3rd Annual Consilio APAC NYC Conference: Caught in the Crossfire: Navigating regulatory, transactional and litigation risk in light of current US-China relations
April 29, 2019 – Fordham School of Law
Session Description: You can’t be a consumer of media these days without hearing something about US-China relations. Trade wars, sanctions, arrests, and competing regulations– it is easy to see how companies doing business in both countries could become caught in the crossfire. But how do you navigate the contours of this delicate multi-national relationship, when the political climate has created so many constantly moving hazards? We have gathered a panel of experts who will speak to risks that companies and individuals doing business with China face, and how to avoid common pitfalls. Among other things, we will discuss US-China business trends, new U.S. regulations including in the AML and economic sanctions space, the impact of tariffs and new regulations on U.S.-China business, data protection and privacy issues relating to cross-border discovery, and other legal and regulatory risks.
How do companies and law firms today navigate the contours of the delicate US-China relationship? How has the political climate affected business? What concerns are you hearing from your clients? These were a few of the questions we gathered together to discuss last Monday, April 29 (a beautiful spring day, to contrast for those of you who have attended in years past!). We were graciously hosted by Fordham Law and joined in support by both the AABANY and the CBLA. Our esteemed moderator, Geoffrey Sant of Pillsbury Winthrop, set the stage for the panelists – he would ask some questions of them each, and would also welcome audience participation. For the next 90 minutes, each panelist (from left to right seating arrangement – Karen King of Paul Weiss, Che Lai Chang of East West Bank, Brian Burke of Shearman & Sterling, Bill McGovern of Kobre & Kim, and Jon Shaman from Consilio) took turns describing their roles within their firms or companies, and how those duties are affected by US-China relations. We covered far too much to recount all that was said, but here are some of the points that really hit the “bullseye” for this timely topic. Please see highlights below from each panelist.
On the litigation front, there are an increasing number of U.S. litigations involving Chinese companies and one topic that arises frequently is long-arm jurisdiction—what type of activity in the U.S. and in the state can give rise to jurisdiction over a foreign entity. As the U.S.-China political relationship fluctuates, you also get a rise and fall in certain types of litigation. For example, CFIUS (Committee on Foreign Investment in the United States) approval is extremely difficult these days. We have seen an uptick in disputes over transactions that have fallen apart because CFIUS approval was not granted by a contractual deadline. Another big area of concern is cross-border discovery, which involves conflict of law and comity principles. We’ve seen a number of examples where U.S. courts have ordered production of documents despite prohibitions under PRC law because the designated avenues for obtaining documents from China are deemed ineffectual.
On the regulatory front, there is definitely increased focus on foreign financial institutions with a U.S. branch or subsidiary. In the BSA/AML (Bank Secrecy Act / Anti-Money Laundering) and economic sanctions space, U.S. regulators were previously focused on U.S. banks, then European banks, and now it seems that Asian banks are the new target. Many of the largest financial institutions in the world right now are Chinese, and China stands in the middle of U.S. foreign policy objectives with respect to North Korea, Russia, and Iran, among others. One common challenge for Chinese financial institutions is understanding the reach of U.S. regulators. There is a tendency to try to contain U.S. compliance requirements and policies to the U.S. branch. But from the U.S. regulator’s perspective, the U.S. branch is the destination of risk. So when the Head Office and domestic Chinese affiliates are sending transactions to the U.S. branch, the obvious question is—what KYC (Know Your Customer) standards were applied and what visibility does the U.S. compliance team have in order to properly screen and assess the risk of the transaction? This is just one of many areas of growing scrutiny.
Karen King, Counsel at Paul Weiss, has extensive experience handling a wide range of complex commercial matters, including BSA/AML and OFAC matters, private securities litigation and arbitration, regulatory investigations and enforcement proceedings, corporate internal investigations and commercial litigation.
Che Lai Chang
Cross border transactions between the U.S. and China carry many risks and challenges. In general, many challenges stem from obvious differences in culture, mindset and dealing style. More specifically, based on my experience in working with U.S. companies doing business in China, as well as Chinese companies doing business in the U.S., majority of companies have very limited knowledge of how the banking system works outside of their home country.
We often see U.S. companies not aware of basic Chinese banking regulations, resulting in all sorts of registration process delays and capital injection/repatriation related issues. Likewise, the majority of Chinese companies doing business in the U.S. are not familiar with the U.S. banking products and services. For example, Chinese companies are not aware of general working capital financing the U.S. banks provide that can be a tremendous help in growing their U.S. operations. Typically, Chinese companies assume that bank loans in the U.S. need to be secured by hard assets such as real estate, which is what they are used to. The concept of bank loans secured by Uniform Commercial Code (UCC) blanket lien on the company’s U.S. assets, mainly accounts receivable and inventory is brand new to them.
In 2018, China’s foreign direct investment into the U.S. fell to just about $5 billion – a massive decline from $29 billion in 2017 and $46 billion in 2016. Unfortunately, every new cross border transactions carry significant compliance and capital control risks which often deterrents for parties involved. If you are financing the transaction, you must always start your process by asking yourself, “How likely can this deal get done?” to avoid wasting your precious time and resources.
Che Lai Chang is Senior Vice President with East West Bank and is responsible for commercial banking relationships with middle market companies, including inbound Chinese companies for the Eastern region.
China is no longer deliberately focused inward. As a result of inviting more outside investment in China, more companies than ever have China business issues. This environment could be exciting to practitioners while being viewed by clients as risky or challenging.
