China due diligence in crisis
China due diligence in crisis
Over the past year, the regulatory and legal environment in China has become increasingly restrictive, with a series of new and stricter laws on espionage, cybercrime, data protection and data transfer attracting a lot of media attention. Since then, access to Chinese data sources has become difficult.
This development also affects access to the information required to carry out due diligence in China. At the same time, however, new laws and regulatory requirements in various countries are forcing companies to improve their due diligence measures, particularly in relation to China.
The current downturn in China, deteriorating relations with the West and the decoupling of companies with production facilities in China are not exactly contributing to an optimistic business climate.
This gloomy economic outlook is exacerbated by China's efforts to conceal forced labor, human rights abuses, arms sales and questionable investments. The business environment in China is becoming increasingly opaque and hostile to foreign companies, which has significant practical implications for due diligence.
In September 2022, China began blocking many sources for due diligence, so that these sources are only accessible via a Chinese IP address. Some of these sources now also require the creation of an account, with personal validation only possible with a verified Chinese phone number. The number of sources affected by these changes appears to be steadily increasing.
The Chinese authorities have also cracked down on due diligence firms operating domestically. International sources report that employees of due diligence firms have been detained, interrogated and banned from leaving the country. It also describes how the Chinese authorities recently closed the office of a local due diligence firm and the employees are currently detained.
Remember that your Chinese supplier or business partner may be penalized for working with you. You need to question the validity and reliability of the data provided by your supplier and be skeptical of the answers in your compliance questionnaires. China has restrictive laws that counteract the effect of U.S. policies and laws requiring you to conduct due diligence, and as such, legal restrictions, including Chinese anti-foreign sanctions laws, may make it punitive for your supplier to fully cooperate with your due diligence efforts.
This ever-changing due diligence landscape also complicates traditional due diligence, such as money laundering due diligence, anti-counterfeiting investigations, asset tracing and merger and acquisition due diligence. Your due diligence may be interpreted as espionage.
Analysts who want to obtain Chinese company information usually turn to reliable primary sources such as the National Enterprise Credit Information Publicity System (NECIPS) or the Chinese Ministry of Commerce. However, third-party data brokers are often easier to access and are a viable solution, especially for analysts who do not have a virtual private network (VPN).
However, if you want to access geo-blocked sources, you need a VPN provider that offers a Chinese IP address. In addition to a VPN service with a Chinese IP address, a Chinese telephone number is essential if you want to access Chinese data sources that need to be validated. However, depending on the level of confidentiality of the data as part of the due diligence, caution should also be exercised here, as personal identification data is always requested when applying for a SIM card.
This article is based on the article “China Due Diligence in Crisis” by Bruno Mortier, published in CDR Magazine on April 9, 2024. This article also highlights two important examples from the US, namely the identification of companies in China's military-industrial complex (军民融合) using US watch lists and the measures against forced labor under the Uyghur Forced Labor Prevention Act (UFLPA).
You can find the full article with many other exciting insights here.
This development also affects access to the information required to carry out due diligence in China. At the same time, however, new laws and regulatory requirements in various countries are forcing companies to improve their due diligence measures, particularly in relation to China.
The current downturn in China, deteriorating relations with the West and the decoupling of companies with production facilities in China are not exactly contributing to an optimistic business climate.
This gloomy economic outlook is exacerbated by China's efforts to conceal forced labor, human rights abuses, arms sales and questionable investments. The business environment in China is becoming increasingly opaque and hostile to foreign companies, which has significant practical implications for due diligence.
In September 2022, China began blocking many sources for due diligence, so that these sources are only accessible via a Chinese IP address. Some of these sources now also require the creation of an account, with personal validation only possible with a verified Chinese phone number. The number of sources affected by these changes appears to be steadily increasing.
The Chinese authorities have also cracked down on due diligence firms operating domestically. International sources report that employees of due diligence firms have been detained, interrogated and banned from leaving the country. It also describes how the Chinese authorities recently closed the office of a local due diligence firm and the employees are currently detained.
Remember that your Chinese supplier or business partner may be penalized for working with you. You need to question the validity and reliability of the data provided by your supplier and be skeptical of the answers in your compliance questionnaires. China has restrictive laws that counteract the effect of U.S. policies and laws requiring you to conduct due diligence, and as such, legal restrictions, including Chinese anti-foreign sanctions laws, may make it punitive for your supplier to fully cooperate with your due diligence efforts.
This ever-changing due diligence landscape also complicates traditional due diligence, such as money laundering due diligence, anti-counterfeiting investigations, asset tracing and merger and acquisition due diligence. Your due diligence may be interpreted as espionage.
Forced labor in supply chains
Recently, the UK, Australia, Canada, New Zealand and Germany have followed the example of the US and introduced laws against forced labor in the supply chain. The fight against forced labor has become an international priority, and companies are trying to assess whether their goods were produced in whole or in part with forced labor. The Global Slavery Index (GSI) 2023 estimates that on any given day in 2021, 5.8 million people in China were living in modern slavery. This issue is addressed in the Supply Chain Law and in the Environmental, Social and Corporate Governance (ESG) criteria and framework. Indicators for forced labor are also provided by the International Labor Organization (ILO). When investigating the risk of forced labor, compliance with environmental, social and corporate governance (ESG) principles and counterfeiting of products, OSINT analysts take a close look at supply chains. A supply chain is the network of all stakeholders, resources, interactions and activities involved in the life cycle of a product or service, from manufacture to delivery.Workarounds for due diligence in China
The good news first: most open source intelligence research (OSINT) in China can currently still be conducted remotely without any problems. Does this mean that you can afford not to visit and review your Chinese facilities on site? No, you should always conduct an on-site inspection of your Chinese business partner if you have the opportunity to do so.Analysts who want to obtain Chinese company information usually turn to reliable primary sources such as the National Enterprise Credit Information Publicity System (NECIPS) or the Chinese Ministry of Commerce. However, third-party data brokers are often easier to access and are a viable solution, especially for analysts who do not have a virtual private network (VPN).
However, if you want to access geo-blocked sources, you need a VPN provider that offers a Chinese IP address. In addition to a VPN service with a Chinese IP address, a Chinese telephone number is essential if you want to access Chinese data sources that need to be validated. However, depending on the level of confidentiality of the data as part of the due diligence, caution should also be exercised here, as personal identification data is always requested when applying for a SIM card.
Outlook for the future
The future of due diligence in China remains uncertain. It can be assumed that data transparency in the People's Republic will continue to decline, which makes the need for solid due diligence even more urgent - but unfortunately also more difficult. Trust is built on transparency. Sufficient and robust due diligence when doing business with China remains of paramount importance for risk management. Unfortunately, if you want to continue doing business in China, there is no way around making even more efforts to minimize your own business risk as much as possible.This article is based on the article “China Due Diligence in Crisis” by Bruno Mortier, published in CDR Magazine on April 9, 2024. This article also highlights two important examples from the US, namely the identification of companies in China's military-industrial complex (军民融合) using US watch lists and the measures against forced labor under the Uyghur Forced Labor Prevention Act (UFLPA).
You can find the full article with many other exciting insights here.