The Chinese Government is Coming for Your Company Secrets

No matter what I do as a lawyer to try to protect my clients’ IP and trade secrets from China, there remain many ways the Chinese government can steal them. And it is very difficult for the average (or even above average) company to prevent this. Your biggest China IP risk is — and I hate to say this — your own employees.

Let me explain.

The CCP is incredibly powerful and ruthless. Most of you already know this. If the CCP wants your IP, it will use its power and ruthlessness to get it. How does it do that when you are not even located in China or you are always extremely careful about what you reveal of your IP in China? Very simple. It leans on your employees to force them to turn over your IP.

I will explain all of this using Canola oil and Meng Wanzhou, the University of Washington, NGOs, and alleged criminal law violations as examples. Lastly, I will summarize a recently released report by Safeguard Defenders (a human rights group based in Madrid, Spain) on how China is officially stepping up its “persuasive” techniques outside China.

1. Canola Oil/Meng Wanzhou

In 2018, Huawei CFO (and daughter of its owner) Meng Wanzhou was arrested by Canadian authorities and held for extradition to the United States. At the time of Ms. Wanzhou’s arrest, China was Canada’s leading importer of canola oil. Within months of Ms. Wanzhou’s arrest, canola sales from Canada to China were essentially non-existent. See “No doubt, they are retaliating’: Canadian canola hits Chinese delays after arrest of Huawei’s Meng Wanzhou.” How did the CCP accomplish this without clearly and unequivocally violating the WTO? It did this by instructing its ports to slow down canola oil clearances and by “leaning on” the Chinese companies that bought canola oil. How does the CCP lean on canola companies? It does that by making clear to them that patriotic companies don’t buy canola oil and by indirectly letting company owners know that they and members of their immediate and extended family are at risk if they keep buying. How do we know this? Because Chinese companies have told us this sort of thing. Usually these risks are mostly financial and relate to things like taxes and pensions, etc.

2. The University of Washington

Before COVID I attended “a China event.” At that event, there was a panel discussion in which one of the panelists — a Chinese national — was absurdly pro-China. By absurdly pro-China, I mean that he would angrily seek to refute anything remotely critical of China by talking about the United States. Each time he would do that, all of the Chinese students in the audience would stand up and cheer. But they would not do this quite in unison. Two students who themselves always looked angry would stand up and cheer first and then everyone else would follow, all while those two students would scan the crowd to see who was standing. These two students were CCP plants. How do I know this? One, it was obvious. Two, two students I knew subsequently told me that they felt compelled to stand up because they knew these two students were watching to make sure that they (and all the other Chinese students) stood up and those that didn’t would almost certainly be reported to the CCP.

3. NGOs

People are constantly reaching out to me to tell me that they are convinced that the NGO of which they are a member (think local Chinese business groups) have been infiltrated by the CCP. They tell me these things in confidence, but the information they give leaves little doubt that this is true. I’m talking about local Chinese-American business and cultural groups. I was in one in Seattle but I eventually left it after becoming convinced that it had been severely compromised. The last straw for me was when a high level officer of a massive Chinese tech company gave a keynote address comparing its problems in the United States to Facebook’s and Google’s problems in China and pretty much everybody just nodded along, as though the two countries were at all alike in how they treated foreign tech companies. At the conclusion of a four-month investigation, Newsweek had this to say about CCP influence on U.S. NGOs:

Experts say the election-related activity is just a small part of a much larger and deeper campaign of influence and interference by China that’s been taking place over many years—and is a far more worrisome threat long-term. Interviews with some two dozen analysts, government officials and other U.S.-China specialists, as part of a four-month investigation by Newsweek, suggest there are myriad other ways in which the Communist Party of China (CPC) and other government-linked entities have been working, through multiple channels in the U.S. at the federal, state and local level, to foster conditions and connections that will further Beijing’s political and economic interests and ambitions.

Those channels include businesses, universities and think tanks, social and cultural groups, Chinese diaspora organizations, Chinese-language media and WeChat, the Chinese social media and messaging app, says John Garnaut, an Australian political analyst and expert on global CPC interference. Separately, Newsweek has identified about 600 such groups in the U.S., all in regular touch with and guided by China’s Communist Party—a larger-scale version of a pattern found in other countries around the world.

See 600 U.S. Groups Linked to Chinese Communist Party Influence Effort with Ambition Beyond Election.

4. Alleged Criminal Law Violations

Worst of all is how the CCP harasses and brutalizes its enemies outside China. In China’s New Tool to Chase Down Fugitives: American Courts, The Wall Street Journal explains how the CCP uses threats to convince/force Chinese nationals to return to China:

Beijing has been deploying aggressive means to go after expatriates like Mr. Peng, sometimes dispatching teams of agents abroad to threaten them in efforts to force them to return home and face corruption charges. On Friday, a senior Justice Department official defended the Trump administration’s decision to shut down the Chinese consulate in Houston in part by citing China’s alleged use of its consulates as a “base of operations” to harass fugitives. The Chinese Embassy in Washington called the accusations “groundless fabrications.”

