China criminal lawyers

Before I explain what to do if arrested in China, I should set out the following “whys” behind this post:

  1. Foreigners get arrested overseas all the time. Not just in China.
  2. Foreigners get arrested all the time in China, for all sorts of things, including for things that would be crimes in countries like Canada and Denmark.
  3. Foreigners get arrested all the time in China, for all sorts of things, including for things that would not be crimes in countries like Canada and Denmark.

Yesterday, a reporter called me to discuss what Michael Korvig (this is the Canadian who was just recently detained by China) should do. My response was somewhat along the following lines:

  1. It is hard to know without knowing more. When I was asked what Mr. Korvig should do, the only rumors about his detention were that they were in retaliation for Canada’s having Seized Meng Wanzhou, the high level Huawai executive. I said if this is in fact the case, there is probably very little he can do as his freedom will likely need to be negotiated government to government (Canada to China).
  2. I now know a little more. This New York Times article, China Says Detained Canadian Worked for Group Without Legal Registration, states that Mr. Korvig has been detained because the organization for which he works was not properly registered. Not a big surprise. Earlier this week, in How to Avoid Being Detained in China, I listed out the following seven things to do to avoid arrest in China:
    1. If you are doing business in China without a Chinese company (and by China, I most emphatically do not mean a Hong Kong or a Taiwan company), you had better be damn sure you do not need a company, especially since the odds are that you do. Doing Business in China Without a WFOE: Will the Defendant Please Rise.
    2. It means paying whatever taxes you or your company might owe. See China Taxes, Getting Legal, and Some Good News.
    3. It means having your visa and the visas of all of your employees in good order. See China Visa FAQs.
    4. It means not deciding you are operating legally in China based on some crap you’ve read on the Internet that feeds into your desire to believe that you are. See China Law Online: It’s All Wrong.
    5. It means protecting your company from your China employees because the odds are good it will be one of your China employees who leads to your downfall either by reporting you to the authorities or by suing you and thereby exposing something you are doing that you should not be doing. Trust us on this one. Please. See China Employer Audits: The FAQs.
    6. It means that if you are not 99.99% certain you are operating in China completely legally you either immediately do something to change that or you immediately leave the country and you take all of your foreign employees with you. And if for some reason you don’t care about one or more of your foreign employees getting into big trouble in China, note that people who go to jail for something that their company do have a tendency to sue their company.
    7. If you are in a dispute with anyone in China regarding money, you should consider paying it and getting a valid and legally sound  release in Chinese making clear that you paid it. See Maybe Owe Money To China? Don’t Go There. Or you should consider immediately leaving China.

    Note how many of these things may apply to Mr. Korvig, if the New York Times is accurate as to his detention “Wait a second,”  you may be saying. Do you really believe Mr. Korvig was detained for some alleged corporate violation of his company and not because he is Canadian and, more importantly, an ex-diplomat. I believe it is probably a combination of these things. China could no doubt have legally justified the detention of at least hundreds of Canadians but it chose this particular person, probably because he is a former diplomat and his detention sends a clear message to Canada. I called the reporter back this morning with this new assessment.

3. Contact your Nearest Embassy or Consulate. There is little doubt that the Canadian government is all over Mr. Korvig’s detention already, but what should you do if you are arrested or detained in China and you are not a former diplomat and your country is not in the midst of a knock-down drag out fight with China? Your first step should usually be to contact your nearest embassy or consulate, but recognize that it will be limited in the assistance it can provide. Foreigners arrested in China are subject to Chinese laws, not the laws of their own country. This should be obvious, but not everyone knows this.

Your embassy or consulate should be able to help you with the following:

  1. Providing you with a list of local attorneys who speak your native language
  2. Contact your family, friends or employer
  3. Visit you in jail and provide you with reading materials and maybe food.
  4. Monitor your situation in jail and help ensure that you are being treated appropriately.
  5. Provide you with an overview of the local criminal justice process

2. Hire a LOCAL Criminal Attorney. You will need a local attorney. This means if you are arrested in Qingdao you need a Qingdao criminal lawyer and not a Shanghai one. China has many terrific criminal lawyers and they usually require relatively low upfront flat fees to take on a new matter for a new client. This means it is usually relatively easy to find a good and cheap Chinese criminal lawyer, but few speak English.

It is absolutely critical that you get a good local criminal lawyer as quickly as possible. Far too often when our China lawyers get contacted regarding a criminal law situation in China, the detainee or the detainee’s friends or family believe that because the arrest was a “mistake” no lawyer is needed. Some claim they do not need a lawyer because they or someone they know has sufficient guanxi to handle the arrest lawyer-free. Even if these people are right (and they pretty much never are), it still behooves them to get a good local criminal lawyer immediately.

No ifs ands or buts: if you are arrested in China, you need a local criminal lawyer and fast. 

How do you find such a lawyer? That depends. By way of an example, one of our China lawyers was recently asked to find a criminal lawyer in a small Chinese city. This lawyer immediately emailed all of the China lawyers in our firm and we all emailed our China lawyer contacts in various cities to ask for the names of recommended Chinese criminal lawyers in this small Chinese city. The client ended up hiring a lawyer who was mentioned multiple times by the Chinese lawyers we know.

4. Contact Family and Friends but Keep Them Quiet. Sometimes. Sometimes you want your family and friends on the outside to scream up and down about your arrest. Sometimes that is the worst strategy possible. It is generally a good idea not to publicize your case unless your local criminal lawyer instructs you to do so. China is not going to release you because your hometown newspaper is saying you are being held unfairly. Instead, your publicizing the unfairness of your arrest might just cause the local prosecutor or court to double down. But see here for a case where the strategy was to generate bad publicity for the arresting country.

