As authorities in China pursue a wide-ranging clampdown on consultancy and due diligence firms operating in the country, industry insiders say many businesses took on risky projects that met a lucrative demand for information but tested Beijing’s patience.
These consultancies, with clients ranging from from global hedge funds to private equity firms, thrived by providing access to industry experts and investigators who could gain valuable Chinese corporate information, which would otherwise be hard to obtain.
Some of these firms also outsourced risky work to contractors and took on projects they knew might irk authorities, according to half a dozen people familiar with the industry.
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The issue shot to focus in March when Chinese authorities raided the office of US 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.
Big money for sensitive intel
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.
“Just about everything they do on the ground puts them at risk,” said Dan Harris, a corporate lawyer 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, especially as China emerged from its Covid lockdowns.
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.”
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Xinjiang-focused projects
Many China-based consultancy firms also outsourced on the ground investigations to local contractors.
Even before the current crackdown, some due-diligence firms were warned to stay away from Xinjiang related projects, sometimes by security authorities, industry sources said.
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.
China denies abuses in Xinjiang, a major cotton producer that also supplies much of the world’s materials for solar panels.
The US 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.
One consulting firm was working on Xinjiang supply chain projects as recently as February, according to several sources.
Risks now outweigh rewards
As the impact of charges levelled against Capvision reverberates across the industry and with Beijing’s Counter-Espionage Law coming into effect from July 1, some consultants in China are now scrambling to reduce risk.
Following the CCTV report, Capvision has said it would resolutely abide by China’s national security rules and take the lead in ensuring the consulting industry was compliant.
The head of another US-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 too, 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.”
- Reuters, with additional editing by Vishakha Saxena
Also read:
China Raids Capvision Amid Crackdown on Due Diligence Firms
China Raids Office of US Due Diligence Firm, Detains Staff
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China Asks State Firms to Drop Big Four Auditors Over Data Fears
Mintz Executive Caught in China’s Growing Web of Exit Bans
China Orders Check on Auditors to Ensure Data Secrecy – FT
China Asks Deloitte to ‘Learn Lesson’ From $31m Audit Fine – FT
