Comply at Your Own Risk: Reconciling the Tension between Western Due Diligence Practices and Chinese State Secrets Law

By Raymond Tran*

INTRODUCTION

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Since China’s market opened in 1978, its maturing companies sought to be listed in U.S. markets to access potentially billions in U.S. capital.² However, to access such capital, Chinese companies and their accounting firms face the quandary of conflicting laws. Complying with U.S. regulatory requirements and satisfying investor expectations for transparency risks violating China’s vague State Secret Law. Resolving this conundrum requires the United States and China to overcome their differences in business practice, corporate governance, and accounting regulations. Recognizing this issue, the U.S. Securities Exchange Commission (SEC) and China Securities Regulatory Commission (CSRC) attempted to cooperate by signing a Memorandum of Understanding; but rather than facilitating cooperation, this memorialized the problem. The SEC insisted on cross-border oversight to facilitate inspection, and the CSRC refused to allow cross-border oversight or inspections to protect China’s sovereign interests.³ China cannot ignore this problem; even if Chinese companies redirect efforts to other markets, without the solution discussed in this article, similar problems will surface.⁴