4. Hire an Attorney in Your Home Country (Sometimes). Our China attorneys get contacted by arrested Westerners maybe ten times a year. If the matter is something like a shoplifting arrest, we usually do little more than provide the family or the arrested with a few tips and find them a good local criminal lawyer and sometimes a good local translator. This is the case for nine out of ten. But in some cases — when the Westerner arrested is from the United States or Spain or Germany where we have our own attorneys — we do considerably more.

By way of one example, our firm a few years ago represented an American charged by China with massive financial fraud. We stayed involved in this case from its beginning through sentencing (note that more than 99 percent of those charged with a crime in China end up being convicted). For this client we did the following:

  • Found him a top-tier criminal lawyer. This lawyer did not speak Chinese and so we often served as the intermediary.
  • We often served as an intermediary with the US Consulate.
  • We would communicate with the detainee’s family in the United States
  • We gathered up key mitigating documents from the United States and other countries outside China.
  • Perhaps most importantly, we explained China’s legal system to the detainee and his family and, in particular, the huge benefits of admitting to the crime and setting up a procedure to reimburse those who harmed by the crime and a rehabilitation plan. We also explained China’s sentencing and early release laws and the importance/benefit of reimbursing the victims so as to get a sentence term that allowed for early release.

We did this in Japan a few years ago in a very high profile case and you can go here (CNN), here (The Guardian), here (ABC News), here (Los Angeles Times)  to read more about that case. In that case, our goal was to publicize the trial as much as we could, so as to convince Japan that releasing the detainee would make life better/easier for Japan than holding him. We also used the press to send various messages to the Japanese authorities to make them feel better about releasing the detainee. It worked. The detainee was found guilty but immediately deported instead of being imprisoned.

But these two cases on which are firmed worked were long ago and the rare sort of case. In the typical case, you do not need a foreign lawyer and you will want to stay quiet.

The one thing you must bear in mind when doing business in China is that China criminalizes many things related to doing business that are not typically criminalized in the West. We actually wrote about this in 2006 in a post entitled, Criminal Law And Business In China — A Strong Caution:

In the U.S. and in Europe, it is quite uncommon for a dispute between two business people to become subject to criminal law enforcement. This is not true in China. In doing business in China, you need to be aware of two things: the scope of economic crime there is far broader than you probably expect and the Chinese party with whom you are conducting business is far more likely to pursue a criminal complaint than you would expect.

China has developed elaborate laws concerning “economic crimes” that parallels its civil law system. The area of economic crime is quite extensive. My Chinese textbook on economic crime is over 1500 pages long and it describes 105 separate crimes, divided into eight categories. Dealing with economic crimes has become an increasingly large portion of the workload of the average Chinese court. Many of these crimes are garden variety crimes, such as smuggling or passing bad checks, that would be considered a crime in any jurisdiction. However, a whole host of crimes applies to areas most Western business people would think would be dealt with by private litigation. For example, one general area of crime is “Disturbing the Market Order.” Another is called “Damaging the Management Order of a Company or Enterprise.” Crimes in these categories can be very broadly described and can often be applied in areas that are surprising to a Western business person. For example, criminal fraud is very hard to prove in the United States. This is not true in China.

Here are some examples of the ways Western business people can find themselves in China’s criminal system:

  1. There is a sale of product. The Chinese party complains that the product is defective. The foreign seller insists the product meets standards and it is the buyer’s own processing that caused the problem. This normal business dispute may be transformed into the crime of sale of defective products.
  2. A Chinese company pays a substantial deposit to a foreign service provider to develop a sophisticated market access program for the United States. There is a dispute over the quality of the service provided by the foreign provider. The foreign provider does not collect the remainder of its fee, but refuses to refund the deposit. This normal business dispute may be transformed into the crime of contract fraud.
  3. A Chinese company insists on a guarantee of payment from a foreign seller through deposit of promissory notes issued by a foreign party. When the Chinese party attempts to collect on the notes it cannot do so due to banking regulation or some other technical matter. The foreign seller does not make alternative arrangements for payment. This normal business dispute may be transformed into the crime of financial fraud.

The offended Chinese business person is also much more likely to pursue a criminal complaint than his or her Western counterpart. This is particularly true outside China’s major cities, where the private court system is less developed. There are a number of reasons for this. First, there is the longstanding tradition in China that law is basically a criminal matter. Many Chinese judges are more comfortable handing out criminal sanctions than deciding the merits of private commercial activity.  Second, many Chinese businesspeople are more comfortable beseeching the police, the prosecutors, and/or the courts for justice than pursuing justice on their own. Third, there is an economic incentive. If the state pursues the claim, the offended person or company saves on the expense of hiring a lawyer. Fourth, as part of the criminal action, the state will seek to force the defendant to pay redress to the offended party. In China, the state is more likely than a private party to be able to obtain assets from a defendant.

If you are involved in a business dispute in China, you should immediately consider the risk it will be transformed into a criminal matter. If the other side in your business dispute threatens criminal sanctions against you, you should take this seriously. You need to make sure you are completely prepared to deal with the issues. Moreover, you need to be completely sure that what you consider to be an entirely innocent commercial dispute is not in fact a potential crime under the wide application of economic crime applied in China. And if it is, you need to prepare for that

China distribution contractsInternational distribution contracts are the new black and this is a good thing. I estimate that the international lawyers at our firm will have done about double the number of international distribution contracts in 2018 than in 2017.

