China’s Due Diligence Procedures: Separating Fact from Fiction
As concerns about China’s treatment of foreign investors continue to dominate headlines, it has become increasingly clear that many are misinformed about the country’s due diligence procedures. Despite attempts by some to overlay US laws onto Chinese practices, it is essential to understand that these two systems operate under different standards.
Corporate Due Diligence in China
In China, corporate due diligence is a standard practice conducted by qualified professionals to ensure target companies are legally compliant and free from financial irregularities. This includes legal, financial, and operational due diligence, which helps investors verify tax returns, audits, and compliance with pending IPO listings. Chinese authorities actively encourage foreign investors to adhere to local laws and regulations.
Key Issues: Blurring of Lines
The key issue lies in the blurring of lines between sovereign law and personal data collection. While due diligence is permitted in China, firms must be aware that they are expected to operate under Chinese laws only. Foreign invested companies cannot apply US or other foreign law standards to their due diligence in China, as this would breach Chinese sovereignty.
Examples: Xinjiang Labor Issue
The Xinjiang labor issue, for instance, is a matter of US law compliance and not a Chinese regulatory instruction. Foreign investors operating in China must recognize that they are subject to Chinese laws and regulations, rather than attempting to impose foreign standards.
Personal Data Security Laws
Moreover, the collection of personal data in China is strictly prohibited, especially by foreign firms. China has robust personal data security laws in place, and any breach can result in severe penalties. The Peter Humphrey case serves as a stark reminder of the consequences of ignoring these laws.
Foreign Investors: Compliance Issues
Foreign investors must be aware of China’s legal boundaries and scope of business to avoid compliance issues. Blurring the lines between due diligence and data collection can lead to severe consequences, including punishment.
Alternative Options
Rather than attempting to navigate China’s complex regulatory landscape, companies may find it more practical to consider alternative manufacturing options in countries with more lenient laws. Ultimately, understanding and respecting Chinese laws is crucial for successful business operations in the country.
Conclusion: Understanding Chinese Laws
Chris Devonshire- Ellis, Chairman of Dezan Shira & Associates, emphasizes that due diligence in China is not the problem; rather, it is the attempt to blur distinctions that lies at the heart of the debate. By recognizing and respecting Chinese laws and regulations, foreign investors can ensure successful business operations in the country.