A new law, the International Criminal Judicial Assistance Law (ICJA) – essentially a blocking statute – says what information and conduct are allowed when providing information to a foreign criminal investigation. If the ICJA is triggered, you can not provide information pursuant to that investigation without a Chinese governmental review. However, the ICJA is silent on penalties. While at the onset, this may seem like it indicates a lack of teeth, when no penalties are proscribed from a Chinese law, normal Chinese penalties apply. If the conduct at issue implicates national security concerns, then the charge will go before the State Council, which essentially has limitless enforcement and punishment power to punish. You also have to consider the Archives Law and State Secrets Law rules. The ICJA is more proscriptive and directive than either of those regulations. With the ICJA, you need to ask who is seeking the information from China. If the requestor is at all related to a criminal investigation, you can not send that information out of China without a governmental review. Civil cases – such as class actions or contract cases, are unlikely to implicate ICJA, unless they involve a parallel government cause of action, for example, something like allegations of price fixing which can give rise to both civil and criminal claims.
There is no good solution, there is no quick fix. We haven’t seen ICJA tested yet, but there have been cases where multinationals argued that producing evidence in proceedings brought by the U.S. government would violate Chinese law. Specifically, the Big 4 auditing companies were ordered by a U.S. administrative judge to produce the work papers from their audits of Chinese companies, but they refused to do so because those work papers were stored in China and the Big 4 argued that they could not be provided beyond China because of the Chinese Archives Law. The judge, however, found that they chose to engage in business in China, and therefore were required to produce the records. They were also fined and faced the possibility of losing their auditing licenses.
Of course, there are options for dealing with potentially criminal matters within your own company, even before investigators come knocking. Does that make you immune to the requirements of the ICJA? Afraid it is not that easy – even if you approach an agency that does not directly possess criminal charging power, such as the SEC, their referral power to the Department of Justice may be enough to trigger the ICJA. Companies also need to be aware that during internal investigations, the usual rules about moving information out of China like the Archives Law and State Secrets Law still apply, even when you are only talking an internal matter
So, what are the solutions? Diplomatic negotiations? Inter-government agreement? Memorandum of Understanding (MoU)? Mutual Legal Assistance Treaty? We will wait and see what solutions crop up.
Audience question: Are there Chinese cybersecurity laws?
Yes, there is the Chinese Cybersecurity Law, which some say is arbitrarily, though not capriciously, enforced. It covers not just movement of data, but also website content. For instance, last year, Chinese internet officials showed up international companies’ Chinese office locations and demanded that changes be made to the companies’ website to reflect China’s geography as including the PRC, Hong Kong, and Taiwan, instead of listing those as three different countries.
Brian Burke is Shearman & Sterling’s Asia Litigation and Investigations practice head. He has conducted investigations in China, Hong Kong, Taiwan, Japan, South Korea, India, Singapore, Indonesia, Thailand, Malaysia and Vietnam. As a fluent Mandarin speaker, Mr. Burke has a particular focus on advising multinationals with operations in China in the areas of FCPA/anti-corruption, antitrust, shareholder litigation, anti-money laundering and other compliance and investigative matters.
The Department of Justice China initiative, led by the FBI, is extremely broad. It means there is a severe threat of aggressive investigation for among other things, the stealing of trade secrets. Trade secrets used to be a private commercial matter and is now a high priority for the Department of Justice. Though they have 10 stated objectives, the most prominent seem to be surrounding enforcement strategies against indirect actors or campus influencers.
I see two major risks: There is less negotiation in today’s climate, which increases the risk for US companies. State secrets are industry dependent and greatly affect the oil and gas industry. And secondly, where the data is stored. Companies should ask themselves: where is the document? Did it already leave China? Is there information on WeChat? WhatsApp? Who owns these documents and where are they held? The more owners and devices you have, the higher the risks.
William McGovern is an attorney at Kobre & Kim, with a focus on high-stakes cross-border government enforcement and investigation matters, with a particular emphasis on matters with an Asia nexus.
Consilio provides legal support services in China, working at the direction of the client and outside counsel to collect data, assist with State Secret and Relevance reviews, and often export the reviewed data out. We do not operate as a law firm and we do not provide legal advice. We need to be cognizant, however, of the laws in China to ensure that we protect ourselves, and sometimes our clients.
The Chinese authorities are the ultimate arbiters of what is permissible, even retroactively. We understand we can never insulate ourselves completely from potential liability. We have procedures and documentation in place to mitigate risk as much as possible, in particular at the collection and export stages. We also make sure that when we are asked to perform certain tasks, we involve in the decision-making persons who are knowledgeable about the local laws, and appreciate the legal consequences.
The predominant form of communication in China takes place in WeChat, exceeding email even for business purposes. Chinese citizens use WeChat in nearly every aspect of their daily lives. The most common questions we field from Chinese clients and counsel regards the collection of WeChat data.
Jonathan Shaman is Vice President of Consilio. He directs Consilio’s international Managed Review team, operating in the United States, Europe, and the Asia. Prior to joining Consilio, Jon spent 12 years as a practicing litigation attorney at Constantine Cannon where he was a senior associate and the firm’s director of Information Technology. He holds a JD from the New York University Law School.
The session was moderated by the esteemed Geoffrey Sant, partner at Pillsbury where he is known for his extensive experience in representing both Chinese and U.S. financial entities, Geoffrey represents some of the world’s largest banks, investment companies and businesses in both litigation and transactional matters. He has successfully obtained the dismissal of lawsuits against major Chinese banks and businesses, including obtaining the dismissal with prejudice of a litigation seeking over one billion dollars in damages.
Sant recently published a perspective on the “conflict of laws when seeking documents from overseas in violation of foreign laws” in an article titled, “Courts Increasingly Demand That Businesses Break the Law” in the Akron Law Review available at: https://ideaexchange.uakron.edu/akronlawreview/vol52/iss1/4/.