I see this increase due in large part to companies better realizing that doing business in a foreign country by setting up a company in that country (be it a wholly owned subsidiary or a joint venture) is almost always invariably difficult, time-consuming, and expensive and that is especially true of China. Going into a foreign country via a distribution contract (or a reseller agreement) is a relatively fast, easy and inexpensive way to stick your corporate toes into a country’s waters.

And here’s one more thing that distribution agreements have over foreign direct investment (which usually means going into a foreign country by forming a company in that country) is that they allow for a company to enter into multiple companies all at roughly the same time. These days, it is almost as common for a company to use our international lawyers for multiple distribution agreements as for one. In other words, these companies are pushing their products into many countries all at once and all via distributors and distribution contracts.

Let’s though focus on China.

As our regular readers know well, forming a WFOE in China and then operating that business in China is difficult and expensive. See e.g., Forming a China WFOE: Ten Things To Consider and also Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. Perhaps most importantly, the typical US or EU or Canadian or Australian company is not experienced at selling products or services within China and is hindered from doing so by China’s discriminatory Internet regime. Selling products and services into China via a distribution agreement is a way to offload these complicated issues on an experienced China company. For the basics on what is involved in establishing a distribution relationship with a Chinese company, check out the following:

Today’s post focuses on the following key questions you should be asking yourself and your potential China distributor if you are looking to do distribution agreements with Chinese companies — to a great extent, these same questions apply pretty much everywhere in the world.

1. What will be the payment and shipping terms?  China’s letter of credit system is not very effective. If you ship your products before receiving payment for them, you are taking the full risk that the Chinese side will not pay. Conservative manufacturers usually require full payment before they ship. Less risk averse manufacturers ship on 30 days after the date of shipment (Net30) terms. These manufacturers provide for the right to shift to payment before ship terms if there is a problem. Shipping terms can be CIF or ExWorks. ExWorks is more common, since estimating shipping and insurance costs can be difficult.

2. Will you have sales milestones? This is always a good idea in an exclusive distributor arrangement. Sales milestones for China distributors are usually set on a quarterly basis and not broken down by province. The issue of sales milestone is usually a big issue, so setting the milestones in a way that is clear and simple to understand is important.

3. What will be the term of your distribution agreement? f you are going to have here an exclusive agreement its term/length becomes of critical importance. The normal procedure is to provide for a term long enough to give the Chinese distributor time to earn back its efforts in promoting your products. A three year term is typically the minimum, with five years more common. Most China distributors that plan to put in substantial work to market and sell your products will require the distribution agreement to automatically renew if they achieve their sales milestones. The China side will often want a provision stating that if the parties cannot agree on new milestones after the end of the first term, renewal will be automatic based on some predetermined formula. Chinese distributors that do not require something like this are oftentimes not planning to do the work necessary to succeed.

4. What about your brand name? When selling products in China, you typically will need Chinese and English language trademark protection for each product that will be sold. Serious distributors insist such protections be in place. You can use your own China trademark lawyers to handle the appropriate China trademark registrations or you can have your distributor take care of this on your behalf as your agent. In either case, you should take care of the trademark registrations as soon as possible, preferably before any distribution gets signed or, better yet, before any negotiations even begin. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. If your distributor takes care of this for you, you will want to ensure that the registrations are done in your name and not in theirs.

5. What law will govern your distribution relationship? This really should not even be in the form of a question in that you are going to need your distribution agreement to be enforceable in the PRC and for that to be the case it must be drafted with Chinese law as the governing law and the Chinese language as its controlling language, and with enforcement in a Chinese court. For why we draft our China contracts this way, check out China Contracts that Work and China Contracts: Make Them Enforceable Or Don’t Bother.

6. How will you protect your trade secrets? China NNN (non-use, no disclosure, non-circumvention) language should go into your distribution agreement and if your China distributor will not accept this, find a new distributor.

7. Who will pay for what? Are you going to pay for marketing/advertising your product in China or will your distributor do that or will you share. Clarity is the key here. Will your technical product documents be translated into Chinese? If yes, who will do this and who will pay for this?

8. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer provide this warranty to consumers without any changes. Under this approach you will need to work with your distributor to design an appropriate warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with Chinese law. The alternative is to allow your distributor to provide whatever warranty it wants to consumers. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers and the consumers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many companies do not want to give up this control. Much will depend on the nature of your product, your consumers and your trust in your distributer.

9. Who determines the sales price to consumers? Normally, the China distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing control. Absolute resale price maintenance is not legal in China so you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and even set a pricing product range, both maximum and minimum.

10. What training will you provide your distributor? Where will your provided this (in China or in your home country)? How will training costs be determined and who will pay those costs?

Go forth and prosper.

 

Yesterday, in Would the Last Foreign Company in China Please Turn Off the Lights: A Sort of Part 2, I wrote about a Wall Street Journal article on foreigners are leaving China. In that post, I discussed the recent arrest of Meng Wanzhou and Chinese government threats by the Chinese government against the United States and Canada for that arrest. A lot has been written about how China may retaliate against US and Canadian businesspeople should Ms. Wanzhou not be released and soon.

I noted China’s foreign ministry’s response to Meng Wanzhou’s arrest, assuring foreigners that if they abide by China’s laws they will be fine:

China’s foreign ministry has said: “China always protects the legitimate rights and interests of foreigners in China. But they should also abide by all Chinese laws and regulations.” See this Financial Times article, Chinese and US executives worry after Huawei CFO’s arrest. Right now anyway, I pretty much take them at their word, but this is a double-edged sword. This means that if you are abiding by Chinese law you should be fine, but it also very likely means that if you are not, you are likely at great risk.

