How to Avoid China Prisons: Know YOUR China Risks

Toxicologists will tell you that everything is toxic; it is just a question of quantity. I will tell you that every foreigner and foreign company is at risk in China; it’s just a question of how much.

The New York Times just did a story on two Americans in “the latest in a series of prosecutions that add to a growing sense of unease among Americans and other Westerners in China.” The two are “being investigated for “illegally moving people across borders,” a crime punishable by at least two years in prison and a fine, though it appears all they really did is recruit English teachers to come to China. I say “appears” because I have no facts regarding this particular case, but that is what I have gathered from reading about it.

The article goes on to note a couple of well-publicized detentions of Americans in China and how the US State Department has issued a travel advisory, warning Americans “that they may be prevented from leaving China is they go there”: In June, a Koch Industries executive was held in southern China and interrogated for several days before being allowed to leave the country. Last month, a FedEx pilot was detained on charges of weapons smuggling. Though he was quickly released on bail, he remains under investigation and has not been allowed to leave the country.

The article then quotes me as follows:

“China has become a risky place,” Dan Harris, a lawyer at Harris Bricken, a firm that specializes in investment with China, said in an email. “If you are going to do business there you had better know what the laws are and you had better follow them, because China is not going to let anyone slide, especially not an American or a Canadian.  Little things that were virtually ignored for years are leading to foreigners going to jail.”

Like pretty much every country in the world, China enforces its laws unevenly. It is not uncommon for China to enact a law and then not enforce it for a few years and then all of a sudden start zealously enforcing it. Conversely, China will sometimes zealously enforce some of its laws for a while, and then relax its enforcement. A great example of this was how tough Chinese law enforcement was in the run-up to the 2008 Beijing Olympics. It is also always the case that some regions of China will strongly enforce a particular law while other regions do not. China enforces many of its laws depending on who is violating them.  For example, China has always been tougher on foreign companies than on domestic companies in enforcing its business related laws.

Right now what you need to know is that China has never been tougher in enforcing its laws against foreign companies and individuals, especially those from the United States, Canada and the United Kingdom, it has taken it up to eleven.

Let’s talk for a minute about English teachers in China, and if you think that because you are not teaching English in China you can stop reading now, you are WRONG. English teachers in China are THE canary in the coal mine in terms of China’s treatment of foreigners.

Earlier this year, I wrote a blog post, entitled, Do NOT Teach English in China and Why EVERYONE Should Read This, highlighting the following problems English teachers face in China:

  1. Teachers are being drug tested using their hair samples. Many are testing for cannabis and being jailed for 30 days or more and then being deported. This is happening to newly arrived teachers who insist they did not consume any cannabis since arriving in China. Listen up everybody, cannabis can show up in hair testings up to (and even sometimes beyond) 90 days after you have consumed it. So if you are going to be teaching in China and you do not want to spend time in jail and get deported, please, please, please go at least four months without consuming ANY cannabis before you go there and please, please, please do not consume any cannabis while there. None. Zero. Zilch. 没有. Aucun. Keiner.  PLEASE. Invariably, the schools use this as a reason not to pay the teacher whatever is owed.
  2. Teachers are being checked (or reported on) for having an improper visa for China. The teachers are then being tossed in jail and then deported or just deported straight away. Invariably, the schools use this as a reason not to pay the teacher whatever is owed. It appears to have become very common (as a cost cutting measure) for schools to have teachers come to China and start their teaching on tourist visas, all the while claiming this is perfectly legal — it isn’t. The teachers believe this until the day they are arrested. Near as I can tell, the schools rarely if ever get in any real trouble for this but the teachers sure do.

I eventually concluded that it is simply too risky to take an English teaching job in China and encouraged people to go elsewhere:

I have reached the conclusion that the best thing an English teacher can to do protect themselves from the sorts of things mentioned above is not to take a teaching job in China in the first place. Go elsewhere. And if you are teaching in China now, leave now or just resign yourself to your fate. I wish I could give better advice than this but I cannot. Sorry.

