Chinese Government Raids and Shuts Down a Well-Known American Business. This is a REALLY BIG Deal.

It was revealed today that China raided a large and well-known American company earlier this week, seizing five of its staff and shutting down its operations in China. This is a big deal and I thought it important I write about it as soon as possible.

1. Factual Background on the Raid

My facts regarding this raid come from The New York Times, The Wall Street Journal, Reuters, BBC News, and The Financial Times, all of which I view as providing high-level and reliable China reporting.

Today (as I write this, it is 6:45 a.m. Pacific Time, 9:45 a.m. Eastern Time, and 9:45 p.m. in China), it has been reported that the Chinese government on Monday raided Mintz Group’s offices in Beijing, detained five of its staff there, and closed down its China operations. Per its website, Mintz Group focuses on providing “background checks” on companies and people, “fact gathering” during disputes, and “internal investigations” after allegations. In other words, it is a high-level international investigation firm.

Randal Phillips heads Mintz Group’s Asia operations from outside of China. He is the former chief representative in China for the Central Intelligence Agency. Per BBC News, Mr. Phillips often criticizes China:

While there is no indication that the raid is related to Mr. Phillips, he has previously said that the United States should address structural imbalances in trade stemming from Chinese policies.

In 2018, Mr Phillips also testified before Congress on China’s efforts to exert international influence.

I’m a longtime fan of Mintz Group’s Deep Background blog and its Where the Bribes Are map, which shows China in brightest red.

Per Reuters, “Mintz Group has not received any official legal notice regarding a case against the company and has requested that the authorities release its employees,”” the company said. The five Mintz Group employees are being held “incommunicado” outside Beijing.

2. Timing of and Reason for the Raid

One of the main reasons I read so many articles before writing this piece is because I wanted to see how various media put this raid in context. Most noted how the raid came on the heels of yesterday’s hearing regarding U.S. plans to force a sale of TikTok or ban it. Though that hearing came after the raid, China certainly knew before the raid how that hearing would go down.

The Financial Times (like many others) put the raid in the larger context of “deteriorating relations between Washington and Beijing, which took a turn for the worse last month following a row over a suspected Chinese spy balloon that flew over the US.”

This raid as another data point in what I have since 2018 described as a straight-line decline in China’s relations with the Free World. See e.g., China’s Relations With the West: Straight-Line Decline. This arrest is China punching back against the United States for its efforts to block China’s access to high-end microchips, ban TikTok, and embarrass Xi for his relationship with Putin and with Russia, and Taiwan President Tsai Ing-wen’s recently announced upcoming visit to the United States.

3. The Raid’s Likely Impacts on Your Business and Your Travels

Per the American Chamber of Commerce in China’s latest survey (taken before China’s balloon was caught hovering over the United States), U.S. businesses operating in China indicated increasing pessimism about their China prospects, with two-thirds citing rising tensions with China as the top business challenge. This raid will increase those tensions.

There are two ways this raid will likely impact your business in or with China. First, it is yet another action that will ratchet down China’s relations with the Free World. And as is nearly always true, there will be a U.S. counterreaction, and then a China reaction to that, and on it goes, with more companies likely to get caught in these crosshairs. This is nothing new.

The other way your business will likely be impacted by this raid will be in its declining ability to get necessary information. Not only was the timing of this raid not a coincidence, the company China chose to raid was no coincidence either. Plain and simple, China’s raid is intended to reduce the information the world gets about China. Just as the United States, Japan, Australia, and the EU are increasingly seeking to block China’s access to their data (see TikTok) China too is increasingly seeking to limit foreign access to its data. China’s going after the Mintz Group sends a message to those who reveal information about China that China does not want revealed.

This is not the first time China has sent out this message. The case of British corporate investigator Peter Humphrey immediately sprang to my mind, and as per Reuters, I’m not the only one to see this link:

British corporate investigator Peter Humphrey and his American wife Yu Yingzeng, who ran risk consultancy ChinaWhys, were detained in 2013 following work they did for British pharmaceuticals group GSK.

Humphrey, who spent two years in jail for allegedly acquiring personal information by illegal means, which he denied, told Reuters that providing due diligence in China was even harder now because of a “massive tightening in access to information.”

“The foreign business community needs due diligence in order to conduct safe business, to pick the right partners and the right hires, to invest in the right companies without losing their shirt … But Beijing has made it impossible to do this,” he said in an email.

“This is at a time when Western companies need transparency more than ever,” he added.

The Financial Times also weighed in on how this raid is tied to China’s efforts to clamp down further on access to information:

A former Mintz staff member said he had noticed official attitudes towards the company harden during the pandemic, when China mostly sealed its borders and imposed strict zero-Covid controls.

“You don’t know where the red line is,” said the staff member, whose job had mostly been to translate Chinese media reports. China has detained investigators, analysts and journalists affiliated with foreign companies in the past.

By blurring the “red line” on information, China is telling companies and individuals that coming close to the line might put them at risk. This message will cause people to stay far away from the blurry line and it will mean companies will increasingly need to transact their China business in the dark, or at least in deep shade. For what this could mean for your due diligence, I refer you to this post on the importance of international due diligence.

