The Chinese media has lately been replete with stories about corruption investigations against Huang Xingguo, former acting Party chief and mayor of Tianjin Municipality. Whenever I read about something like this, I always wonder how many foreign companies will get caught in the crossfire.
How does that happen? Let me explain with an example of a China law story I never tire of telling.
Many years ago, an American company retained my law firm to form a WFOE in a fairly remote China city. Remote in terms of foreign companies anyway. This American company had a Chinese General Manager based in that remote city on whom it relied for pretty much everything. Very early on in the WFOE formation process, it became clear to our China lawyers working on the WFOE formation project that there was (and would continue to be) tension between how our China lawyers wanted to form the China WFOE and how the Chinese General Manager wanted to form the China WFOE. You see, we wanted to form the China WFOE completely by the book, but the Chinese General Manager viewed us as naive and kept insisting that he could do it much faster and with virtually none of the formalities because he had friends in the government. So we put it to the owner of the American company: either give us full control over how this WFOE formation is going to be done or just fire us. Because having us involved and paying lawyer fees to do the WFOE formation “the Chinese way” (the General Manager’s term, not mine) makes no sense at all. The American company agreed with our assessment and told us that it had to go with its General Manager because without that person it would have no Chinese company. We parted on shockingly amiable terms.
So amiable in fact, that about two years later the owner of the American company wrote me to say that though it had managed to get the WFOE formed really easily and really quickly, Beijing had come in and audited the local government and shut down a bunch of improperly formed WFOEs, including theirs. Beijing had come in after terminating a whole crop of local government officials for corruption and then, as it so often does, it throws out a fair amount of the bath water (our client’s WFOE for instance) with the bath (the officials who were terminated and jailed). This sort of thing goes on all the time in China.
So if you have a Tianjin WFOE now would be a good time to go back and figure out whether you have one that is legitimate enough to withstand what looks like will be coming down the pike. And if not, you should do whatever you can to shore it up or even just prepare to have to tear it down.
Bottom Line: If you are not operating legally in China, there will come a time when you will pay the price for that. Going after American companies operating illegally in China is low hanging and lucrative fruit for the Chinese government and it is just one of the ways we see China retaliating against Trump. The Chinese government has stepped up its law and order efforts and that has meant that time is coming more often these days for foreign companies doing business in China. China’s Tax Authorities Want You.
Can Your China WFOE Survive the Local Mayor’s Arrest?