International lawyers China lawyers

China today announced that it will be ridding China of unreliable people and companies. See China is establishing an ‘unreliable entities’ list that will include companies and people. Specifically, China’s Ministry of Commerce announced it will kick out of China “foreign enterprises, organizations and individuals that do not comply with market rules, violate the spirit of contract, block or cut supplies to Chinese firms with non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises.”

What exactly does this mean for your company if it is doing business in China? What can you do to reduce the risk of being deemed unreliable and being booted out of the country?

If past performance is any indicator of future performance — and I firmly believe it is — we know well what foreign companies must do to avoid China problems going forward and we set out those things below. Before anyone panic (too much), let me just say that for the past decade or so, China has consistently gotten tougher on foreign businesses in China that are not operating legally there and though this announcement is a really big deal, it is more a change in scope than it is in kind.

In fact, two days ago, in How to React to a China Economy in Decline: The China Lawyer Edition, I listed out 8 things our international lawyers were seeing that were telling us that China’s economy is in decline. Item number one was the following:

  1. The number of foreign companies getting into legal trouble in China. Whenever China’s economy slows, its government starts looking for foreign companies out of compliance with Chinese laws. It does this both to show its citizens that it is working on their behalf and to raise money by collecting on unpaid taxes, with interest and oftentimes steep penalties. In particular we are seeing yet another increase in China going after foreign companies doing business in China without a WFOE. See Doing Business in China Without a WFOE: Will the Defendant Please Rise and China’s Tax Authorities Want You.

For at least the last six months it has been apparent to our China lawyers that China was tightening its legal enforcement against foreign companies. We also have been hearing of tightened enforcement against individuals as well, as reflected by the following:

  1. Many foreigners getting arrested for being in China on the wrong visa and put in jail for 30 days and then deported.
  2. Cities paying Chinese citizens to report to the authorities foreigners in China illegally.
  3. Chinese police going to nightclubs and rounding up foreigners and then cutting their hair for drug testing. I have a good friend who asked that we tell people who consume cannabis not to go to China unless and until they are certain that their hair would no longer test for it.

What concerns me most about this latest announcement though is that some companies operating 100% legally in China are going to get pushed out simply because of who they are and for that there likely is little to no cure. Foreign companies in industries that China has never liked may be getting notices to leave very shortly. Companies involved with movies or newspapers or books come to mind. Foreign tech companies that compete with Huawei or some other greatly favored Chinese company may also get that notice. Foreign companies that know too much about China’s government or economy or citizen sentiment are also likely going to be at greater risk. American and Canadian companies are going to be at greater risk. Companies and countries that side with (or appear to side with) the United States’ ban on Huawei or even the United States in general are also likely going to be at greater risk as well.

But because all foreign companies and individuals not in full compliance with China’s laws are at great risk our advice to every foreign company and every foreign individual in China right now is that you do whatever it takes to quickly clean up your company compliance issues and at least consider having foreign personnel live and work elsewhere until this all blows over, if it ever will.

Foreign companies that are doing business in China should do some or all of the following to make sure they are well set up to weather this big storm:

  1. Make sure your WFOE or your Joint Venture or your Representative Office actually exists and is still licensed to do the business it is doing in China. Make sure it is current on its capital obligations. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Make sure your WFOE or your Joint Venture or your Representative Office is actually properly licensed to do business in every city in which it is doing business. It is shocking how often this is not the case.
  3. Make sure your company is doing everything correctly with its employees. Consider an employer audit and note that our China employment lawyers have never done an employer audit without finding multiple problems.
  4. Make sure your company is current with its taxes. If you think it may not be, it almost certainly is not.
  5. Review your lease agreement and the relevant zoning rules. Are you renting from a real landlord? Is it really legal for your business to do what it is doing where it is doing it?
  6. Have a trusted China contract lawyer review your contracts related to your China operations to make sure each and every one of them is legal.
  7. Conduct due diligence on your suppliers/manufacturers, distributors, retailers, and e-commerce platforms. Your risk is going to be influenced by the company you keep.
  8. Make sure your IP has been properly registered and that your company is not violating a China company’s IP rights.
  9. If your WFOE or your Rep Office or your Joint Venture share is American or Canadian owned, consider forming a new company (“Newco”) in a country with good relations with China and selling the WFOE Joint Venture share or Rep Office package to that Newco.

I could go on and on. None of these things are at all new, but with today’s truly chilling announcement their importance has increased exponentially.

What are you seeing out there? What are you thinking? What are you going to do?

UPDATE: A China lawyer I know well and respect sent me this article (in Chinese), with the following comment: Here is a copy of the Chinese version of the threat from the Chinese government to compile an unreliable persons/companies list. Since China already blacklists every U.S.company it does not need, this would mean a blacklist of U.S. companies it DOES need, like Qualcomm and Intel and related. I recommend China start immediately.

 

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.