I then listed the following seven things which foreign companies should do to avoid finding themselves at cross-purposes with the Chinese government:

  1. If you are doing business in China without a Chinese company (and by China, I most emphatically do not mean a Hong Kong or a Taiwan company), you had better be damn sure you do not need a company, especially since the odds are that you do. Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. It means paying whatever taxes you or your company might owe. See China Taxes, Getting Legal, and Some Good News.
  3. It means having your visa and the visas of all of your employees in good order. See China Visa FAQs.
  4. It means not deciding you are operating legally in China based on some crap you’ve read on the Internet that feeds into your desire to believe that you are. See China Law Online: It’s All Wrong.
  5. It means protecting your company from your China employees because the odds are good it will be one of your China employees who leads to your downfall either by reporting you to the authorities or by suing you and thereby exposing something you are doing that you should not be doing. Trust us on this one. Please. See China Employer Audits: The FAQs.
  6. It means that if you are not 99.99% certain you are operating in China completely legally you either immediately do something to change that or you immediately leave the country and you take all of your foreign employees with you. And if for some reason you don’t care about one or more of your foreign employees getting into big trouble in China, note that people who go to jail for something that their company do have a tendency to sue their company.
  7. If you are in a dispute with anyone in China regarding money, you should consider paying it and getting a valid and legally sound  release in Chinese making clear that you paid it. See Maybe Owe Money To China? Don’t Go There. Or you should consider immediately leaving China.

I then promised we would today “discuss some specific factors our China lawyers look at to determine the level of risk people and companies face in China.” More specifically, I am going to address what to do to avoid being detained in China, like this person here who is seeking funding to get out.

Let me start by noting that one of the things our international lawyers have long done is provide companies and individuals an assessment on their risks on going to China or staying in China. We have taken to calling this our “China detention risk assessment package.” What we do as part of that assessment package is gather up as many facts as we can about why the person is going to China, what the person has done that might increase or decrease their risk of being held in China, and where exactly that person will be going in China and with whom they will be meeting and why. We tell them right up front that we will never tell them there is no risk in going or staying in China because there is some risk in whatever we do, including just crossing the street. And yet, even the risk of crossing the street can vary based on a number of factors, including (as you can see by the video on crossing the street in Vietnam), the country. We have done these sort of risk assessments for a whole host of countries, but in the last fifteen years, I estimate about 90% of them have been for China or for Russia.

In doing these risk assessments we look at the following, among other things (For various reasons, I do not want to reveal everything):

1. What has our client done? Who might it have angered?
2. Who exactly is our client? What exactly does our client do? Is what it does overall good or bad for China to which he or she will be going? To what countries is he or she tied?
3. Where in Greater China will our client be going? Some cities in the PRC are riskier than others. We’ve dealt with Hong Kong, Macau and Taiwan? We’ve looked at the odds of someone getting seized in Cambodia for problems in China.
4. What about having the meeting somewhere near China? Is that possible, and if it is, where will the risk be lowest of China exerting its authority? How can we minimize the risk of our client inadvertently finding him or herself in China? We once had a client concerned about China, but badly needed to go to Vietnam. We researched airlines and routes to try to determine the one least likely to divert to China in an emergency.
5. What can our client do to reduce its chances of being detained in China before going there? Oftentimes there is quite a lot that can be done.

Whenever we write about China detentions or China hostage situations, we get a slew of emails from people saying that we are exaggerating this risk. In this post we have been as careful as we can be not to quantify anything so as to avoid such a claim. But if you think this is rare we urge you to Google “China hostage” and “detained in China” and read for about an hour. That way it will be you to estimate the frequency and not us.

What though do you do if you are already in China and you have a problem? Generally, you get out as quickly and quietly as you can and you enlist qualified help in doing so.

The bottom line is be careful out there, even when just crossing the street.

 

International lawyers

Oh, baby this town rips the bones from your back
It’s a death trap, it’s a suicide rap
We gotta get out while we’re young
Cause tramps like us, baby we were born to run

    From Born to Run, by Bruce Springsteen

About a month ago, I wrote what I will now call Part 1 of this series: Would the Last Company Manufacturing in China Please Turn Off the Lights. After reading James Areddy’s excellent Wall Street Journal article, Wall Street Journal article, American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned, I feel compelled to write part 2.

The gist of Areddy’s article is that American entrepreneurs are tired of China and leaving in droves and it cites a boatload of statistics backing this up. According to Areddy, “disillusion” has set in among expats in China, “fed by soaring costs, creeping taxation, tightening political control and capricious regulation that makes it ever tougher to maneuver the market and fend off new domestic competitors. All these signal to expat business owners their best days were in the past.” Yes, but this is just the half of it. The other half is the more visceral feelings of those who are fleeing and Areddy nicely captures that too, as reflected in the following quotes from the article:

  1. “He lost the feeling ‘it’s all happening’ in Shanghai and will try Thailand.”
  2.  “It’s harder for them [foreign entrepreneurs] to live here now.”
  3. “How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.
  4. “The label of ‘foreigner’ is always on your forehead.”
  5. “China started to become less clear about what the endgame was for foreigners.”

