Foreign companies doing business in China can establish stable supply chains by finding local partners who are legally compliant, reputable, and capable. To achieve these goals when doing business in China, due diligence investigations are standard as a means for a company to determine that potential business partners can meet your operational requirements or compliance standards. In this article, we will explain how to get China due diligence right, and avoid common problems others have experienced when trying to identify appropriate suppliers.

How Much Should You Spend on China Due Diligence?

The depth of your China supplier due diligence investigation depends on your goals, for example general legal compliance with a focus on the FCPA will involve a search for past regulatory penalties or litigation implicating its executives, shareholders, or beneficial owner. In addition to this, anti-bribery compliance investigation will look for relationships or conflicts of interest between the supplier’s executives or directors and the client itself. Some investigation approaches look at legal issues that may impact business performance, with a recent focus on avoiding problems with export control restrictions and supply chain ESG requirements. This is achieved by inspecting raw material origins and supplier compliance with the law. A well-rounded approach looking at both legal compliance and legal risk, ensures your company can avoid unreliable supply chains.

Common due diligence techniques for China include both using direct requests for information and stealth due diligence. The stealth approach uses open source intelligence methodology to supplement information from supplier questionnaires and interviews.

Investigators cross-check information with site visits and third-party interviews with affiliates and beneficial owners, and limited inquiry into the supplier’s business partners. Unless cutting corners, a due diligence investigation in China with good supplier cooperation takes two to four weeks, but a purely stealth investigations can be much faster.

Where to Find Public Information on China Companies

Business Status: The China Business Credit Lookup System provides governance information, regulatory penalty, and litigation records.

Personal Property: the Personal Property Finance Lookup System shows security interests filed on personal property such as equipment and raw materials, but does not cover any kind of vehicles or financial instruments.

Court Judgments: China Judgments Online, Credit China, China Enforcement Lookups, and the China Court Notices websites show judgments, but some are unavailable due to confidentiality requirements or delays in posting information, which raises a risk the information is outdated.

Company Reputation: Searches can be run in Google and WeChat to understand how the market and news media in China sees them. Public information can provide insights into what the supplier is doing in markets and about the scale of their operations. However, private company documents including financial records, resolutions, and business transactions are protected trade secrets unless voluntarily provided. China public company information is easier to find in public sources.

If you know where supplier real property is situated in China, you should have property title and mortgage filings reviewed. There is an important caveat that merely having the supplier’s legal name is not enough to identify all of their real property, nor will having a list of property addresses.

A full view of a supplier’s assets and liabilities generally cannot be found using public sources. Nonetheless, these challenges can be overcome to an extent by having an attorney request business registrar filings on your behalf, such as corporate change history, board resolutions, and filings. Accessing private supplier information by engaging due diligence firms can sometimes be effective, and many companies have used them or private investigators. But caution is warranted in this case because you could be vicariously liable if they violate privacy or trade secret law on your behalf.

A China due diligence best practice is to investigate the supplier’s affiliates and beneficial owners because there is substantial relevant information outside of the supplier entity in itself. For example, the supplier you are negotiating a deal with is usually a part of a network of affiliates controlled by the beneficial owner but have different shareholders, assets, and staff.

Moreover, the parent company and beneficial owner has substantial influence over a Chinese supplier’s reputation, debts, and business model. Therefore, due diligence investigations should take a close look at the supplier’s affiliates and beneficial owners. In typical cases, significant issues include supplier relationships with client management, regulatory violation liability, failure to maintain required licenses, and material litigation.

Early identification of issues can help you avoid making the wrong deals, or obtaining additional protective assurance such as getting additional performance guarantees. Foreign companies doing business in China in also face unique challenges such as language and cultural barriers, difficulty obtaining and verifying important information, and risk uncertainty. Experienced outside advisors can help a lot with these kinds of issues.