China and Bitcoin and Its Lesson for Everyone: Don’t Fight the Trend

China Law: Don't fight the trend
China Law: Don’t fight the trend

China Bystander (a very thoughtful deep-dive type China blog that has been churning out truly excellent posts since 2007) just did a story, entitled, China Cracks Down On Cryptocurrencies. The story begins with what I see as its money quote:

The default position of Chinese authorities is that if it exists, it should be regulated. Cryptocurrencies are a prime example.

Exactly.

I was a big fan of uber-investor Martin Zweig who would often talk about how the “trend is your friend” and how “you don’t fight against the trend.” That advice applies to Chinese law and business. A CEO I know will every five years put the basics of China’s Five Year Plans on a small card, get the card laminated and then keep that card in his wallet at all times. He does this so that he can easily check all of his company’s proposed actions against the Five-Year plan to make sure it coincides with it or at least does not contradict it. In other words, he makes sure his company acts in harmony with China’s plans, not against them. Smart. Very Smart.

Our China lawyers constantly get phone calls/emails from potential clients (it is almost always potential clients and not actual clients) convinced they have found a “workaround” for some Chinese law and they want us to confirm their workaround will work. When we immediately express our serious doubts, they express their serious doubts about hiring us. This indicates to us they do not really want an objective answer to their question regarding the viability of their workaround, they just want confirmation of it, preferably in writing and they move on.

Anyway, This sort of interaction happens quite often and the following are the most common instances:

1. Getting more than $50,000 out of China. We get at least 2-3 emails every week from someone wanting to know if we can help their Chinese counter-party get x millions of dollars out of China, usually to buy real property or to invest in an American or European business. See Getting Money out of China: It’s Complicated and while you are at it, you might as well check out parts 2, 34, 5 and  6 of that series.

About half of those emails include some “new” idea for getting the money out and about half of those involve a long explanation as to why that idea is legal under Chinese law. Our response is essentially to point out that if it were easy to get money out of China legally, people would be doing it AND their Chinese counter-party would be contacting a Chinese lawyer to do it, not having the American/European side do the contacting. About half the new ideas involved cryptocurrencies, usually Bitcoin. Our position on all of these ideas, especially the Bitcoin ones, has always been that if China is not now blocking them, it will soon and those who facilitated such transfers when the facilitating was perceived as relatively good could face serious consequences.

Starting a few months ago we started getting communications from frantic foreigners whose bitcoin accounts had been frozen in China asking our help to unfreeze them. Starting about a month ago, we started getting communications from people who were having their associates arrested for actions tied in with Bitcoin (but not for using Bitcoin directly). Things like conducting business in China without an entity and without paying taxes. More than one caller who had millions of dollars in Bitcoin frozen AND one or more associates on the ground in China would insist that they were not conducting business in China because all they were doing was sending money out of China and that is not conducting business.

What people need to realize about China law is that when it comes to something like this, China is just not a particularly big fan of these sorts of arguments. In other words, don’t fight the trend.

2. Using Third-Party Hiring Agencies to Avoid Having to Form a China WFOE. Nope, not going to recommend this. No way, no how. Way back in 2015, I wrote an article for Forbes Magazine, entitled, China’s Tax Authorities Want You. In this article, I talked about the illegality of foreign companies hiring Chinese “independent contractors” directly, rather than by forming a WFOE and having their WFOE do the hiring. This is illegal 999 times out of 1000 and China hates hates hates companies that do this. China hates this because it means it does not collect the approximately 40% of salaries employers are supposed to pay in taxes and social benefits nor does it collect the approximately 25% of salaries that is to be paid by China employees.

Couple the hate with the opportunity to collect large amounts of money and you can see why China is hyper-zealous about hunting down companies engaged in these arrangements. Far be it though for foreign companies to simply comply by forming a China WFOE and using their WFOE to hire employees in China legally. No, they want us to tell them whether it is legal for such and such third-party hiring agency to hire employees for them in China.