The article notes how the climate for foreign businesses took a downward turn in around 2012 when Chinese government authorities “stepped up scrutiny of visas. . . ., reinforced China’s Great Firewall of internet controls. . . and [set up a situation where] big domestic tech firms thrived while laws excluded foreign rivals or pressured them to share technology.”

The international lawyers at my firm have heard some variation of all of the above countless times from our own clients, and not just Americans; we hear it from our Canadian and our European and our Australian clients in roughly the same proportion.

And yet, most of the China complaints we hear are from companies that intend to STAY in China because the economics for doing so are still there. These companies are calling us seeking help to stay in China. Some of them are downsizing and seeking help in dealing with China’s complex employee termination laws. Some are looking for employment benefit advice in an effort to keep their foreign employees who want to leave. Most are calling for advice on how to make things better/safer for them in China. I alone have gotten more than a dozen calls/emails since China threatened “grave consequences” against Canada over Meng Wanzhou’s arrest.

What will China do against Canadian and U.S. companies and personnel? Hard to say, but if past history is any predictor of future performance (and we all know that it is), you should expect China to (at minimum) continue to step up enforcement of its existing laws against all foreigners, but particularly against Americans and Canadians. If you are a regular reader of this blog, you know this sort of thing isn’t new as China has been stepping up its enforcement against foreign companies pretty much since we started this blog more than a decade ago. Way back in 2012, in a post entitled China’s Business Law Trends for 2013. we listed the following as the top three of four things to expect for 2013:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you are  at risk. Yes, this is more likely to impact you if you are from Africa or the Middle East, but we are definitely hearing of increased problems for Americans and Europeans too.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. China has especially stepped up its enforcement against American and European companies that operate in China but have an entity in Hong Kong without one in the PRC.  We have seen such an increase in this over the last six months that we are wondering if maybe the PRC is using a Hong Kong list.  Providing jobs to Chinese citizens does not let you off the hook on this one. Trust me on that.

3. China will increase its tax collection efforts. This has been going on for years now and if you are doing business in China already I am guessing that your response to this is “yeah, so.” In particular, China has stepped up its transfer pricing efforts and so if your China operations are not making a healthy profit, be prepared for the government to impute healthy profits to it. If you do not already have a good China accountant, get one.  Now.

In response to Meng Wanzhou’s arrest China’s foreign ministry has said: “China always protects the legitimate rights and interests of foreigners in China. But they should also abide by all Chinese laws and regulations.” See this Financial Times article, Chinese and US executives worry after Huawei CFO’s arrest. Right now anyway, I pretty much take them at their word, but this is a double-edged sword. This means that if you are abiding by Chinese law you should be fine, but it also very likely means that if you are not, you are likely at great risk.

If you are a regular reader you know that our perpetual advice to avoid China’s stepped up enforcement against foreigners is to do whatever you can to make sure neither you or your company become low hanging fruit for such enforcement. What does that mean for right now? It means the following, in a way that has become more pressing than ever before:

China employment lawyersIt is fairly easy for China-based employees to leave their employment. Regardless of the circumstances surrounding an employee’s departure/termination, China employers must issue a proof of termination of employment relationship document to the departing employee. It is generally not possible for a China employer to hold the employee to specific performance by making the employee come back work or continue working. Sometimes it is possible for the employer to pursue the departing employee for contract or other damages, but doing so rarely makes business sense. The reverse is NOT true though as it is easy for a terminated employee to hold the employer to specific performance (i.e., reinstatement) and to sue for damages.

In other words, if you are a China-based employer, watch out! But I’m guessing all of you already knew that, but with quickly deteriorating relations between the United States and China and between Canada and China and between much/most of the EU and China, this warning has never been more important or urgent.

Consider this hypothetical (based on a real case in Shanghai with the facts simplified and slightly revised). Employer and Employee enter into an employment contract for a fixed term. Employee leaves before the end of the term. Employee demands Employer issue a proof of termination of employment relationship document. Employer provides the requested document but Employee claims Employer put in the wrong start date and so refuses to accept the document. Employee begins working for a new employer several days later. Employee then sues Employer for damages allegedly caused by Employer’s failure to provide a proof of termination document. How will this case turn out for the parties?

The short answer is the employer will probably have to pay damages for having failed to timely provide its former employee with a proof of termination document. Employers generally must issue such a document when the employment contract is terminated and no later than 15 days after the termination. This document is important for China employees because China employers usually require this as part of their new employee on-boarding process, and without such a document, the employee will likely not be able to work for the new employer. China employees also need this document to claim unemployment benefits. Our China employment lawyers often see foreign employers in China get into trouble for failing to get this key document to their former employees or being late in doing so. We have had to settle far too many employee disputes arising from these mistakes.

Note though that in the above hypothetical the employer did provide its employee with the proof of termination document but it was rejected by the employee. In an employment dispute, the employer bears the burden of proving the employee’s commencement date. So when an employer is unable to produce evidence showing the employee’s commencement date is indeed correct on the rejected proof of termination document, the employer will have to bear the adverse consequences of failing to meet its burden of proof. In the actual case on which I based the hypothetical, the employer did not issue a proof of termination document until trial; nor was it able to produce evidence showing that it had issued a proof of termination document within 15 days after termination. The employer was therefore required to pay its former employee damages (calculated based on the local unemployment insurance payment standard) from the 16th day after the employee left the job until the day the employee started her new job. All of this employer’s problems could have been avoided had it properly handled its task of providing this one document to its employee at the time of employee separation.

As a foreign company that employs people in China, you should make sure your employee terminations are performed correctly. This has always been the bare minimum, but this is especially true today.

