China Cracks Down on Consultants for sending out Sensitive Data to Clients

The consulting firm Capvision Partners is the latest to be raided in the name of national security, sending a chill through the foreign business community.

For weeks, little was known about why prominent international consulting firms in China were being raided by the police. Employees had been questioned and even detained for doing what has long been the nuts and bolts of the job: compiling information about Chinese markets, companies and policies for foreign clients working in the world’s second-largest economy.

Now, the motivation behind the raids, which included American firms such as the Mintz Group and Bain & Company and most recently Capvision Partners, a consulting company with headquarters in New York and Shanghai, is beginning to come to light after state media on Monday revealed a multiagency crackdown on the consulting industry in the name of national security.

Beijing has also moved to limit the availability of financial data to foreign customers and expanded an already sweeping counterespionage law. In the business community, concern is growing that more Chinese commercial information could be swept up in the intensifying geopolitical rivalry with the United States that has frustrated China, particularly over losing access to advanced American semiconductors.

Using language that echoed the recent denunciation of the West by China’s top leader, Xi Jinping, China’s state broadcaster, CCTV, accused Western countries of stealing intelligence information in key industries, including defense, finance, energy and health, as part of a “strategy of containment and suppression against China.”

The broadcaster, which devoted a 15-minute special report to the issue and focused on Capvision Partners, also blamed “overseas institutions” for teaming up with domestic consulting companies to conceal their foreign backgrounds to “evade” Chinese laws and regulations.

The campaign threatens to undercut Beijing’s attempts to persuade foreign businesses to reinvest in China and help revive an economy still trying to climb back after large parts of it had been effectively closed to the world by tough anti-Covid restrictions. New data released by the Chinese government on Tuesday showed a steep decline in imports last month, another sign that growth remains fragile.

“Whatever China’s gaining by restricting ‘sensitive’ information is not worth the reputational costs China is paying with foreign businesses,” said Gerard DiPippo, a senior fellow at the Center for Strategic and International Studies and a former senior U.S. intelligence officer, who added that the raids “will have a chilling effect, especially with investors and local staff employed by U.S. firms.”

The crackdown is shining a spotlight on a sprawling industry of due-diligence and business intelligence firms that sprang up along with China’s rise to help make sense of the country’s lucrative, but often opaque, economy.

Eric Zheng, president of the American Chamber of Commerce in Shanghai, said in a statement that the organization was “concerned” by the raids. “Without proper due diligence, foreign companies will be unable to invest in new projects in China,” he said.

Capvision appears to have been near the center of the business intelligence industry. According to its website, Capvision offers a matchmaking service connecting a roster of 450,000 “experts” across various industries with clients looking for more information. It has said its clients include most of the world’s leading consulting firms, the largest private and venture capital firms investing in China, and all of the country’s biggest financial securities firms.

Officers raided several of the firm’s offices in China, including in Shanghai, Beijing, Suzhou and Shenzhen, state media said, adding that the company was not “earnestly fulfilling the responsibilities and obligations” of preventing espionage.

Capvision did not respond to requests for comment.

On Monday night, the company said on its official account on WeChat, the Chinese social media and chat app, that it would “firmly implement national security development” and take a leading role in regulating the consultancy industry.

In March, Mintz, which specializes in corporate investigations, said that Chinese authorities had raided its offices, detained five of its Chinese staff and closed the branch. Last month, Bain said security officials had visited its offices and questioned employees.

The police told Jiangsu Television, a state broadcaster, that Capvision had frequently contacted “secret-related personnel” in the Chinese Communist Party as well as officials in fields such as defense and science. The authorities accused Capvision of hiring consulting experts “with high remuneration” to “illegally obtain various types of sensitive data,” which they said posed a “major risk and hidden peril to China’s national security.”

The CCTV report said the inquiry resulted in the arrest of at least one employee of a state-owned company who was sentenced to six years in prison for providing “state secrets and intelligence” to Capvision’s foreign clients.

The image of the employee, surnamed Han, was blurred in an interview with the state broadcaster and appeared to be wearing a prison uniform. He said he initially refused to provide Capvision with what he described as “secret information,” but that he changed his mind when the firm offered to double his consultancy fee. The report did not describe what company or industry the employee worked for.

CRACKDOWN

Even as China reopens, security visits spook foreign businesses.

Last month, China’s newly revised counterespionage law expanded the definition of what could be construed as spying, a reflection of Mr. Xi’s heightened security state. The law alarmed foreign businesses and governments because it stipulated that sharing “documents, data, materials and objects” could be considered spying if the information had “a bearing on national security and interests,” a criteria seen as overly broad and potentially arbitrary.

The revisions signal Beijing’s renewed focus on limiting the flow of what it considers sensitive information to foreign investors and governments. China has curtailed foreign access to its biggest academic database that distributes research papers, dissertations and statistics, while there are reports that access to the country’s database of corporate registrations had been restricted for some overseas users.

China is locked in a standoff with the United States over restrictions on microchip technology and growing unease about Chinese dominance of materials and components used in the production of electric vehicles. The free flow of goods helped build a global supply chain that tethered the United States and China as economic partners — if not geopolitical allies — but those ties have now been frayed.

Capvision was founded in 2006 by former Bain consultants and Morgan Stanley investment bankers and is based in New York and Shanghai with 700 employees, according to the company’s website.

In 2021, Capvision filed documents for a public stock listing in Hong Kong although its shares never debuted.

In an investor prospectus, the firm said it was the biggest provider of “expert knowledge services” in China, garnering 33 percent on the market with sales it said were five times larger than its nearest competitor.

In the United States, such firms were targeted by the Securities and Exchange Commission in 2011 as part of a crackdown on insider trading at hedge funds. In those cases, the firms were often used to pass on nonpublic information about companies’ earnings and strategies to gain a trading advantage. Such firms have largely faded from public view in the United States.

In 2013, Kai Hong, a co-founder of Capvision, told Reuters that it was capitalizing on the fact “that information flow in China has always been fairly un-transparent.”

News of the raids on consulting firms last month prompted the U.S. Chamber of Commerce, the powerful business lobby in Washington, to warn of rising risks in doing business in China.

Mr. DiPippo at the Center for Strategic and International Studies said China would remain an important market for Western companies, but many firms would increasingly diversify their investments in other countries because of the growing risks.

“China’s economy cannot fully recover until private business sentiment and investment improve,” he said.