In 2017, The Economist wrote, “The world’s most valuable resource is no longer oil, but data.” China is the world’s second-largest economy, with a ballooning data sphere projected to eclipse the U.S. in the coming years. As the hope of the most significant and valuable data sphere globally, China is a highly attractive place to do business, ranking 14th on the Global Competitiveness Index.
The countries’ growing data sphere poses a tricky opportunity: The information is there, but recent legislation renders it inaccessible. The Chinese government’s relationship with data and regulation is highly contested and longstanding; to understand the tumultuous nature of our current environment, we have to go back in time.
As the internet became a more significant component of culture and international business throughout the early 2000s, authorities began interfering with Chinese citizen’s internet access, barring profanity and briefly canceling access in certain regions. These actions are early examples of China’s developing internet policy, referred to today as the Great Firewall of China.
The Cyberspace Administration of China was founded in 2014, symbolizing the country’s first significant attempt to administrate technology and public data.
Despite clear opportunity and broad interest, conducting research or business in China is risky, even for firms unrelated to due diligence. For international due diligence firms, business and research in China aren’t just dangerous; they’re nearly impossible.
Early this year, U.S. due diligence firm Mintz Group faced punitive action for its due diligence work in China. Chinese authorities fined Mintz $1.5 million for doing what they called “unapproved statistical work.” The firm’s Beijing office was raided, resulting in the detention of five employees.
This isn’t the first time something similar has occurred. In 2023, a Chinese executive was barred from leaving the mainland after cooperating with Kroll, another U.S. diligence firm.
What happened to Mintz Group is just one example of the legal challenges of conducting due diligence in China, a front-of-mind topic for U.S. and international due diligence firms. In recent years, conducting due diligence or obtaining public records in China has become increasingly challenging for U.S. diligence firms. Unfortunately, several challenges interfere with normal investigation processes, including language, laws, regulations, and barriers to non-citizens’ access to Chinese systems.
Legislative Challenges to Due Diligence
China’s unique but intense legal landscape is perhaps the most significant barrier to international due diligence. Based on internalized actions, it makes sense that the Chinese government is so careful with international companies searching through its immense data sphere.
In 2017, the Chinese government enacted the Cybersecurity Law (CSL), tightening its grip on localized data. Shortly after, the State Administration for Market Regulation was ratified, restricting access to management and shareholding information for non-Chinese citizens. Third-party databases using China’s dataset could no longer provide such related information to foreigners, and user registration and foreign IPs were blocked.
2021 marks even stricter legislation: The Personal Information Protection Law (PIPL) was enacted, imposing stringent data collection, storage, and transfer requirements. China’s Anti-Foreign Sanctions Law, also passed in 2021, allows the Chinese government to take countermeasures against foreign bodies complying with sanctions imposed by foreign governments, adding another layer of complexity to accessing Chinese data.
Just last year, China’s anti-espionage law was enacted, expanding the country’s definition of espionage to include “all documents, data, materials, and articles concerning national security and interests included for protection.” Unfortunately, this law’s language is highly opaque, much like other components of China’s legal system. The anti-espionage law doesn’t define what falls under China’s jurisdiction, providing Chinese officials significant leeway when prosecuting foreign corporations.
The challenge is:
- The State Administration for Market Regulation has restricted access to management and shareholding information for those without Chinese login information.
- The Chinese government has decreed that third-party databases can’t provide information to foreigners and enforces a block on foreign IP addresses (including Hong Kong and Taiwanese addresses)
For U.S. businesses and investors, this means navigating a complex web of regulations to ensure compliance while attempting to access necessary information. And, for international due diligence firms looking to vet Chinese companies’ legitimacy, this means taking extra sidesteps and maintaining a comprehensive awareness of the market’s state.
Some global background check firms, including Vcheck, are using a newly approved provider of Chinese company registration. Unfortunately, not all firms are aware of the new provider, and some, as seen in the case of Mintz, are facing severe consequences.
Additional Challenges to Foreign Due Diligence
China poses investors and businesses with a two-pronged problem: While the area is rich with opportunities, China leads the world in Foreign Corrupt Practices Act (FCPA) enforcement actions levied and ranks relatively high in the Corruption Perceptions Index. In other words, China’s corruption index indicates a need for thorough international due diligence and background checks, but China’s regulatory landscape complicates this need.
Nevertheless, China’s regulatory landscape is one of the many challenges in conducting foreign due diligence in the region. The country’s linguistic challenges, unique media landscape, and other cultural factors create barriers that complicate this essential process:
Linguistic Challenges to International Due Diligence
The Chinese language is another challenge–one many overlook. Mandarin is ranked among the most difficult languages for English speakers to learn. If someone were to sit down and try to learn it, it would take over 2,200 hours to become fluent in Mandarin.
Every detail matters in thorough international due diligence. Not only is the language difficult to learn, but translation tools are insufficient, too: These tools rely on a literal translation, meaning they can’t account for cultural contexts and implied tones, which are crucial for research in Asian countries.
In Mandarin, many words are simultaneously nouns, verbs, and adjectives, depending on their use. Also, tones are crucial in Mandarin and nearly impossible to catch without a native background.
The Chinese language poses another crucial risk to U.S. due diligence firms without native speakers who can catch what translation tools miss. At Vcheck, we have linguistic experts covering over 135 countries to ensure clients have the most precise and relevant information possible to make better business decisions.
Media Barriers
Vcheck’s investigators rely on inside intelligence to conduct their international background checks. One example is using Baidu, not Google, to conduct research. Baidu is China’s most widely used search engine and is available to U.S. users but not in English, highlighting the importance of native-speaking investigators.
Baidu’s homepage.
Additionally, investigators conducting media research should use specific Chinese search strings, known as ‘dirty word strings,’ to find adverse information.
Cultural Barriers
Beyond those discussed earlier, Chinese culture represents another potential barrier to business and due diligence in the region. Chinese cultural attitudes toward information sharing differ significantly from those in the U.S., primarily when that information or documentation discusses performance, ownership structures, and operations.
Additionally, Chinese companies generally prefer secrecy and may be unlikely to trust outsiders. Aligned with this are certain aspects of Chinese business culture, which highly values personal relationships, referred to as ‘guanxi.’ In other words, building trust is paramount, especially before exchanging sensitive information.
This isn’t the case for all Chinese firms, but due diligence remains a prominent challenge in the region. Chinese companies’ reluctance can make gathering comprehensive data more difficult for firms without native speakers and discreet sources.
Many barriers impede due diligence in China, including legal complications, cultural obstacles, and political issues. As previously stated, navigating these barriers requires thoroughly understanding these disparate factors and the tools necessary to bridge them. Despite these challenges, comprehensive due diligence is essential for mitigating risks and making informed investment decisions in China’s dynamic and rapidly evolving market.
Vcheck’s human-led, tech-enabled due diligence methodology more accurately pinpoints risk internationally, clarifying the foreign investment landscape. Since the beginning of the year, Vcheck has conducted over 330+ investigations in China.
Contact Vcheck to learn more about our international due diligence capabilities and to protect your firm from potential risk.
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