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Thursday, May 11, 2006

China Poised to Crack Down on Foreign Law Firms


China is apparently poised to crack down on foreign law firms operating within its borders, as shown by a menacing memorandum issued by the Shanghai Lawyers Association.

China Law Blog obtained the memo from a Chinese lawyer and shared a copy with China Confidential.

The memo details "illegal activities" that most of the foreign law firms doing business in China are allegedly engaged in, describing the activities as "serious" and "severe" threats to "China's legal system and economic safety." Shanghai is most threatened, according to the document.

The principal sin seems to be practicing Chinese law without a license.

In 2005, there were 82 "foreign law firms" in Shanghai, and 16 more "established by Hong Kong law firms," the memo notes.

While recognizing that foreign law firms "bring advanced new concepts and management experience to China," the memo asserts that their "illegal business activities are becoming serious" and must be stopped.

The document says China's Foreign Affairs Committee has proposed punishments for illegal business activities of representative offices of foreign law firms, following announcement of an investigation by the Justice Department. The Foreign Affairs Committee, according to the memo, has also suggested ways to strengthen supervision of the firms.

According to the memo--and Chinese Law Blog confirms this--Chinese representative offices of overseas law firms are prohibited from conducting any legal services concerning Chinese law. The document lists the activities to which foreign firm rep offices are limited:

(1) consulting services regarding the laws and relevant international treaties and usual practices in the country in which the lawyers of the overseas law firm have obtained licenses (i.e. the United States, or England, or elsewhere);

(2) handling the legal affairs entrusted to them by their Chinese clients or Chinese law firms relating to the country in which the lawyers of the foreign law firms have obtained licenses (i.e. the United States, England, or elsewhere);

(3) representing their foreign clients in entrusting Chinese law firms to handle legal affairs in China;

(4) maintaining long-term business relationships with Chinese law firms to handle Chinese legal affairs; and

(5) providing general information about China's legal environment, but not interpreting Chinese laws.

The memo goes on to state that representative offices of foreign law firms may not hire Chinese-licensed lawyers and any legal assistant hired by a foreign law firm may not provide legal services.

The memo then posits that foreign law firms have "far exceeded what is allowed and that the situation is becoming more and more severe, which not only has deterred the creation of a fair and sound legal environment in which Chinese law firms can develop, but also "threatens China's legal system and economic safety."

The document states that Shanghai is "suffering seriously from these
activities."

Foreign law firms are specifically accused of engaging in the following illegal activities:

(1) Hiring large numbers of licensed Chinese lawyers as assistants to provide legal services. Foreign law firms, the memo charges, are using their competitive financial strength to recruit local lawyers to the detriment of the development of Chinese law firms. China's laws provide that only those who have provided legal services abroad for two years may offer legal services in China without first going through the normal Chinese lawyer internship requirements. Because most of the Chinese "lawyers" hired by foreign law firms have not spent two years working abroad, they can only be hired as "assistants" and they may not provide legal services to clients.

(2) Drafting and interpreting contracts under Chinese law; consulting on and providing opinions on Chinese law, and directly
engaging in negotiations regarding investments, and mergers and acquisitions.

(3) Engaging in due diligence--referred to as "project investigations" and "target company investigation."

(4) Controlling "the whole procedure of litigation, such as investigation, evidence collection, providing legal opinions" in
litigation matters, bringing in Chinese lawyers only to make court appearances.

(5) Doing all of the work for their clients involving registrations, applications, and filings, with Chinese government agencies even though they are prohibited from doing so.

(6) Working as partners or consultants to offer Chinese legal services by establishing or controlling Chinese law
firms.

(7) Issuing "illegal and misleading propaganda," the purpose of which is to offer services concerning Chinese law and to mislead potential clients into believing their firm is a Chinese law firm with Chinese licensed lawyers on
staff.

(8) Tax evasion. The memo accuses foreign firms of not paying taxes on money earned in China from services provided to multinational clients that allegedly pay the firms abroad so as to evade Chinese taxes. "Tax evasion is severe," the memo stresses.

China Law Blog says its legal sources in Shanghai are taking the memo quite seriously. They predict a major crackdown on foreign firms operating there, with rumors flying that one or two large rep offices will be shut down to set an example.

The sources--Chinese lawyers--say the crackdown reflects mounting anger at foreign law firms for alleged misrepresentation--meaning giving potential and actual clients the impression that the firms are authorized to practice law in China. The Chinese lawyers are said to be particularly peeved about foreign law firms billing outside Chinese law firm work as though an inside foreign lawyer did it.

The sources say the crackdown also reflects mounting resentment by local law firms over the commercial success of foreign firms in the Chinese market.

Our analysts agree--up to a point. Putting the coming crackdown in broader perspective, they point out that the concept of rule of law in China, despite recent reforms, remains rooted in the overriding need for social control.

The same holds true for media in China. While promoting foreign investment in other industries, Beijing has increasingly turned against overseas influences--from Internet sites to magazines and movies--that potentially threaten the government's grip on Chinese hearts and minds.

China in the past year has cracked down on film and television co-productions, banned use of foreign news video on Chinese TV programs, and put an end to co-publishing and licensing of foreign magazines.

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