How to Do Business in China Without Going to Prison

1. China is Cracking Down on Foreigners

China has laws and it enforces its laws. And like pretty much every country in the world, China enforces its laws unevenly. By unevenly, I mean it is not uncommon for China to enact a law and then not enforce it for a few years and then all of a sudden start zealously enforcing it. Conversely, China will sometimes zealously enforce some of its laws for a stretch, and then relax enforcement. Some regions in China will strongly enforce a particular law while other regions do not. China tends to be tougher on foreign companies in enforcing its business related laws. Oh, and lately, China has tended to be tougher on enforcing its laws as against companies and individuals from the United States and Canada and, starting a few weeks ago, as against companies and individuals from the United Kingdom and Australia as well.

Right now what you need to know is that China has never been tougher in enforcing its laws against foreign companies. It is at a ten out of ten on that right now. But with respect to the United States, Canada, Australia and the United Kingdom (and perhaps a few other countries as well, like South Korea, Taiwan and Norway), it has taken it up to eleven.

Let’s talk for a minute about English teachers in China, and if you think that because you are not teaching English in China you can stop reading now, you are WRONG. English teachers in China are THE canary in the coal mine in terms of China’s treatment of foreigners.

Less than a month ago, I wrote one of our more controversial blog posts, Do NOT Teach English in China and Why EVERYONE Should Read This, highlighting problems English teachers were facing in China, including (but not limited to) the following:

1. Teachers are being drug tested using their hair samples. Many are testing for cannabis and being jailed for 30 days or more and then being deported. This is happening to newly arrived teachers who insist they did not consume any cannabis since arriving in China. Listen up everybody, cannabis can show up in hair testings up to (and even sometimes beyond) 90 days after you have consumed it. So if you are going to be teaching in China and you do not want to spend time in jail and get deported, please, please, please go at least four months without consuming ANY cannabis before you go there and please, please, please do not consume any cannabis while there. None. Zero. Zilch. 没有. Aucun. Keiner.  PLEASE. Invariably, the schools use this as a reason not to pay the teacher whatever is owed.

2. Teachers are being checked (or reported on) for having an improper visa for China. The teachers are then being tossed in jail and then deported or just deported straight away. Invariably, the schools use this as a reason not to pay the teacher whatever is owed. It appears to have become very common (as a cost cutting measure) for schools to have teachers come to China and start their teaching on tourist visas, all the while claiming this is perfectly legal — it isn’t. The teachers believe this until the day they are arrested. Near as I can tell, the schools rarely if ever get in any real trouble for this but the teachers sure do.

I eventually concluded that it is simply too risky to take an English teaching job in China and encouraged people to go elsewhere:

I have reached the conclusion that the best thing an English teacher can to do protect themselves from the sorts of things mentioned above is to not teach in China in the first place. Go elsewhere. And if you are teaching in China now, leave now or just resign yourself to your fate. I wish I could give better advice than this but I cannot. Sorry.

I then wrote about how what was true for English teachers in China was also true for all foreign employees in China and then I concluded that post by noting how important it is for every foreign person and company to comply with China’s laws:

Living and working and doing business in China is way more legally complicated than ten years ago and tolerance of foreigners in China (particularly for Americans and Canadians and Australians and Africans) is way down. This means the likelihood of you going astray of Chinese law is considerably higher as well. When you add in that China’s ability and desire to catch foreign companies and foreigners operating illegally in China is higher now than it has ever been, you can see why it is so critical you make sure both your company and you are operating in China within the law. If you are not already operating legally, you need to start doing so now and if you cannot, you probably should leave China or not go there at all.  This is the new normal for China. See Want to Keep Your Business in China? Do These Things NOW. 

If you are not able to know whether you are in compliance in China and thus protected, you (and your company) would be better off not being there at all, English teacher or otherwise.

I said that this English teacher post was controversial in large part because it engendered a ton of social media discussion, especially on Linkedin, on Facebook, and on Reddit (here and here, among other places).

And yet, at least three times in the last few weeks we have received emails from foreign companies making clear they would continue operating illegally in China either because they had “no choice” or because they had “nothing to lose.” I felt compelled to warn them of their actions. And before anyone says that my compulsion arises from a desire to charge these companies money for legal services, please note that the opposite is in fact true. Our law firm does not make any money from a company we tell we cannot help get into compliance. Anyway, the below is an amalgamation of the sort of emails I wrote:

I strongly disagree that you have nothing to lose here. I think the opposite is true.

