China: Digital Due Diligence: Uncovering Violations In China

This year's historic stock market rise and crash was only the most visible sign of overall economic turmoil in China. Other key indicators include China's lowest annual growth rate in decades, concerns about stagnating real estate prices and the first ever bond default by a state-owned enterprise. As a by-product of these significant and rapid economic changes, China's already high instances of bribery, embezzlement, kickback schemes, insider trading, theft of trade secrets and other white collar crimes may see a further rise as dramatic and swift as that of stock prices this spring.

China's current compliance challenges are a continuous source of concern for multi-national companies operating in China. The government's most recent campaign against corruption has made progress in this area, but in the near future these issues will remain a high priority for compliance professionals. Identifying and remedying these violations can be expensive and disruptive and often leads to the dissatisfying result of inconclusive evidence ending in a negotiated (and usually paid) resignation for suspected employees.

The rise of digital due diligence, and new data compliance techniques, offer a powerful new tool to complement and strengthen traditional methods for legal and compliance departments to close the gap and obtain more effective results.


The development of e-discovery has had the unanticipated ancillary benefit of creating a robust and powerful set of tools for quickly finding evidence of compliance violations. Just as litigants must quickly sort through millions of e-mails to identify and produce responsive documents while retaining privileged materials, modern investigators must undertake a similar digital needle in the haystack exercise to quickly identify key pieces of electronic evidence.

Digital due diligence is the combination of traditional computer forensic methods and the application of e-discovery tools in order to identify, collect, review, and analyse data to verify potential misconduct. Electronic evidence has the significant advantages of being detailed, objective, and contemporaneously recorded and fixed in a medium without loss over extended periods of time. Unfortunately, it also has the distinct disadvantage of often being grouped together with billions or trillions of other pieces of data that have similar characteristics and traits but are not relevant to the case.

In China, digital due diligence has emerged from the services grey market of "consultants" and underground investigators to become a legitimate legal practice that can provide crucial insights and value for companies facing a compliance crisis or attempting to determine legal risk levels in other areas. In particular, law firms with local licenses have developed this solution into a mature, professional and effective service that no longer holds the risks and clouds of illicitness found with the grey market of investigators.


Data Export

China's infamous "Great Firewall" prevents some information from coming into China, but what is less well known is that the legal system also prevents certain categories of information from leaving China. Most famously, "state secrets" are prevented from being transferred outside China, but an assortment of minor laws also protect some forms of health information, accounting records, certain types of archives and a variety of other information from leaving the borders. The result is that it is not possible to follow the usual e-discovery default of moving data to large off-site data centres in India, the United States, or even Hong Kong.

Employee Privacy

Although outside China the country has a reputation for being the world's factory and having challenging working conditions, those who spend time in the country quickly become aware of how favourable its laws are towards employees. Both in the letter of the law and through enforcement efforts, there are strong protections of employees' job security, limits on working hours and other general rights, including privacy, which can create an issue when conducting internal digital due diligence on employees.

In an internal investigation, employee privacy can be a high-risk pitfall. Overstepping legal limits can lead to a variety of issues, from inadmissibility of evidence and tort actions, to criminal penalties in some extreme cases. In the urgency and chaos of normal internal investigations, the need to find immediate answers and control the crisis can often result in accidental violations by investigators unaware of the laws relating to employee rights or the sensitivity of the information being collected.

Other Types of Protected Information

In addition to regulations relating to the export of data and the protection of employees' personal private information, China has other regulations aimed at protecting a variety of additional types of information, all of which are potential landmines for digital due diligence. In typical M&A due diligence, for example, buyers tend to focus on the shareholders, especially in a country like China where a disproportionately large number of people could be considered "government officials," for the purposes of the US Foreign Corrupt Practices Act, due to the historical systems that existed under China's planned economy. Obtaining personal details of shareholders, however, especially if they are connected to the government, and cross-referencing these with other databases in order to assess risk levels, can be an extremely delicate process that may touch on a variety of protected information issues.


Data Export: Keep the Sensitive Data in the Mainland

At all stages of any digital due diligence project in China, there may be a perceived need to send the data outside the country. Immediately after collection, it may be considered beneficial to process and store everything at an offshore data centre, as these are often more advanced, reliable, and in some ways more secure than counterparts in the mainland. Similarly, during the analysis of the data, it may seem necessary to give counsel in other jurisdictions access to the data in order to perform their due diligence or prepare their case. The legal risks of these moves can, however, be high, especially in certain industries traditionally dominated by the state, and the penalties can be severe.

Screening data for export out of the country is still in its infancy. The early definitions for "state secrets" were so broad and ambiguous that any screening was likely to be an ineffective compounding of a series of highly subjective acts of guesswork that would be costly but most likely do little more than provide some procedural comfort. New rules and regulations, especially those issued in 2014, have helped to clarify the definition of state secrets, but there is still considerable ambiguity and risk in this and other areas.

Given the necessity of the screening procedures, the question of applying the export filters is not "if", but "when", and the answer is clearly "as late as possible". In all forms of digital due diligence, from internal investigations to acquisition risk assessment, there is a dramatic funnelling process that winnows down the data to a relatively small set of information at the very end. Performing the export filter at the final stages, and keeping everything in the mainland prior to that can ensure the most efficient and cost-effective solution to this difficult problem.

Employee Privacy: Obtain Consent

Clear and explicit consent is the key that unlocks nearly every employee privacy issue in China. If not already in place, all companies can and should immediately update standard employment contract templates with specific clauses (or better yet an entire appendix); update employee handbooks (often called the labour law "bible" in China because of their power in resolving disputes); hold routine annual training about acceptable use of electronic information; and have separate policies about electronic devices, especially for the two most troublesome issues: personal data on company devices and company data on personal devices.

In addition to these prophylactic policies, a best practice during due diligence is to always obtain specific collection and use consent from each custodian.


The information age and the exciting intersection of big data and artificial intelligence presents one of the greatest value explosions of our lives. Data continues to emerge as a new natural resource, and the frameworks and methodologies involved in dealing with data trigger the need to address previously un-thought-of social, moral and legal problems. Companies hoping to harness this power through legal means will continuously run into difficult challenges, and China, possibly more than any other country in the world, is likely to continue to present unique issues that require careful and tailored solutions before the true value of data can be discovered.

Digital Due Diligence: Uncovering Violations in China

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions