Navigating Risks: Due Diligence Dilemmas for Western Businesses in China's Shifting Legal Landscape

Ensuring compliance through due diligence has long been a cornerstone of corporate practices, but Western businesses operating in China are grappling with a challenging dilemma. The concern revolves around the potential risk of employees being arrested or detained while fulfilling obligations tied to due diligence in the face of China's ambiguous national security laws.

"The blame often starts at the national level, which then trickles to a blacklisted country’s businesses, then its brands, and eventually to the employees in China," warns Jonathan Bench, a partner at law firm Harris Sliwoski.

Legal experts express concerns about China's lack of due process safeguards, emphasizing the regulatory and criminal justice systems' deficiencies in ensuring oversight and preventing overreach. "China’s regulatory and criminal justice systems lack the procedural tools and judicial oversight to ensure that the regulatory agencies and police authorities do not engage in overreaching," says James Zimmerman, a partner in the Beijing office of law firm Perkins Coie.

This situation, coupled with geopolitical tensions, raises the risk of companies and individuals becoming targets for political reasons. "China’s anti-espionage law essentially allows the Chinese government 'to arrest and prosecute anybody any time it wishes to do so,'" notes Dan Harris, another partner at Harris Sliwoski.

While due diligence remains crucial, conducting it in China poses challenges. Bench suggests prioritizing information from legal and public sources, cautioning against pursuing nonpublic information, and emphasizing the importance of robust reporting provisions in contracts.

"We have not seen a significant uptick in the threat level within China since the Capvision Partners and Bain & Company raids," Bench said. However, arrests aren’t the same as informal detentions, "which can and do happen without any formal charges," he said.

As businesses navigate the complexities of operating in China, risk mitigation strategies vary based on industry, intellectual property protection, and restructuring joint ventures for a more secure business environment. The evolving landscape demands a careful balancing act for companies seeking compliance while safeguarding employees from potential legal risks.

By fLEXI tEAM