 

 

 

 

How to form a china wfoe

Our China lawyers are often asked about the steps it takes to form a China WFOE. So often, in fact, that we long along drafted a stock response to that question. Figuring this response would be helpful to you-all, our faithful readers, I am running it below. Please note that the below is a generic roadmap for WFOE formation and the exact details for forming a WFOE in China will depend on, among other things, the WFOE’s business scope and the city/district in which the WFOE will be formed.

Generally, if all goes smoothly, the overall process will typically take 3-5 months. We do not breakdown each of the steps as to time because the time involved for each step can vary wildly, depending on (for instance) how long it takes to prepare financial information, negotiate a lease, obtain documents from the landlord, authenticate relevant documents, and validate the corporate structure. Lately though the Chinese authorities have been quite efficient in processing applications, at least in the major cities and usually once we have provided them with all of the requested information in the exact format they need, they usually provide a response within 2-3 weeks. It is getting to that point that takes so much time.

Generic WFOE Formation – Roadmap

A. Name Approval Application

  1. WFOE Investor(s): corporate structure chart, authenticated corporate documents, passports and other documents identifying key personnel.
  2. Business Scope: define scope of business.
  3. Registered Capital: determine amount of capital to be invested, pursuant to financial projections.
  4. Total Investment Amount: determine maximum investment amount (capital + investor loans).
  5. Capital Contribution Timeframe: default is within 30 years.
  6. Proposed Chinese Name(s) for WFOE: at least 6-10 choices.
  7. WFOE Address: dependent on lease/office space.
  8. Name Approval Application Form: prepared by your lawyers, signed by client.

B. During Formation Process

  1. Select accountant.
  2. Select bank.
  3. Draft labor and employment documents: employment agreements, WFOE rules and regulations, non-compete agreements, confidentiality agreements, etc.

C. Post-Formation

  1. Open bank account.
  2. Carve chops.
  3. Open social insurance accounts and begin tax reporting.
  4. Other post-formation activity as relevant.

For more on what it takes to form a China WFOE, check out the following:

China Law online

One of the things we often stress on here is that our posts should NOT be used as a substitute for real world advice. Like ever. This holds true (oftentimes in triplicate) about every other site out there that writes about Chinese law as well.

I am saying this again today because there are apparently a bunch of people out there who believe things about China personal income taxes because someone on WeChat is saying that we said this particular thing about China income taxes, even though we never did and even though it is apparently flat out wrong.

It all started when someone wrote to ask whether his living and business situation would mean that the Chinese government would deem him to be doing business in China. I responded as I usually do to such inquiries by saying that there is no way we are going to answer a question like that:

Much of what you say below is not at clear to me and there is much more I would need to know to even venture a guess as to whether what you are proposing is legal or not, and even then, we would probably want to confirm it with the local authorities. In any event, we cannot give out specific and direct advice to anyone not our client because our malpractice carrier forbids it — just imagine if on the sketchiest of facts (which are not even clear to me) I were to tell you that everything is okay and then you get jailed because it isn’t? See Doing Business in China Without a WFOE: Will the Defendant Please Rise.

This person then wrote back to say that he was confused about “the new tax legislation that would be coming into effect in 2019 for foreigners.” My response to that was to say “what legislation.” He responded by saying that xyz tax laws would be changing for foreigners. I then pointed out that this was a completely different question than his initial question and that what he was saying would be new in 2019, we had written about in 2014 (and it wasn’t even new then!).

Then I got another email, this one from someone who said that he had read a couple people on WeChat who were claiming that our blog had said that foreigners need to submit some strange form to the Chinese government by 2019, when in fact we absolutely never said such a thing nor are we aware of such a thing nor is something like that even something we would write about even if it were to be the case.

I then told these two people the following:

The internet on China laws is unbelievably bad. I think I need to write another article on why you should never take what you read on the internet as legal advice.

Speaking personally, I recently spent about a year living in Spain (helping out our Barcelona office) and I read everything I could on Spain visas before I went but I knew that I still didn’t know enough to do it on my own. So I hired a really good and really expensive Spain immigration lawyer and in about three hours she totally set me straight and I walked out of her office knowing exactly what to do and I did it and it worked. 90 percent of what I had read about Spain visas on the internet was true but ten percent that was either dead ass wrong or had changed recently changed or just did not apply to our specific situation. Had I gone with just what I had learned on the internet, I likely would have been booted out of Spain in 90 days. Despite all that I had learned by going through all of this, when it came time for another American lawyer in my firm to take my place in Spain, he too went to this same Spain immigration lawyer and he reported back to me the same result. She saved him huge amounts of time and huge amounts of problems.

And China is ten times worse than Spain on this, for the following reasons:

1. China’s laws are incredibly local. See e.g., China Employment Law: Local and Not So Simple, China “Laws” Are Local And Don’t You Forget It, and China. Where Everything Is Local. Until It’s Not. More so than Spain.

2. China’s written laws say one thing and local government enforcement (or even Beijing enforcement) will do another. Sometimes there are laws that are not enforced and this benefits foreigners, but more often there are laws that are written for China to look good to foreign governments that are completely ignored to the detriment of foreigners. This is far far less common in Spain. This is why our China lawyers will first research the written laws and then go to the appropriate Chinese government authorities and just flat out ask whether our interpretation of those laws jibes with theirs. Fortunately, Chinese government officials are very good at responding honestly to such queries.