Living and working and doing business in China is way more legally complicated than ten years ago and tolerance of foreigners in China (particularly for Americans, Canadians and British) is down. This means that the likelihood of you going astray of Chinese law is considerably higher as well. When you then add in that China’s ability and desire to catch foreign companies and foreigners operating illegally in China is higher now than it has ever been, you can see why it is critical that your company and you are operating in China within the law. If you are not already operating legally, you need to start doing so now and if you cannot, you probably should leave China or not go there at all.  This is the new normal for China. See Want to Keep Your Business in China? Do These Things NOW. 

When similar things happen to foreign company employees in China, it almost never makes the news and there are two good reasons for that. First,  companies do not want the publicity. Second, if your company or employees are in trouble in China, it is a really bad idea to publicize that fact because all that does is cause the Chinese government to get its back up and become even less likely to back down. Trust me though when I tell you things are indeed happening behind the scenes to all sorts of companies and people in China.

Despite all these issues for foreigners in China there are still plenty of foreign companies operating illegally in China, oftentimes because they believe they have “no choice.” These companies commonly note that they’ve been doing what they are doing for years and there are plenty of other foreign companies doing the same thing and nobody has gone to jail. Our China lawyers’ response to these companies is usually something like the below:

You are violating Chinese law by operating this way. China is in open conflict with the United States/Canada and your company will be violating the law in a sensitive area — the Internet — the PRC government has identified as a national security issue. Today’s New York Times discusses what is happening to Americans in China these days and the sort of mistreatment it discusses is far more prevalent than the media lets on. American businesspeople are either afraid to publicly discuss what is happening or they do not wish to do so, but we hear similar stories from American companies all the time. They usually act surprised and a little perturbed for getting into trouble for doing “the same thing we’ve always done.” When we say, “ yeah, but what you were doing is illegal” their response is often something like, “well they [the Chinese government] always did allow it and it’s not like we are the only ones doing this.”

How will it be/look if someone from your company gets detained or if you get shut down and essentially banned from China?

Your company competes with [large Chinese company] in [Chinese city], a city completely controlled by [large Chinese company]. I can easily imagine [large Chinese company] inspecting your url, noting __________________, and then convincing the local authorities to crack down on you in a big way or in such a way to end you as a competitors and to scare away others. This is China….

What exactly should you do to avoid becoming a Chinese shut-down, deportation, or arrest statistic? What exactly does all of this mean for your company if it is doing business in China? What can you do to reduce your risks?

If past performance is any indicator of future performance — and we really don’t have anything else to go on, so we have to assume it is, you should do the following, and fast:

  1. Make sure your WFOE or your Joint Venture or your Representative Office actually exists and is still licensed to do the business it is doing in China. Make sure it is current on its capital obligations. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Make sure your WFOE or your Joint Venture or your Representative Office is actually properly licensed to do business in every city in which it is doing business. It is shocking how often this is not the case.
  3. Make sure your company is doing everything correctly with its employees. Consider an employer audit and note that our China employment lawyers have never done an employer audit without finding multiple problems.
  4. Make sure your company is current with its taxes. If you think it may not be, it almost certainly is not.
  5. Review your lease agreement and the relevant zoning rules. Are you renting from a real landlord? Is it really legal for your business to do what it is doing where it is doing it?
  6. Have a trusted China contract lawyer review your contracts related to your China operations to make sure each and every one of them is legal.
  7. Conduct due diligence on your suppliers/manufacturers, distributors, retailers, and e-commerce platforms. Your risk is going to be influenced by the company you keep.
  8. China has many business crimes that are not crimes in the West. Know these.
  9. Make sure your IP has been properly registered and that your company is not violating a China company’s IP rights.
  10. If your WFOE or your Rep Office or your Joint Venture share is American or Canadian owned, consider forming a new company (“Newco”) in a country with good relations with China and selling the WFOE Joint Venture share or Rep Office package to that Newco.

I could go on and on. None of the above are new, but with what is going on in China today, their importance and their urgency has increased exponentially. Get fully legal. Now.

But what is your risk if you do get legal and what is your risk if you don’t? The answer to this depends on many factors, including who you are, where you are from, what you and/or your company are doing in China, what you have said about China online, and your China history. These are some of the main factors we typically look at in assessing China risks.

What are you seeing out there?