WEBINAR RECAP: Navigating Political Risk to Business Operations and Supply Chains in China

PANELISTS Martin Purbrick, an extensively-published author on Asian affairs and the owner of Purbrick & Associates Ltd, a political risk and gaming compliance advisory firm with a strong focus on China. Martin has worked in managerial and leadership roles in corporate security and integrity risk management for over three decades. Michael Short, a successful Vancouver-based entrepreneur specializing in risk data and background screening in international markets with over 30 years of China and Asian business experience and a background in law enforcement in the region. Mike serves as a senior executive advisor at Integrity Risk International. Mini vandePol, who heads of Baker McKenzie’s Asia Pacific Compliance and Investigations Group. Her professional engagements focus on a variety of ESG risks including sanctions, anti-bribery and corruption, human rights violations related to supply chains, and significant financial misconduct. HOST Iain Johnston, Senior Vice President and APAC Region Head, Integrity Risk International.

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According to the Harvard Business Review, although COVID-19 has dominated the news for most of 2020, a deepening US-China rift with far-reaching implications is unfolding as geopolitical tensions between the two global economic powerhouses escalate and evolve. Three leading geopolitical, compliance, legal, and business intelligence experts recently took part in an IntegrityRisk-hosted webinar to explore both sides of this challenging coin: the evolving de-globalization political drivers and their practical implications for regulatory compliance. The video recording of the full webinar is available here and highlights from the discussion are below.

Political and Business Operational Flash Points in China

• Martin Purbrick provided an overview of China’s political landscape, noting that the outlook of the country has dramatically changed in the past few years under the leadership of Xi Jinping. He noted that overall, firms that have in the past navigated the risk of doing business in mainland China can adapt to the shifting situation.
• Purbrick noted that the governing system in Hong Kong has been changing steadily over time, with greater involvement of Central People’s Government agencies since the early 2000s. There is a perception that today there is a more arbitrary implementation and interpretation of different laws, and although the primary drivers are political, there is an impact on business.
• “Business risk and compliance management in Hong Kong by Western international companies,” said Purbrick, “should now be treated on the same level as mainland China.” He noted that the same policies and procedures that have been utilized in China should be aligned, although not necessarily replicated, when conducting business in Hong Kong.

“Business risk and compliance management in Hong Kong by Western international companies should now be treated on the same level as mainland China.” — Martin Purbrick, Purbrick & Associates Ltd

• Purbrick reviewed the pillars of current US policy concerns, as articulated by Secretary of State Pompeo: economic espionage; Chinese propaganda in the US and elsewhere; intellectual property theft; repression in Hong Kong and Xinjiang; and military expansion in the South China Sea.
• The panelist noted that the tangible concerns expressed by the current administration echo a perspective that’s been around for some time. In that vein, Purbrick commended the work of China expert/author Michael Pillsbury who wrote that: “Trade and technology were supposed to lead to a convergence of Chinese and Western views on questions of regional and global order. They haven’t.” Pillsbury, added Purbrick, stated that China actions contradict any peaceful or productive intentions, and he recommends US policies and strategies to compete with China.
• Purbrick said that supply chains and manufacturing in China have been diversifying away from coastal provinces to inward regions and other parts of Asia for the past decade due to rising costs. He quoted a Financial Times article citing surveys conducted by the American Chamber of Commerce in China over the past two years indicating that about 40 percent of US companies in China have moved manufacturing facilities out of the country already or are considering doing so. The political rhetoric from the US about “de-coupling” from China is a reaction to, and follows the diversification of, economic investment in China by companies with supply chains to manufacturers elsewhere.

Security, Shifting APAC Supply Chain Sentiment, and Corruption Risk

• Michael Short emphasized how mounting political tensions may give rise to some extraordinary security risks that impact the global business community in China, noting the high-impact/low-probability risk of “captive diplomacy” that recent events have brought to light. He described the fate of two Canadian businessmen, accused of ‘spying,’ who were arrested by PRC authorities and remain in detention without access to their attorneys.
• The concept of what constitutes a PRC state secret, he explained, has created confusion for foreigners in China and advised enterprises to remain aware of how statements or decisions might be interpreted by state security officials. Even seemingly well-connected business figures are not necessarily insulated from this risk and suggests that companies have contingency plans in place in the event that “an ill wind blow in their direction.” Such plans include awareness of where senior managers and their families are geographically located at all times, the location of intellectual property and communication assets, and ensuring business continuity plans are up to date.
• Short also reviewed the practical challenges that arise from shifting sentiments about the wisdom of maintaining supply chains in China. He shared some insights on how several major corporate players that shifted some of their manufacturing facilities to Vietnam, noting that multiple factors informed their calculus including cost, relative investor friendliness, an educated workforce, and strong GDP growth
• Finally, Short emphasized the ongoing scourge of corruption in the region and the importance of implementing a third-party screening program that demonstrates defensible antibribery and anticorruption standards of care in order to ameliorate risks associated with the FCPA and other international legislation such as the UK Bribery Act. He noted, too, that “corruption is illegal everywhere,” and so it was vital to remember that local anticorruption investigations in China, some politically motivated, can put organizations at risk of being caught in a “highly disruptive and uncomfortable” middle.

Enforcement Risk as Byproduct of US-China Tensions

• Mini vandePol reviewed the history of US sanctions targeting China, noting that the current landscape of risk is unique given its basis on cultural, political, and legal considerations. She reviewed a 2020 timeline of US China sanctions and the key events shaping the current environment. In a relatively short period of time, dramatic legal and sanction-related upheavals have set the stage for a sobering risk environment for foreign businesses operating in the region
• The four offenses under Hong Kong’s National Security Law (NSL) are secession, subversion, terrorist activities, and collusion with a foreign country or external elements. The penalties for violations of the NSL, noted vandePol, apply to both natural persons and “body corporates” and involve up to life imprisonment for the former. Companies violating the NSL are subject to a criminal fine, confiscation of proceeds, and suspension of business operations or revocation of business licenses. She also highlighted the extraterritorial nature of the law and its inclusion of offenses committed outside Hong Kong (by a Hong Kong permanent resident or Hong Kong established company) as well as offenses committed ‘against Hong Kong’ by a person who is not a Hong Kong permanent resident.
• Creating additional difficulties — beyond the risk to business from violations of the NSL — enterprises must also be aware of new Hong Kong-related OFAC sanctions as well as the recent (12 November 2020) Executive Order prohibiting investments in ‘Communist Chinese Military Companies’ (CCMCs). That order takes effect on 11 January 2021. This EO puts strong and urgent pressure on businesses that will need to quickly divest from existing relationships with selected Chinese military entities.

SELECTED BACKGROUND Hong Kong’s National Security Law, Explained (New York Times, 13 July 2020) Addressing the Threat from Securities Investments That Finance Communist Chinese Military Companies (US Executive Order 13959, 12 November 2020) The Great Uncoupling: One Supply Chain for China, One for Everywhere Else (Financial Times, 6 October 2020) Joint Statement on Hong Kong (US Department of State, 18 November 2020) Treasury Sanctions Individuals for Undermining Hong Kong’s Autonomy (US Department of the Treasury, 7 August 2020)