3. China’s laws are in Chinese. Unless your Chinese is amazing and you have China legal experience, you almost certainly do not understand them. Sorry, but this is true. And to top it off, most translations you see on the Internet range from terrible to just okay. In English Translations Of Chinese Laws. Don’t Call Us, I wrote about the risks of using our blog posts or English language translations of Chinese laws:

Pretty much every week someone asks one of our China lawyers for an English translation of a Chinese law or cites one of our blog posts as an explanation for a decision they made or are contemplating.

China’s laws are too precise/too vague/too changing/too real world/too dependent on regulations to use English language translations of one or two laws for making final decisions. An English language translation can in many cases give you a good “feel” for a situation or a starting point for how to proceed, but the risk of that translation being very wrong or just enough wrong to make a big (or even just a little difference) is just too great for you to rely on it without more.

And every year or so we get a company comes to us as a new client seeking our help in getting them out of some sort of trouble they find themselves in with the Chinese government for having accidentally violated some law due to a mediocre translation or one that simply did not include all of the laws and regulations on the subject.  In figuring out how to legally proceed in China, in many instances even a good translation is not nearly enough because decisions on how to proceed might require interpretations of local regulations or even knowledge of local quirks. Many times one of our China-based lawyers (or even one of our China lawyers in the US) will get on the phone and call a government official (or two) to get their views on how the relevant government body interprets/enforces particular laws/regulations and/or treats particular situations.  Chinese government officials are virtually always willing to talk these things out and they are often surprisingly helpful, even if they do not always provide the expected or desired answer.

So what do I tell those who ask me for English language translations of Chinese laws?  I send them the following form email:

I am sorry but because we do not work from translations of Chinese laws (we find them too risky and unreliable) I do not know where you can find translations of the particular laws you   seek nor am I aware of the best site or sites for such translations generally.  I wish you the best of luck in your search.

Reading Spanish is far easier than reading Chinese if your first language is English, for obvious reasons — the alphabet, the cognates, the sentence structure, among other things. And in Spain the laws do not change as often as in China. Not nearly.

Years ago, a company called us about forming a WFOE in China. They asked about the minimum capital requirements and then mentioned that they had read on our blog that assets could count towards that. I said that was correct. They then said good, because they had shipped over $5,000,000 (yes, 5 million dollars) of equipment and they would need that to count as their minimum capital for their WFOE. I immediately went into near-panic mode, demanding to know whether they had secured Chinese government approval to have that equipment count towards their minimum capital before they sent it to China. They had not and I had to tell them that getting it approved in advance was a requirement. To which about all they could say was “that’s ridiculous, that’s putting form over substance,” to which about all I could say, was “that’s right but that’s how it is in China on this.” They had relied on one of our blog posts saying that physical assets can count towards a WFOE’s minimum capital requirements but they had not bothered to determine the rules required to make that a reality.

So please, please, please do not make any business or legal decisions based on what you read on the Internet. Go ahead and use it to give you a basic education and some sense of the issues, but not for more. Our own disclaimer basically says this:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice. By using this blog you understand there is no attorney client relationship between you and our law firm. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

Why does anyone ever think otherwise?

12-7-2018 Update:  Fake News on WeChat, International Panda does a great job tracking down how our China Law Blog appears to have been inappropriately used to bolster support for a tax position on which we never ever wrote a thing. Read this for a good idea on how wrong information can quickly spread on China’s internet. Of course, this sort of thing is not peculiar to China’s internet, it’s endemic pretty much everywhere and it is further reason to be wary of using the internet as the sole basis for your important legal decisions.

 

China employment lawyers

It is not news that Chinese labor authorities have been cracking down on employers that fail to make social insurance payments for their employees. What is news is that Chinese labor authorities are taking that enforcement to the next level. Last week, 28 government departments (including the National Development and Reform Commission, the People’s Bank of China, the Ministry of Human Resources and Social Security, and the State Administration of Taxation) jointly executed a Memorandum of Understanding on Joint Punishment against Serious Dishonest Enterprises and Related Personnel in the Social Insurance Sector (the “MOU”) that defines “serious dishonest employer behavior” to include the following:

(1) Failing to participate in social insurance in accordance with the law and refusing to rectify the situation;

(2) Failing to truthfully declare the social insurance contribution base and refusing to rectify the situation;

(3) Failing to pay social insurance premiums;

(4) Concealing, transferring, misappropriating or embezzling social insurance premiums, funds or engaging in illegal investment operations;

(5) Participating in fraud by, among other things, falsifying certification materials or social insurance fund expenses or social insurance benefits;

(6) Illegally obtaining, selling or disguising trading of social insurance personal rights and interests data;

(7) Refusing to assist the social insurance administrative department in its efforts to investigate accidents and problems; refusing to assist the taxation department in its efforts to supervise or inspect social insurance, and failing to provide relevant information related to social insurance; or

(9) Otherwise violating applicable laws and regulations.

Numbers 1, 2 and 3 above — that is, not paying or under-paying employee social insurance — are the violations our China employment lawyers most often see among foreign employers in China, and even before the MOU, we often saw foreign employers get in trouble for such violations.

The Ministry of Human Resources and Social Security, the State Administration of Taxation and the Medical Security Bureau will pass on information regarding employers that violate the social insurance laws to other Chinese government departments via the national credit information sharing platform and publish that information on Credit China, China’s National Enterprise Credit Information Publicity System, and on the official websites of these government agencies. In other words, the dishonest parties will be publicly named and shamed.

