Beijing’s sudden crackdown on consultancies and due diligence firms has not only sent a chill through those firms’ offices: It’s added to the confusion for multinational companies about their future in China.

The Chinese government effectively made its campaign against the alleged sharing of sensitive information official this week, when state broadcaster CCTV aired a prime time segment showing police raiding the offices of Capvision, a consultancy headquartered in New York and Shanghai. That followed recent news that security officials are investigating other companies, including American firms Mintz Group and Bain & Company. 

For the foreign business community, the most puzzling question is: why now? Just seven weeks ago, China’s new premier, Li Qiang — who had gained a pro-business reputation in his previous roles — vowed to keep the country “unswervingly” open to international investors. 

Companies that took such words as a cue to double down on post-Covid investment plans are now having to grapple both with the practical implications of Beijing’s latest crackdown, and the mixed messages from different parts of the Chinese system. 

From a state security perspective, [Beijing’s] concern is people putting together pieces of information to draw a larger conclusion that is at odds with China’s current interests.

Lester Ross, chair of the American Chamber of Commerce in China’s Policy Committee

“There are two silos with different key performance indicators,” says Jörg Wuttke, president of the EU Chamber of Commerce in China. “In one silo are the economic ministries and city governments which have to get the economy going again. They have been laying out the fluffiest and brightest carpets possible, asking us again and again: where can you invest?”

“The [other] silo, called security, possibly got told that access to information has to be more limited… And I’m not sure these two silos actually talk to each other,” he adds.

The suspicion of data providers and due diligence firms in parts of the Beijing security apparatus stems from long-held concerns about preventing so-called ‘state secrets’ falling into foreign hands. But for overseas companies, the services such firms offer are a vital aid in ensuring they comply both with local Chinese regulations and their own home laws.

Companies headquartered overseas will often, for example, use Chinese databases that provide company registry information to understand more about suppliers and potential business partners. Shanghai-based Wind Information Co. has long been a leading provider of Chinese economic and financial information. The Chinese authorities have, though, reportedly restricted access to such platforms since mid-2022. 

For multinationals looking to scrutinize their China operations, “a really key component is the ability to do remote compliance and due diligence,” says Virginia Newman, a lawyer who specializes in corporate compliance at Miller and Chevalier, a Washington D.C. law firm. Company registries — or specialist vendors that aggregate data from them — are “often the first step that companies go to for corporate due diligence; looking at a sophisticated database of the suppliers they work with, as well as those suppliers’ corporate family trees.”

For companies which operate both in the U.S. and China, compliance requirements have become more complex thanks to legislation like the Uyghur Forced Labor Prevention Act (UFLPA), which mandates that firms operating in the U.S. prove their supply chains don’t contain goods made with forced labor in Xinjiang. Beijing regards Xinjiang-related audits as crossing a red line, and has cracked down on domestic firms helping to conduct them. 

“Companies have grown to accept that doing UFLPA-related investigations in China are off the table,” Newman says. “But there are a whole host of other reasons why you might want to hire a due diligence firm, such as for anti-corruption or [Foreign Corrupt Practices Act] compliance.” Under the FCPA, a more than four decade old law, American companies can be held liable for corrupt activities they engage in abroad.

If you look for the single biggest change in the intelligence industry in the past 20 years, it’s the rise of open source intelligence.

Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise

Within China, meanwhile, the country’s recently revised counterespionage law has added to corporate confusion. Under that law, which was passed in late April, any foreign entity — and anyone who aids them — deemed to be gathering information relevant to Chinese national security risks being prosecuted for espionage. 

“From a state security perspective, [Beijing’s] concern is people putting together pieces of information to draw a larger conclusion that is at odds with China’s current interests,” says Lester Ross, chair of the American Chamber of Commerce in China’s Policy Committee. 

Further muddying the waters is the fact that researchers at due diligence firms and elsewhere have gotten smarter about using publicly available information to report on sensitive areas, from human rights issues to the state of China’s tech sector. What Beijing views as a ‘secret’ may in practice be something openly available information for those who know where to find it. 

“If you look for the single biggest change in the intelligence industry in the past 20 years, it’s the rise of open source intelligence,” says Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise. “The nature of open source is it’s not always obvious what you’re giving away. And China doesn’t want that. It wants controllable information.”

Chinese authorities haven’t said exactly what activities are being cracked down on, and this isn’t the first time that those in the sector have landed in trouble. Companies like the Mintz Group, which specializes in corporate investigations, have a reputation for information gathering practices that venture into sensitive areas. So far, other due diligence firms that focus on general due diligence work, such as for corporate deal-making, don’t appear to have been disrupted.

A spokesperson for Mintz Group said the company “believes it has been in compliance with applicable laws and regulations in China, where it is licensed to conduct business and has operated transparently and ethically for more than a decade.” 

Moreover, business groups emphasize that Chinese officials at the local level are throwing open the doors to foreign investment. “They have never been as open as they are now,” says the EU Chamber of Commerce’s Wuttke. “The European business community has access to the highest level of regional leadership, from the party secretaries to governors and mayors. They are all about doing more business, more technology and more research.” 

On Thursday, France’s foreign minister and her Chinese counterpart agreed to strengthen economic ties between the two countries.

Still, for AmCham China’s Ross, Monday’s CCTV broadcast on the Capvision investigation underscores an additional risk factor arising from the recently-revised counterespionage law — namely, the responsibilities of Chinese employees working for foreign companies. The state broadcaster interviewed two thinly anonymized Chinese Capvision employees, who testified about Capvision’s internal operating practices. 

“The big question is, what does this mean for Chinese employees?” Ross says. “Will they be expected to act as conduits to the Chinese authorities, what does that do to your trust in them? Now, there is a somewhat greater risk that your employees may agree in their own interest to share information with authorities about the company itself.” 

This is the question at the heart of the issue: Is it possible to operate in China in accordance with your home country’s laws, if compliance activities in China are restricted?

Virginia Newman, a lawyer at Miller and Chevalier

As the space for open information in China steadily narrows, the ultimate concern for foreign businesses is that there may come a point when firms can no longer square their obligations to perform due diligence and supply chain audits — whether for legal or ESG reasons — with China’s growing refusal to share critical information.

Whether the recent crackdown has brought businesses to that point is too soon to tell, Wuttke says. Nonetheless, that isn’t stopping companies from accelerating contingency plans in case it becomes a reality. 

“This is the question at the heart of the issue: Is it possible to operate in China in accordance with your home country’s laws, if compliance activities in China are restricted?” says Newman. “Every single company that has operations or supply chains in China is to some extent asking that question right now.”

Correction: A previous version of this article incorrectly stated that Bain Capital, not Bain & Company, has been targeted by Chinese authorities for investigation.

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