China Debt Hostages: Getting Even More Common

China Debt Hostages

The mainstream media has given massive coverage to workers in China holding Chip Starnes, the president of an American company, hostage for alleged non-payment of wages. See The Single Best Way To Avoid Being Taken Hostage In China.

But how common are these foreigners being taken hostage situations and how worried should you be? I was called by three reporters yesterday asking me the commonality question and I told all three the same thing, which was essentially as follows:

We learn of a foreigner getting held hostage in China just about every month. We learn about this from the media (as in the case of Chip Starnes), from spouses and co-workers calling to see what our China lawyers can do to help them, and from readers who email us to report such a situation. My law firm has worked on a handful of these cases over the last five years. They are not terribly complicated in that usually the only choice is to negotiate. We have on occasion brought in local Chinese lawyers to get the police to end the stand-off, but that has never once worked. Heck, in most of the cases we have handled, the police were assisting the hostage takers.

The common theme in every hostage taking we have handled — and, I think, of all those of which I am aware as well — is money allegedly owed for a breach of contract, for wages, or for a personal injury.

As for whether these hostage takings in China are getting more or less common, I see them increasing as China’s economy continues to slow. These hostage situations stem from money allegedly owed and now that China’s economy is in a downturn, we can expect more situations where Chinese companies and individuals believe they are owed money and more situations where Chinese companies and individuals will take hostages to get paid.

Does this sort of thing happen as much outside China? I don’t know enough to make comparisons, but I assume this sort of thing goes on in most emerging market countries.  I know it has happened in Vietnam and I know of someone who was held upside down out a third floor window in Moscow until he agreed to pay a dubious debt. So yes, it does happen outside China too.

So what is the answer then about the numbers? Who really knows? But what I find so interesting is the initial response a China risk consultancy friend based in Shanghai gave to one of the reporters that contacted him as well as me (I was cc’ed on the email):

We work on several cases of unlawful detention like this per month (and, depending on the month, sometimes several per week). This kind of thing is that prominent in China these days.

How worried should you be? Not that worried and here is why

First off, not a single client of my firm has ever been involved in a China hostage situation. Every time my law firm has been to assist on one, it has been for a new client. And much of the time, our law firm’s assistance consisted of little more than telling the company it would be better off paying the USD $100,000 claimed, as opposed to paying my law firm to try to contest the amount owed while their employee remains guarded in an office somewhere in China by three men or in jail for an indefinite stretch. But the real point is that all of our own clients have avoided this problem because they simply do not go to China when there is the risk.

Just the other day, a client of ours called us while he was walking down the street in a smaller Chinese city. He told us he had gone there to look into what his company should do now that one of its suppliers had just shut down. During the conversation we learned that the Chinese company had shut down owing its employees a ton in back wages and our client was calling to discuss our law firm assisting his company in buying the factory. We quickly told him to leave town. NOW. We explained how if he went to the factory and explained who he was, the workers very likely might kidnap him. We told him of how we have seen and dealt with exactly this more than once.

Foreign company buys product from Chinese company. Chinese company shuts down and foreign company goes to Chinese factory to see what is going on and to see if the products it has already paid for might be sitting in inventory. Chinese workers learn of the foreigner in their midst and grab him or her and demand the foreign company pay the outstanding wages. The foreign company explains how they too have been hurt by the shutdown and they certainly do not owe anyone in China any wages. The Chinese workers see things very differently. They worked hard to make product for the foreigner and the foreigner got the product and the workers never got paid and so now the foreigner must pay the workers and if it does pay, the workers will free the hostage and the company will get its products. That the foreign company already paid once for the product is irrelevant.

Anyway, our client left that small town safely.

Not only are these hostage situations generally preventable, but (and I know this is only small solace) these situations in China do not typically involve violence in that the person taken hostage is usually not beaten nor killed. I am not saying violence never happens, because it absolutely does. But should you be so worried about being taken hostage in China that you do not conduct business there? No. Should you at least consider the possibility of a hostage situation? Yes, you absolutely should at the first sign of any sort of potential dispute.

What do you think?

UPDATE:  One of the articles for which I was interviewed just came out and I was provided a copy of it by Bloomberg BNA [hidden behind a paywall].  I was provided with a pdf of the article and I have been permitted to highlight the portion of this article quoting my Shanghai risk consultancy friend, who I can now reveal to have been Kent Kedl of Control Risks. Kent discussed the commonality of these China hostage situations and the benefits of thinking and planning before acting when a hostage situation is possible:

The commercial element of the Starnes case is “typical” of other hostage situations in China, which are increasing as the economy slows, according to Kent D. Kedl, the Shanghai-based managing director for Greater China and North Asia for Control Risks, a global risk consultancy based in London. ”

“We work on several cases of unlawful detention like this per month — and, depending on the month, sometimes several per week,” Kedl told BNA in a telephone interview June 26. Unlike countries such as Mexico and Nigeria, it is extremely rare in China for a company executive to be kidnapped and held for ransom, Kedl said. In China, cases usually arise because of a commercial dispute, which may involve a company’s employees, distributors, suppliers, or other affiliates. “It’s someone who gets upset and doesn’t know what to do,” Kedl said.

Control Risks has seen a “sharp increase” in hostage situations in China in the past two years, Kedl said, and has seen an increase in threats and actions against company management and foreigners. Kedl attributes the change in part to China’s slowing economy, as companies reassess their businesses in China and in some cases start to restructure–news that often comes as “a shock” to workers. Restructuring “is an anathema to most Chinese employees,” said Kedl. “It’s been nothing but growth for the past 10 years. In China, business hasn’t come and gone. It has only come.”

Companies need to think through all aspects of a downsizing or restructuring, including the compensation strategy, the communications strategy, and relationships with local officials before they undertake a restructuring, Kedl said: “It is the company’s responsibility to think through what they’re doing and think through what could happen.”

I agree.

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