Employers/relevant personnel determined by Chinese government authorities to be dishonest may face a number of adverse consequences imposed by different government departments –not just limited to social insurance. Punishment might include restrictions on participating in government procurement as a supplier, financial subsidies and social security funds support, government assistance on streamlining the handling of social insurance, and participating in social insurance cooperation projects. The list of potential punishments also includes enhanced scrutiny or regulations. For example, when a dishonest enterprise applies for customs-related business, its import/export activities will be more strictly supervised and regulated, such as more stringent customs inspection, supervision and audit. The relevant authorities will also consider the “dishonest behavior” of the employer, its legal representative, actual controlling person, directors, supervisors, officers, and senior management in determining whether to grant preferential policy support. Punishment also may include prohibitions on purchasing airplane tickets and withdrawals of previous honors (e.g., taking back a previously-awarded model of high morality honor).

In October of this year, China’s Ministry of Human Resources and Social Security released a set of draft Interim Measures for the Management of a Blacklist for Serious Dishonesty in the Social Insurance Sector for public comments. This blacklist would be publicized on local and national credit information platforms and be made available to all government authorities. The MOU mirrors the spirit of these draft Measures. As always, the localities are expected to come up with their own detailed implementation rules.

Life in China for foreign employers has never been easy, but don’t make it harder by getting your company and its personnel on the “blacklist.” Can you confidently state that your company is in full compliance with its social insurance obligations? If not, you need to take action now to make sure it is.

 

 

 

 

How to avoid the china tariffsAs has been widely reported, the United States and China agreed to a temporary “cease fire” in the current round of tariff escalation. This happened this weekend at the G20 meeting in Argentina and the formal results of the meeting are not known. However the White House has issued a press release that outlines the basic terms of the deal that was cut in Buenos Aires.

On the tariff issue, there are two components to the G20 agreement:

First: The U.S. had threatened to raise tariffs on $200 billion in Chinese product from 10% to 25% effective January 1, 2019. In exchange for the United States not raising tariffs in January, China has agreed to purchase a “substantial, amount of agricultural, energy, industrial, and other product from the United States” so as to reduce the trade imbalance between the the U.S. and China. Note the following regarding this:

First,

  1. The list of products has not been determined.
  2. The purchasing dates have not been determined.
  3. This kind of agreement is standard. China obtains concessions in return for agreeing to purchase products but it never does purchase the products as promised. There is zero doubt the US negotiators are well aware of this predilection.
    The trade deficit is not the core basis of the United State’s Section 301 claim against China. So even if China makes these purchases, this does nothing to address the issues that support the imposition of the existing and proposed tariffs.

Second, the parties will enter into negotiations over a 90 period. These negotiations will be designed to resolve the issues that actually do form the basis of the U.S.’s Section 301 claim against China. As summarized by the White House, the US and China will discuss forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. None of these issues can be resolved by China merely increasing its purchases of U.S. goods and services. The White House release then states in absolute terms:

If at the end of this [90 day] period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.

As someone who has been involved with these sorts of China IP issues for decades, I view the odds at near zero that China will make significant and meaningful changes in their system on the issues that will be discussed.  This means that if the White House is serious about its absolute deadline the chances of the tariff rate being increased come March are nearly 100%. However, tariffs are very unpopular in the U.S. business community, so it is not at all clear what Trump will actually do 90 days from now.

All of this means the new normal is still operative for China-United States business relations and U.S. companies that are doing business in China should us the next 90 days to make their plans on (a) how to begin or continue relations with their Chinese counterparts and (b) whether and how to move to other countries to mitigate the continuing China risk.

What will you do?

China trademark registration

In a recent Quick Question Friday, I addressed whether a trademark application for a color device (aka logo) should be in color or black-and-white. As I wrote,

According to trademark practice in China, registration of a black and white device in China would protect the logo regardless of the actual color scheme used on the device, and for that reason we typically recommend our clients file an application for the black-and-white version of their trademark.

The exception is if the color scheme for the device is part of the trademark, such as UPS’ brown-and-beige, FedEx’s purple-and-orange, John Deere’s green-and-yellow.

But you know what can’t be protected in China? A single color. Article 8 of China’s Trademark Law reads as follows:

An application may be made to register as a trademark any mark, including any word, device, any letter of the alphabet, any number, three-dimensional symbol, colour combination and sound, or any combination thereof, that identifies and distinguishes the goods of a natural person, legal person, or other organization from those of others. [bold added for emphasis]

We’ll ignore the quaint British spelling of “color” and focus instead on the important word: “combination.” What this means is that China will only approve a trademark registration for a combination of colors, i.e., two or more colors used together. So Tiffany blue is not protectable in China. Or T-Mobile magenta. Or Owens-Corning pink. Or UPS brown (aka Pantone Matching System 462C), which is protected in the U.S. by U.S. Trademark Reg. No. 2,901,090 for transportation and delivery services, as applied to the surface of delivery vehicles and uniforms.

For most companies that use color marks, the requirement of a color combination isn’t an issue. For most, the color isn’t itself an essential part of the trademark. And for those that do consider color an essential part of the trademark, the color is already in a combination or can be easily made to be part of a combination.

So though UPS can register the color brown by itself as a trademark in the United States, in China it would have to use the brown-and-beige color combination. And though Caterpillar may want a trademark for the particular shade of yellow it uses on its logo and equipment, it could instead register the yellow-and-black combination that appears on its “Cat” logo as a China trademark.

To register a color combination as a trademark in China, the application must include a color sample as well as a Pantone color. And the color combination must be sufficiently distinctive with respect to the covered goods/services. Trying to register red-and-gold as a color combination on wedding services in China would not get you far.