© Reuters. FILE PHOTO: A surveillance camera is seen in front of an office building, where the office of Capvision is located, in Shanghai, China, May 9, 2023. REUTERS/Aly Song
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By Engen Tham and James Pomfret
SHANGHAI/HONG KONG (Reuters) – China’s clampdown on its consultancy and due diligence sector has driven companies to review their operations after some tested the limits of the laws and Beijing’s patience to meet surging demand as China emerged from its COVID-lockdowns.
These consultancies thrived by providing investors – from global hedge funds to private equity firms – access to industry experts and investigators who could obtain valuable corporate information.
While often easily available in the West, some information is sensitive and non-public in China, requiring careful navigation by those familiar with a complex bureaucracy, where rules are often unclear and subject to change.
Some of these firms in China outsourced risky work to contractors and took on projects they knew might irk authorities even before an official crackdown started in recent months, according to half a dozen people familiar with the industry.
The issue shot to focus in March when Chinese authorities raided the office of U.S. corporate due diligence firm Mintz Group in Beijing and detained five local staff in a surprise move.
About a month later, state-run CCTV reported “expert network” services firm Capvision had accepted projects from overseas firms to source information, including “state secrets and intelligence” on sensitive sectors.
And on April 26, Chinese lawmakers passed a wide-ranging update to anti-espionage law banning the transfer of any information related to national security and broadening the definition of spying, further rattling the sector.
“Just about everything they do on the ground puts them at risk,” said Dan Harris, a corporate lawyer with past dealings in China, who has had clients who have conducted supply chain due diligence in China.
Despite the dangers, the demand for information in the world’s second-largest economy was too big to ignore.
Consultants could charge clients hefty fees for access to experts, such as ones with in-depth knowledge of a company’s results or those that understand the competition and regulatory landscape, industry sources said.
Capvision, for example, said it charged up to $10,000 to connect clients to their top experts. Some clients would also push for more information of the sort that might breach confidentiality, blurring the lines between what is legal and what is not, the sources said.
One private credit investor who used to join Capvision’s calls with “industry experts” said clients did not want to pay top dollar for easily available public information.
“I am not paying for any easily available public information,” the Hong Kong-based investor said. “I need you to poke around… and the business nature itself makes these firms walk a fine line between what is legal and what is not.”
SENSITIVE PROJECTS
Capvision, which said after the CCTV report it would resolutely abide by China’s national security rules and take the lead in ensuring the consulting industry was compliant, did not respond to a Reuters request for comment.
Many China-based consultancy firms also outsourced on the ground investigations to local contractors.
Even before the latest raids on consultancy firms, some due-diligence firms were warned to stay away from Xinjiang related projects, sometimes by security authorities, according to industry sources.
Rights groups accuse Beijing of abuses against mainly Muslim Uyghurs in the western region of Xinjiang, including the mass use of forced labour in internment camps.
The U.S. has compiled a list of companies which it is sanctioning for using forced labor in Xinjiang and has passed a law that put the onus on companies to prove that goods sourced there are free from forced labour, requiring a high level of evidence from firms.
China denies abuses in Xinjiang, a major cotton producer that also supplies much of the world’s materials for solar panels.
One consulting firm was working on Xinjiang supply chain projects as recently as February, according to several sources.
RISK MITIGATION
As the impact of charges leveled against Capvision reverberates across the industry and with Beijing’s Counter-Espionage Law coming into effect from July 1, some consultants in the country are scrambling to reduce risk.
The head of a U.S.-headquartered consultancy’s China service said the company was no longer sharing key takeaways from closed-door meetings with clients, as these sometimes included information that could be considered sensitive by Chinese authorities.
Another Asian consulting firm has started asking China experts to provide details on content they are sharing to reduce risks of crossing red-lines, said a person who recently worked with the company as an expert.
For some local investigators, the risks now outweigh the rewards.
“I left the industry because you can’t trust your boss, your source, your client,” said someone who no longer works in the sector. “You’re always looking over your shoulder.”
($1 = 6.9121 renminbi)
This story originally appeared on Investing
