In China, foreign consultants are learning to expect a knock on the door.
First, police raided the Beijing office of US due diligence group Mintz in March. Weeks later, there was a similar visit to the Shanghai premises of Bain, the blue-chip US consultancy.
Police have also visited one of the China offices of expert network Capvision, according to at least four people familiar with the matter, as part of an emerging number of raids on international consultancies operating in the world’s second-largest economy.
Information on the raids is scant — Bain and Mintz have provided few details, while Capvision has not commented, although one person familiar with the matter said police visited its Shanghai office.
While Bain is known for its management consulting work, the incidents at Mintz and Capvision — a network whose members are available for chats with clients about an industry they have worked in — have thrown the spotlight on the world of corporate investigations in China, which also includes companies such as Control Risks, Kroll, FTI and Blackpeak.
Even in ordinary times, due diligence is inherently risky in China. The risk assessments those groups conduct, which are crucial for foreign investors, almost always involve research into non-public information of companies and their key managers.
But with President Xi Jinping’s government fighting a trade and tech war with the US and facing pressure over issues such as human rights in Xinjiang and Hong Kong, due diligence work in the country is becoming more vital — and more hazardous. Last week, the Communist party broadened the scope of an already expansive espionage law to include “all documents, data, materials and articles concerning national security and interests”.
For foreign companies, the raids threaten their conduct of due diligence through consultants or their own staff, hampering their ability to invest just as Beijing tries to woo them to revive an economy hit by Covid-19 controls.
“A lot of the fund managers I know won’t go [to China] any more,” said Anne Stevenson-Yang, founder of J Capital Research, a US and Hong Kong registered independent research group. She said many had internal policies preventing staff from visiting the country.
Among the worst hit of the consultancies raided was Mintz, with police in March detaining five local staff for undisclosed reasons. When the Financial Times visited Mintz’s office in a Beijing business park shortly after the raid, there was no sign of activity and the glass doors were locked with a heavy chain.
The Mintz shutdown follows growing suspicion in Beijing of the due diligence industry, which frequently uses methods familiar to spies and private detectives, according to current and former executives in the sector. Corporate investigators would pretend to be headhunters to get executives to talk about former employers, several people familiar with the practices said.
China’s security agencies, including the feared Ministry of State Security, have traditionally kept a close watch on the companies and “are constantly in touch with the industry”, said one executive. “We call them the ‘men in black’.”
Under Hu Jintao, Xi’s predecessor, the due diligence groups felt they had ample space to operate and that authorities understood their importance to foreign investors.
“For the longest time, before Xi came to power, there was a tacit understanding that they knew what we are doing, but they also knew that the spy companies were the gatekeepers for money,” the executive said.
That sense of a mutually beneficial relationship is gone. People in investigation consultancies and some of their clients said stricter regulations regarding information, such as the anti-espionage legislation and rules barring the transfer of personal data of Chinese citizens abroad, as well as informal communication to industry players, were drastically narrowing their space to operate in China.
A person familiar with the industry said companies complying with instructions that they should no longer pull personal information from hukou files — China’s household registration system — had been on safe ground.
“Doing due diligence on individuals has always been a big no-no,” said Shaun Rein, founder of China Market Research. “Chinese authorities have made it very clear that this is a red line. If a person is being researched, they can make a complaint.”
But another person familiar with the due diligence groups said the government had now gone further and “drawn a whole web of bright red lines that you can get very easily entangled in”. US sanctions had created massive demand for vetting of supply chains. “But Beijing is telling us to not touch that business,” the person said.
Multiple sources said checking supply chains to ensure they did not involve forced labour from Xinjiang, a big supplier of textiles, was one such problematic area. Advice on how to restructure technology supply chains to reduce dependency on Chinese sources was another.
Two people said Beijing moved against Mintz because the company had taken some of the untapped business for Xinjiang supply chain audits. Mintz declined to comment.
Those who believed only riskier work would attract trouble were surprised by the Bain case, one investigator said. “If it can hit Bain, it can hit anyone.”
One consultant working for an international group in China said police “visits” and investigations were not uncommon and were often related to specific clients or projects. What is “a bit scary” now, however, was the new counter-espionage law, with a broad scope that would allow authorities to apply it to almost any area, he said.
The revision to the law passed last week prohibits “collaborating with spy organisations and their agents” and conducting cyber attacks against state entities. Particularly troubling, according to a note from the US-based Institute for the Study of War, is its broad definition of “agents”.
“This may grant the [Chinese Communist party] access to sensitive company data or trade secrets under the guise of preventing foreign cyber espionage,” it said.
Ultimately, if Beijing cracks down too hard there could be a chilling effect on foreign investment. “It’s hard to attract capital if you can’t get a report from a global due diligence firm,” said one international services executive.
That could run counter to the government’s efforts to revive animal spirits in China’s economy, consultants and investors said.
“Maybe this is the intention,” said the head of one consultancy in Beijing, “to choke off investment and get the state to step back in, to stop the ability of investors to place bets.”
Reporting by Kathrin Hille in Taipei, Joe Leahy in Beijing, Primrose Riordan and Eleanor Olcott in Hong Kong, Edward White in Seoul and Demetri Sevastopulo in Washington