Financial Crime World

China Due Diligence Crucial for Foreign Businesses Amid Limited Public Information Channels

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For foreign companies seeking to do business in China, thorough due diligence is paramount to success in the Chinese market. Due diligence serves as a prerequisite for any transaction with Chinese parties, and can prove invaluable in identifying potential risks and mitigating losses.

The Importance of Due Diligence in China

Despite limited public access to information in China, foreign investors looking to establish a presence in the country must rely on professional service providers to conduct comprehensive due diligence on potential business partners, agents or suppliers. A comprehensive due diligence report should include:

Operational Due Diligence: Verification of Business Partner Legitimacy

  • Chinese companies are required by law to register with the State Administration of Industry and Commerce (SAIC) or local SAICs.
  • This registration data enables verification of information provided by local companies, including:
    • Registered capital
    • Legal person
    • Address
    • Business scope
    • License expiration date

Financial Due Diligence: Assessing Chinese Companies’ Financial Accountability

Before significant transactions such as joint ventures or mergers and acquisitions, a thorough financial assessment of the Chinese company is essential. This includes:

  • Evaluating the company’s financial accountability
  • Reviewing financial statements
  • Assessing management controls
  • Identifying potential risks

Reference Check and Third-Party Evaluation: Gauging Business Partner Credibility

  • A reputable business partner should be willing to provide references from:
    • Suppliers
    • Customers
    • Competitors
    • Other trusted third parties
  • Companies with limited market share or single suppliers may pose a higher risk than those with diversified networks

On-Site Inspection: Verifying Business Partner Capabilities and Performance

  • Due to geographical distance, it can be challenging to gauge a business partner’s background, capabilities, credibility and performance.
  • For significant deals, on-site inspections or establishing an on-the-ground presence are essential in verifying the accuracy of claims made by potential partners.

Ongoing Due Diligence: An Integral Part of Business Operations

  • Due diligence is not a one-time procedure; it should be conducted regularly throughout your time in the China market.
  • Trusted partners may become less reliable over time, and ongoing due diligence helps identify potential risks before they escalate.

Conclusion

The age-old adage “Trust but Verify” holds particular significance for businesses operating in China or with Chinese companies. By conducting reputational and/or financial due diligence, Sovereign China can assist foreign investors in better understanding their potential business partners, agents or suppliers. Contact us today to learn more about our corporate services in China.