese digital marketing company.we supply you with Chinese SEO,brand promotion,website design,social network promotion,PPC advertising, banner ads, Chinese writing.China SEO companies and institutions are the first choices for doing business in China.