China Law Blog

Yet another great post by Andrew Hupert over at the Chinese Negotiation/Negotiating in China Blog, entitled, Negotiating in China:  Partners in Crime.  Post is on how foreign companies must avoid engaging in illegal acts just because asked to do so by their Chinese partner. 

Now I know many of you are saying/thinking, "Well, Duh," (which is what I always get from my daughters whenever I say something they deem particularly obvious), but I can assure you foreign business constantly engage in illegal activities in China on the advice of their Chinese partners.   

Hupert's post starts out by noting how if an American company with were to ask you to issue a fake receipt, forge a contract or commit fraud, you would almost certainly say "no" and terminate your relationship.   But when "many newly arrived westerners are asked to do the same type of things in China . . . a surprisingly large number actually do it." 

The post correctly notes how China now has a functioning legal system, at least when it comes to foreigners against whom it does not hesitate to use it:

The days of back-room deals, special favors for connections and outright bribery are largely over for run-of-the-mill transactions.  (Ok, there may still be a lot of corruption and back-channel deals at higher levels, but if you are reading this for business entry information then you shouldn’t be dealing with that sort of thing yet.)  China has a new legal system that it is very proud of.  So proud, in fact, that they are excited about showing it off to their new foreign friends.  Trust me, you don’t want to see it close up.

Your Chinese parter will entice you to engage in illegalities by telling you "everyone breaks the rules," "the government expects you to cut corners," "no one does the paperwork," and, "you'll never be caught."  Hupert's response to this is eminently sensible:

Well, they don’t, it doesn’t, they do, and you will. 

Plenty of Americans evade taxes and break laws in the US, but that doesn’t make it a good idea.  You certainly wouldn’t recommend that a newcomer to your town start his new venture by committing fraud and forgery.  Well, don’t be that guy in China.

The post then points out THE relevant difference between you and your Chinese partner:  he or she is Chinese and you are NOT: 

Yes, your local lawyer, accountant and partners have had a ripping success evading the authorities and living by their wits.  But that doesn’t mean it will work for you.  The Chinese government is very sensitive about foreigners it perceives to be exploiting China or taking advantage of Chinese people – and breaking business laws will put you in that category.

Nearly every month, one of my firm's clients comes to us planning to do something blatantly illegal in China, solely on the instructions of and with assurances from one of its Chinese partners. This happens so often that I have a stock response, which is, "what makes you think Mr. so and so is an expert in Chinese law as it applies to foreigners?"  I then ask whether it would make sense for their assistant plant manager here in the United States to be the one giving legal advice to foreign companies doing business in the United States. 

The post then goes on to point out that making the money in China and keeping the money you made are two very different things:

Another issue in China is the exit strategy.  You may be able to buy the property, you may be able to sell the product – but collecting the money, selling the business and getting the money out are all much different things.  You will see the same bureaucrats on the way out that you saw on the way in – so you’d better have all your paperwork.

I found this part of the post particularly interesting because just last week I spoke with a U.S. company owner who kept insisting his million dollar China investment had to have been "completely legal" because the local government knew about it and had done nothing to stop it.   My explanation that the governments in China (particularly the local ones) tend to be very liberal in allowing money to come into China but very strict (particularly Beijing) when it comes time for that money to leave China seemed to stun him.  This had simply never occurred to him.

I have said it before and I will say it again.  In practice, there are essentially two legal systems in China, one for foreign companies and one for domestic companies. 

In many ways, figuring out what is legal and what is illegal is easier for foreign companies because those companies need to know only one thing:  they must follow the law as it is written.  Do this no matter what anyone may say.