Foreign Businesses in China and Illegality Per Se

When I judge mock trials at law schools, one of the things I find myself criticizing the lawyers-to-be for “talking like a lawyer.” I go after them for describing a person getting out of a car as “a person descending from a vehicle”.  This is my long handed way of apologizing for using Latin in the title.

Knife Tricks blog has a post entitled, Chinese Law Relating To Publishing By Foreigners on my recent post on how foreign companies are allowed to operate illegally in China until the day they are not. As I said in my post:

The problem with operating a business illegally in China is that past history is simply not a good indicator of future performance. We know foreign businesses that have operated illegally in China for 15 years without a problem and we know other businesses in the very same industry that have been shut down within six months of beginning operations. And that is the problem with an illegal business: you just never know when the knock on the door is going to come and when it does, saying that you have gotten away with it for x number of years is no defense at all. There is little that can be done when you are on the wrong side of China’s law.

Rich Kuslan of Asiabizblog makes an excellent comment on foreign companies operating illegally in China. Rich rightly points out that it is not really the “illegality per se” that causes the Chinese government to shut down a company; it is almost always something else in addition to that:

Illegality per se is not the problem. In the case of publishing, the Chinese Communist Party wants control. But over and above that, illegal enterprises are tolerated in China until they start to make money. Thereafter, the threat of shut down is costly to the founders. Heavies from government can then come in demanding a piece of the action — or the whole thing.  Do you see how “illegality,” as an American might understand it, does not really figure in here?

Rich is absolutely right. Foreign companies operating illegally in China are not shut down so much for operating illegally, rather, they are shut down because they are easy to shut down because they are operating illegally and nearly always because of some additional reason, including one of the following:

1. The foreign company is operating in an industry in which the Chinese government does not want foreign companies. Publishing is a great example of that. Foreign owned companies are not allowed to publish in China. An unregistered foreign company is not allowed to sell t-shirts in China either. Though both are illegal, the publishing business is more likely to get closed.

2. Profitable foreign companies operating illegally in China are at greater risk of being shutdown. If you have a successful business in China and you are operating illegally, the chance you will anger someone in government (perhaps by not rewarding someone enough) or someone in your industry (perhaps by competing too well) are simply greater.

3. Foreign companies operating illegally that make people unhappy are at greater risk of a shutdown. Without a doubt the most common triggers my law firm’s China lawyers see for a foreign company getting shutdown in China are the firing of an employee or a dispute with a vendor.

Though all of the above increase your risk of getting shut down for operating illegally in China, the simplest solution (in those cases where a foreign company can operate legally in China) to avoiding getting closed is to get legal. It is usually a “plus factor” that causes a shutdown, not the illegality per se, but without the illegality, the “plus factor” standing alone is very unlikely to lead to your company getting closed down.

What are you seeing out there?

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