Brilliant lights blazing in modern city showing China data regulations

Dentons Quit Operations in China Due to Incoming Data Regulations

New data regulations that will go into effect in China later this year have shaken up the regional operations of Dentons. The globe-spanning law firm will make partner Beijing Dacheng Law Offices fully independent, and keep it within the company loop by designating it a “preferred partner.”

The business-centered law firm operates in some 200 countries and sells itself on being in touch with local culture and communities everywhere it operates, opting to not keep a formal global headquarters so as not to show a preference. Formed by a series of mergers and acquisitions spanning the 2010s, Dentons has become the largest firm in the world by total count of lawyers and offices.

Chinese data regulations continue to spook foreign firms

Since the passage of the Data Security Law (DSL) and the Personal Information Protection Law (PIPL) roughly two years ago, foreign companies in China have been re-evaluating their structure and operations given stricter new terms regarding international transfers of personal data and increased government access to anything stored in the country.

With fines and penalties (such as potential shutdown of company operations) looming in November of this year, some companies are opting to bail out rather than even attempt to comply with the slew of new data regulations. This takes different forms for different organizations, everything from relocating data stored on Chinese servers to relocating masses of employees that work on the mainland.

Dentons originally got into China by partnering with Dacheng Law in 2015, and looks to be answering these concerns by making the local firm the focus of a restructuring. While any organization might consider going to these lengths given the size and strength of China’s economy, there is more on the line for Dentons than most with the new data regulations: it counts some major state-owned utilities, such as China TeleCom and PetroChina Co., as its clients. Dacheng has about 4,000 attorneys that work in the country, nearly one-fifth of its full global complement.

Dentons has said that it will be maintaining its Hong Kong office, the most likely landing spot for any employees that need to be relocated.

International transfers of employee, customer data could trigger raids and fines by Chinese government

The terms of recent data protection law updates were enough to give foreign companies pause, but the main motivator as of late has been an update to China’s Counter-Espionage Law that prevent international transfer of any information the government deems to be related to national security. The prior data regulations specifically named state secrets and intelligence; the new terms are extremely broad and general, potentially putting foreign companies on the hook for exporting something like market research or information even incidentally related to critical infrastructure.

The new data regulations also provide the Chinese government with greatly expanded access to the information that companies hold. If national security needs are invoked the government can access personal devices, any personal data or documents the company is in possession of, and information about any and all assets. There is also essentially no court oversight, with the approval of a local government official the only thing needed to approve a raid on a company.

2023 has seen foreign firms raided in China due to data regulations, even before the full powers of the new espionage law came online. This began in March, when the Mintz Group experienced a police action that has kept local offices shut down and saw five of its Chinese employees detained. Bain & Company underwent a police inspection in April, and in May several locations of a consultancy firm called Capvision were raided on television under accusation of passing national secrets to foreign entities.

The Biden administration has responded with its own national security concerns, recently announcing restrictions for Americans on investing in an assortment of Chinese tech firms thought to be supplying the country’s military or developing tech that might have a military application. Private equity and venture capital firms are now more limited in their ability to invest in Chinese artificial intelligence, quantum computing and advanced semiconductors among other sectors.

These moves are part of a more general squeeze on the Chinese economy, as a broad variety of companies continue to find reasons to  pack up and leave that are not necessarily even related to data regulations. In recent months Apple, Ford, Hyundai, Mazda, Samsung and chip manufacturing giant TSMC have all announced plans to gradually wean manufacturing off of sources in China (or have done so already), which has been the go-to production center for most of the world since the 1980s. In some cases this has been at substantial added cost to these companies, indicating the deep concerns about security and long-term supply chain stability that Western firms are experiencing. Vietnam and India have been among the biggest beneficiaries of this new business so far, and some US firms are looking at “reshoring” manufacturing operations back to the US or “nearshoring” them to Mexico and other friendly countries in Latin America.