China is in open conflict with the United States and your company will be violating the law in a sensitive area — the Internet — which the PRC government has identified as a national security issue. Today’s New York Times discusses what is happening to Americans in China and the sort of mistreatment it discusses is far more prevalent than the media lets on. American businesspeople are either afraid to publicly discuss what is happening to them in China or they do not wish to do so, but we hear similar stories from American companies all the time. They usually act surprised and a little perturbed for getting into trouble for doing “the same thing we’ve always done.” When we say, “ yeah, but what you were doing is illegal” their response is often something like, “well they [the Chinese government] always allowed it and it’s not like we are the only ones doing this.”

How will it be/look if someone from your company gets detained or if you get shut down and essentially banned from China?

Your company competes with [large Chinese company] in [Chinese city], a city completely controlled by [large Chinese company]. I can easily imagine [large Chinese company] inspecting your url, noting __________________, and then convincing the local authorities to crack down on you in a big way or in such a way to end you as a competitors and to scare away others. This is China….

I worry for you. A lot. Just my two cents.

The common response to the above is usually a non-committal “thank you.”

The arrests yesterday in Shanghai of twelve stock analysts from Taiwan have me even more worried. Global Times (an official CCP publication) wrote about these arrests in 12 stock analysts from Taiwan arrested in Shanghai. I learned about these arrests from one of my firm’s China lawyers, who who Slacked me this article with the following comment:

Note this article on Taiwan stock traders arrested in Shanghai for operating without a license. This is what we are seeing: the PRC government ignores the illegality issue for years and then they are suddenly cracking down. Notice also that the crackdown is not a deportation. The crackdown is arrest and jail time. People need to stop assuming China today is the China of a year ago because it isn’t. It is far riskier in every way and this idea that you can just violate Chinese laws because that was allowed in the past or would just be met with a slap on the wrist and/or deportation must be excised. China is getting serious and I just hope more people start realizing this before it is too late for them.

It is hard to know exactly what these 12 analysts were doing, but based on what we have seen other companies do in this space and reading a bit between the lines of what the media is saying about it, it appears they were making stock recommendations live and via an app and doing so without a license. If this is correct, I can tell you there are a ton of other foreigners in China at extreme risk of arrest. The good news is that China can go one of the following three ways in the next few months:

1. It can wait a few months to let these arrests sink in, giving the others that are doing the same thing time to shut down and leave China. If I had to bet, this is what I suspect China will do. The fact that this got a big story in the Global Times makes me think this.

2. It can arrest more people for doing the same thing to speed up the cleansing of this problem. This is the second most likely option.

3. It can do nothing further on this front. It may have had special reasons for singling out these 12. The big story in the Global Times makes me think this will not be the case.

In other words, it is not clear how China will proceed against other similarly situated foreigners in the next few months, but I can tell you that if I were a similarly situated foreigner I would likely already be on an airplane by now, relieved and en route back to my home country.

What exactly should you do to avoid becoming a Chinese shut-down, deportation, or arrest statistic? What exactly does all of this mean for your company if it is doing business in China? What can you do to reduce your risks?

2. How to Reduce Your China Risks

If past performance is any indicator of future performance — and we really don’t have anything else to go on, so we have to assume it is — you should do the following, and fast:

1. Make sure your WFOE or Joint Venture or 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 Joint Venture or 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 in China 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 isn’t.

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 all are legal and none are likely to get you in trouble.

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. China has many business crimes that are not crimes in the West. Know these.

9. Make sure your IP has been properly registered and your company is not violating any China company’s IP rights.

10. If your WFOE or Rep Office or Joint Venture shares are American or Canadian or Australian owned, consider forming a new company in a country with good relations with China and selling the WFOE Joint Venture share or Rep Office package to that new company

I could go on and on. None of the above are new, but with what is going on in China today, their importance and their urgency has increased exponentially. Get fully legal. Now.


UPDATE:  Lest anyone out there truly believes China does not treat harshly the citizens of foreign countries that dare to challenge China, the below tweet from Global Times ought to extinguish that belief.  The picture is of Robert Lloyd Schellenber, a Canadian convicted in China of drug smuggling and sentenced to 15 years in prison, but then dragged back into court and ordered executed in retaliation for Canada’s having arrested Huawei CFO Meng Wanzhou. There is no doubt the below tweet from China’s official English language newspaper is intended to send notice that there will be deadly repercussions for citizens of countries that do not hew the Party line. Does this scare you? It should.

“Viewing as an opponent was wrong and would only make meet more setbacks in bilateral relations: expert.”