The answer is really complicated because it depends on so many factors, including the third party hiring agency (a whole boatload of companies (mostly foreign companies operating outside China) have jumped into this business without being licensed to engage in it and much depends on who you which to see hired, their position, the number of people you wish to see hired, the length of time you intend for your third-party hiring agency to employ someone and then on top of all this, the city and perhaps even the district. In the end, it would almost certainly cost more to 1) conduct due diligence on the hiring agency 2) figure out the legality of the specific situation, 3) pay the 10 to 15% premium/commission these third-party hiring agencies typically require, 3) deal with the contracts between you and the third-party hiring agency and the contracts between the third-party hiring agencies and the employees you want to be hired (because the third-party hiring agency drafts these contracts to protect itself, not your company).

Far be it though for foreign companies to simply comply by forming a China WFOE and using their WFOE to hire employees in China legally. No, they want us to tell them whether it is legal for such and such third-party hiring agency to hire employees for them in China. The answer is really complicated because it depends on so many factors, including the third party hiring agency (a whole boatload of companies (mostly foreign companies operating outside China) have jumped into this business without being licensed to engage in it and much depends on who you which to see hired, their position, the number of people you wish to see hired, the length of time you intend for your third-party hiring agency to employ someone and then on top of all this, the city and perhaps even the district. In the end, it would almost certainly cost more to 1) conduct due diligence on the hiring agency 2) figure out the legality of the specific situation, 3) pay the 10 to 15% premium/commission these third-party hiring agencies typically require, 3) deal with the contracts between you and the third-party hiring agency and the contracts between the third-party hiring agencies and the employees you want to be hired (because the third-party hiring agency drafts these contracts to protect itself, not your company).

The answer is really complicated because it depends on so many factors, including the third party hiring agency (a whole boatload of companies (mostly foreign companies operating outside China) have jumped into this business without being licensed to engage in it and much depends on who you which to see hired, their position, the number of people you wish to see hired, the length of time you intend for your third-party hiring agency to employ someone and then on top of all this, the city and perhaps even the district. In the end, it would almost certainly cost more to 1) conduct due diligence on the hiring agency 2) figure out the legality of the specific situation, 3) pay the 10 to 15% premium/commission these third-party hiring agencies typically require, 3) deal with the contracts between you and the third-party hiring agency and the contracts between the third-party hiring agencies and the employees you want to be hired (because the third-party hiring agency drafts these contracts to protect itself, not your company).

Most importantly, the odds are overwhelming that what is being proposed is illegal in any event and if it isn’t clearly illegal, it will be so disfavored that you could end up getting in trouble anyway. And again, that’s the point. Don’t fight the trend.

3. China Representative Offices. China does not like them and way back in 2010, I wrote a post, entitled, The Slow Death Of The China Rep Office. They are still alive and China still does not like them and they almost never make sense for a foreign company looking to go into China. China does not like them and our China lawyers do not like them because they are legal only under very limited circumstances. Since the Chinese government does not like them, you are at some risk even if you are just on the legal side of the legality/illegality line and you are also always at risk of China’s tightening its Rep Office laws and shutting you down. The trend says don’t do it.

4. Variable Interest Entities/VIEs. Way back in 2011, in VIEs In China. The End Of A Flawed Strategy, we made clear our distaste for VIEs and why our law firm refused to handle that sort of work. This position angered many (especially those who were profiting off VIEs) but our position was based on the strong belief that China would eventually make clear its prohibition against them and at that time those who had gone into China as VIEs would suffer. It took longer than we expected, but it did happen in 2015 and we wrote about that in China VIEs Are Dead. Done. Over. Stick A Fork In Them and as we had predicted, the consequences were dire for many companies. Again, the trend.

As China attorneys, we see our job as more than just knowing what the law says now. Our job also encompasses our knowning what the Chinese government things about what our client’s are proposing to do and counseling our clients on that as well. Our job is to help our clients stay on trend.

Your thoughts?

This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2017/09/china-and-bitcoin-and-its-lesson-for-everyone-dont-fight-the-trend.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.