Per Reuters, “news of the raid and detentions comes as Beijing is gearing up to hold the three-day China Development Forum . . . where executives from multinationals and representatives from international organizations will be among the more than 100 overseas delegates present”:

One U.S. business community person told Reuters the Mintz Group incident sent a “remarkable signal” that Beijing wants foreign money and technology but that it won’t accept credible U.S. firms conducting due diligence on Chinese partners or the business environment.

“Red alerts should be going off in all boardrooms right now about risks in China,” the source, who did not wish to be identified due to the sensitive nature of the matter, said.

China has said it welcomes foreign trade and investment but stressed that security comes before development.

The red alerts have already gone off and I know that because I started getting emails from clients within hours of this raid hitting the media asking how this will impact what they are doing in China. I also got an email from a company that wants my law firm to provide it with a legal risk assessment of its China business “as soon as humanly possible”. This is not a normal morning.

This raid is China doing what it always does, which is killing the chickens to scare the monkeys, with the Mintz Group as the chickens and all other foreign companies as the monkeys. Nobody really knows where and when the Chinese government will strike next, but the level of risk does vary by company and by industry.

Very briefly, foreign companies in industries China does not like are at higher risk, while foreign companies in industries China likes are at lower risk. Companies with executives that speak out against China are at higher risk and companies with executives who speak out for China are at lower risk. Companies not in full compliance with China’s laws are at higher risk and companies in full compliance with China’s lows are at lower risk. See A Legal Checklist for Doing Business in or with China.

In How to Handle China’s Rising Risks, I wrote that “China is going to get tougher on foreign companies doing business in China” and  “everything foreign businesses and foreigners do will be under heightened scrutiny.”

In How to Prepare for the Worst in China and Why You Should I wrote of how foreign companies and foreigners were seeing increasing peril in China and recommended companies polish up their China exit plans, just in case:

It seems like every time I talk with serious China people these days, they want to talk about what is going to happen in China regarding treatment of foreign companies and foreigners. Many of them say they wince every time there is an announcement of a Western company planning to leave China or reduce its footprint there. As a friend of mine puts it, “The fewer foreign companies and foreigners that remain in China, the greater the chance it will be my company or my family that gets singled out for mistreatment.”

But even if you do not believe there will at some point be even more change for the worse for foreigners in China, it at least makes sense to be ready for it. I can tell you that virtually all companies big enough to retain risk consultancies are doing so. Frankly, I am always amazed people do not think about these sorts of things more often.

So good for Joseph Sternberg of the Wall Street Journal for way back in 2011 writing A Businessman’s Guide to China’s Collapse: It might not happen soon, but when it does it will pay to be prepared. The article focuses on the need to be aware of and prepare for China risks.

It is just wrong to assume and act as though things cannot and will not change. As Sternberg notes, “Four months ago, no one would have predicted imminent mass unrest in Tunisia, Egypt, Syria, Bahrain, Yemen or Libya,” and he warns companies to “consider managers trying to evacuate staff, safeguard physical property or keep supply chains operating as smoothly as possible.” He then provides “a brief guide to keeping your business afloat if China goes kablooey”:

    • First, recognize that it really could happen. Human nature is to assume the status quo will continue indefinitely.
    • Understand where your vulnerabilities lie. “You may already have ‘a detailed list of expat staffers in China, their addresses and dependents, to aid in a worst-case evacuation’ but you should also ‘track executives who might be visiting, in case one of those should happen to be in town’ when something serious goes down.”
    • Think about your specific risks. “Are your factories identifiably ‘foreign,’ and will that be a sore point in the eyes of locals? Have you previously stirred controversy for hiring lower-wage workers from other regions instead of locals? Are you in a controversial industry . . . that could make you a target?”
    • Perhaps the biggest risk companies need to manage in China is one that hides in plain sight: supply-chain security.  The key is to diversify supply chains, a practice some—though by no means all—companies already have adopted. This is not necessarily cheap. But those companies that invest in a little excess factory capacity in another country or buy insurance against supply-chain disruptions may one day find the additional expense a price worth paying.
    • Think ahead as to how you will “respond to varying degrees of disruption.” What events would trigger a factory closure for a couple days, or a reduction in factory hours, or moving workers’ dependents to another area, or in the worst case an evacuation of expat staff entirely? Who would make those decisions, based on what sources of information, and how would the decision be communicated down the line. And so on.

There is nothing wrong with being prepared. Just look at what happened to companies in Russia when Russia invaded Ukraine.

For more on the difficulties/risks of doing business with China, check out the following:

A Resounding Maybe on Fleeing China

Your China Supply Chain is a Bet Against the House

Doing Business with China and Your Reputation Risks

I also urge you to read Russia’s War Will Impact Your China Business because what happened to foreign businesses in Russia is instructive as to what could happen to foreign businesses in China and because Xi’s “unlimited [and growing] friendship” with Putin will itself impact companies that do business in or with China.

What are you seeing out there?