China’s Regulations Went From Being a C lient Problem to a Law Firm Problem, Too

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The Shift: China’s Regulations Went From Being a Client Problem to a Law Firm Problem, Too

For months, rising global tensions and toughening cross-border regulations have kept law firms busier than ever advising clients on how to successfully—and legally—operate a multinational organization. Now, law firms could start to feel the pain their clients are experiencing—and one already has.

Dentons’ decision to end its longtime combination with Chinese firm Dacheng came amid regulatory one-upmanship between the U.S. and China that has restricted investment between the nations’ entities. At the same time, new Chinese regulations make certain legal work near impossible to do.

The security risks to client information or the inability to share information, among other difficulties arising from a shifting regulatory landscape, were too great for Dentons to stomach. The firm’s decision to remove itself from the situation is one other firms could soon face.

The Conversation

As my colleague Jessica Seah reported, Dentons’ decision was born out of “an evolving regulatory environment for Chinese law firms in China—including new mandates and requirements relating to data privacy, cybersecurity, capital control and governance.”

“The Chinese regulator tends to be pretty opaque,” said one Beijing-based partner at a U.S.-headquartered law firm, according to another report by Seah. “But I think that’s going to increasingly be a challenge for global law firms to be able to operate in the marketplace. The intrusion of the Chinese government regulator into law firm business will not stop with Dentons.”

For international law firms that have substantial practices in mainland China, the country’s focus on national security and the broader geopolitical issues has major implications, Seah writes.

Under the broad national security umbrella, Chinese lawyers can be required to divulge explicit client information to the state. Lawyers can also be prohibited from releasing China-related data to their international counterparts, all making basic conflict checks and due diligence on cross-border deals impossible to implement.

The “Chinese Wall”—an old term used to describe corporate measures adopted by firms to prevent information leaks internally—is now neither relevant nor adequate.

In 2021, China also started its tech crackdown on companies that have access to and hold data of Chinese users. New cybersecurity laws have also been imposed, making dealmaking onerous and risky. Companies wanting to share data outside of China must now go through a national security review.

The Significance

This issue becomes one of value for law firms, which often struggled to realize significant profitability from their operations in the region—though that was starting to shift. And while the market was significantly impacted by a Covid-related shutdown that lasted longer than most other regions, China is still one of the fastest growing legal markets in the world. It’s a region (and revenue opportunity) clients and law firms struggle to ignore.

But if deals are increasingly difficult to do and client data is at risk, along with lawyers’ liberties, is it worth it?

Kent Zimmermann, a principal at the Zeughauser Group, told Law.com International that there has been an increasing number of law firm leaders who have been reassessing their China operations in recent months.

“Dentons is not the first professional services firm practicing law to pull out of China,” said Zimmermann. “It is not going to be the last. Given the conditions, which make it virtually impossible to practice there as a Western firm and comply with the laws and regulations, it wouldn’t be surprising if other firms follow suit.”

Meanwhile, China is successfully doing business in other parts of the world as it builds out relationships across Africa and Latin America, among other regions, Law.com International executive editor Lisa Shuchman notes.

The significance of the shift between the U.S. and China along with China’s related national security interest in Western businesses operating in the country means U.S. firms are faced with shifting their footprint, walking away from potential revenue in a fast-growing region and seeing other regions step in to forge relationships with Chinese companies.

The Information

Want to know more? Here's what we've discovered in the ALM Global Newsroom:

The Forecast

This is far from the first time U.S.-China tensions have caused companies to consider pulling back from China, with a knock-on effect of law firms wondering whether it’s worth their investment in the region.

Typically, the lure of the market size is too strong to keep anyone away for too long. But safety of their lawyers on the ground and an inability to protect client information from being seen by Chinese regulators may be the tipping point firms need to close up shop in the region.

You can find a list of law firms with offices in China from Law.com Compass here.

Gina is the senior vice president, content at ALM. Her coverage focuses on the business of law, client relationships, law firm strategy and the future direction of the profession. She also has a particular focus on mental health in the legal profession. Contact her at gpassarella@alm.com.