Indeed, the CCP has gone so far as to threaten to put someone’s infant child up for adoption in China if the father did not return to China for a criminal law trial:

In the summer of 2017, a few months after the couple arrived in California, a Discipline Commission official from Hunan turned up with people whom Mr. Peng in filings referred to as a “hit squad.” They staked out the couple’s Chinese friends in California and threatened to detain one friend’s family members in China unless she provided Mr. Peng’s phone number, according to the filings.

The official, Chen Jian, called Mr. Peng telling him that “a squad of 20 local agents and Triads” stood ready to spirit the couple to China, the filings say. Mr. Peng told the official that he wouldn’t return and that he and his wife had applied for asylum in the U.S., they say.

The Journal couldn’t locate Mr. Chen, and the Hunan Discipline Commission, where Mr. Chen was a member, didn’t respond to questions directed at Mr. Chen.

Discipline Commission agents turned to the couple’s son, taking him from his daycare in October 2017 to an orphanage, and conveyed to Mr. Peng that the boy would be put up for adoption if Mr. Peng didn’t return, according to court filings by Mr. Peng.

State Department and other U.S. officials got involved within weeks, according to court filings and people familiar with the episode, because the child had been born in the U.S. and was thus an American citizen. After weeks of wrangling—and with President Trump due in China for a summit—the boy was returned to the grandparents, according to the filings and the people familiar with the episode. While the son has been in the grandparents’ care, Chinese authorities haven’t allowed any visits from U.S. consular officials, or allowed him to be reunited with his parents, the filings say.

Someone smashed windows at the couple’s new home outside Los Angeles in the spring of 2018, a court filing by Mr. Peng says, adding that the couple believe it was “a house-warming gift from China telling them they know where they live.”

5. Safeguard Defender’s Report on CCP Overseas “Persuasion”

Safeguard Defender’s just released report — Chinese Transnational Policing Gone Wild — details CCP overseas influence operations and it is a chilling must-read.

Among other things, the report details how the CCP pressures overseas Chinese “through means of intimidation, harassment, detention or imprisonment”. It also details how China is setting up “overseas police stations” to better carry out these tactics. Perhaps most importantly, it also describes how the government targets “children and relatives” in China to accomplish its overseas goals.

China’s documented tools for “persuasion” operations include denying the target’s children in China the right to education, and other limitations on family members and mandating that relatives in China that do not help overseas police “persuade” targets should be investigated and punished.

It also reveals the Chinese government plans to establish at least 54 police-run “overseas police service centers” across five continents to carry out policing operations on foreign soil (including in Spain).

Lastly, it details a new law set to go into effect on December 1 that will establish full extraterritoriality over Chinese and foreigners globally for certain crimes.

In other words, the Chinese government intends to formally extend its reach well outside its own borders.

6. Your Business’s IP is Similarly Threatened

If you are wondering what (if anything) the above has to do with your business, here goes. The point of the above is that the Chinese government has all sorts of methods it ruthlessly uses to achieve its desired results and it that includes gaining access to your IP. Suppose you have a Chinese employee. Now let’s just assume — as is very likely the case — your Chinese employee loves working for your company, is incredibly loyal to your company and quietly but resolutely dislikes Xi Jinping and the CCP. In my experience, all of these things are more likely than not going to be true as most Chinese living in places like the United States or Australia or Spain or wherever do so because they like those places more than they like China.

Here though is where the problem can arise. Suppose your employee has parents or young relatives in China. Now suppose that person is threatened by one of the many CCP operatives in your country, and told that unless they do just this one thing, their parents’ pension will be cut or their cousin will be fired from his plum government job or their nephews will never get to go to a good university. And suppose also that your employee is told that it is a shame that they will never be allowed to go back into China (or even without being told this they realize that they never should go to China again) and that their elderly parents are in China and this means they will never see them again. Now put yourself in the shoes of your employee and tell me that you would not at least consider turning over just one small piece to the CCP under these circumstances.

And this is how your IP is always at risk of being stolen by China. Not everyone’s, of course, because in addition to being ruthless, the CCP is also smart. And it being smart means that it will not risk an operative getting arrested and jailed and the political fall-out that goes with that for just any IP. In other words, if your company’s key IP is a better way to make a rubber ducky, your company is almost certainly safe. But if you are making solar panels, self-driving cars, semiconductors, or just about anything of moderate-to-great value to the CCP because of its economic or military value, your company is indeed at risk.

If your company does not already have strong trade secret and IP protections in place, now would be the time to start.