Consider this China Law Blog’s first URGENT ALERT.
For the second time in a month, we are hearing of mounting Chinese government efforts to crack down on unregistered foreign companies doing business in China. We see this as part and parcel of Beijing’s attempt to moderate rising Chinese resentment against foreign companies operating in China.
Tens of thousands of foreign companies conduct business in China without properly registering to do so. These companies hire and fire Chinese workers, buy and sell goods, and engage in virtually every sort of business activity one might expect of any company doing business in China. Yet, all of these companies run the constant risk of being shut down or harshly penalized and that risk has just gone way up.
Long ago, when I was a young lawyer, I wrote an article entitled, “Four Essential Principles of Emerging Market Success,” positing that a failure to abide by the law in the country in which you do business is the surest way to lose your business without any basis for complaint:
In many emerging market countries, local businesses take advantage of corruption to avoid complying with laws. This may work for the locals, but it won’t work for you. The easiest way for a local rival to drive you out is for you to do something illegal. Neither you nor your government will have good grounds to complain if your rival gets your business closed down due to your illegal activity. It might even be your own partner who reports you so he can assume full ownership and control of your business.
The strength of my views on this has only increased as my firm has been contacted far too many times by companies driven out of countries for having engaged in illegal conduct no different from thousands of other foreign companies in the same country. These companies assume they have legal redress, but in reality they almost never do. So long as the law of the country in which the company was operating allows for closures and/or penalties (and in every such situation my firm has encountered, it has), the company is essentially out of luck.
There was a time where most foreign business was illegal in China, particularly as a Wholly Foreign Owned Enterprise (WFOE). Those days are pretty much over now and the Chinese government knows it. If you came into China as a representative office (rep office) back when that was the only way, and your “registered office” is engaged in business activities that are improper for such an office, the time is now to get that right also.
If your local people in China are telling you this is not how Chinese business is conducted, you need to remind them you are not Chinese and the government will treat you differently. Also remember that your employee’s knowledge that you operating illegally in China gives them tremendous leverage.
Bottom Line: No matter how good your China connections (and trust me, they are not as good as you think), now is the time to get legal. Now is the time to register your company in China. It is that simple.