China’s Not-So-Innocent NGO Law and Its Impact to Businesses

China’s Not-So-Innocent NGO Law and Its Impact to Businesses

Why This Impacts Companies’ Rights in China and How This Led to the Arrest of Former Canadian Diplomat Michael Kovrig

The Chinese government has been extremely busy these days. In addition to dealing with President Trump’s rhetoric and tariffs, they overhauled a number of important laws. For example, China’s E-Commerce Law is set to become effective on January 1, 2019. There’s an equally important yet lesser known law which became effective two years ago on January 1, 2017 – the Law governing foreign NGOs’ operations in China. While Taobao, Alibaba and other giant eCommerce sites are figuring out exactly how they will implement the E-Commerce Law, I thought it would be helpful to take a look at China’s NGO Law and see how it’s currently impacting businesses in China.


Wait – affecting businesses? Why would an NGO operation have an impact on any businesses? Isn’t the basic definition of an NGO that it is a non-profit?

Things have taken a drastic turn since January 2017.

Things have taken a drastic turn since January 2017.

Contrary to the typical understanding of an NGO operation in the Western world, many US/European/South East Asia companies are in fact profiting from China through an NGO setup (or, under the disguise of an NGO). Touting a business with NGO status, or using language that suggests or alludes to an NGO status, gives the business the needed legitimacy and accordingly, the credibility, to convince the public to open its checkbook.

Since the New NGO Law became effective in 2017, there have been a total of 427 registered NGOs in China as of December 2018. China had approximately 7000 NGOs registered prior to the New NGO Law taking effect. It doesn’t take a rocket scientist to notice that the New NGO Law has drastically decreased the number of registered (i.e., approved) NGOs in China.

We can ask WHY but since China is a communist regime, we would probably never get a clear answer to this question.  The more “appropriate” and “practical” question is HOW.  How does China’s New NGO Law significantly reduce the approved foreign NGOs operating in its market and what are the new rules if anyone wants to play along?

The requirements for a foreign NGO to start its operation in China are very similar to the joint venture requirements. A foreign NGO needs to either get approval from the Chinese government or form an alliance with a Chinese entity. Neither is an easy or, quite honestly, inexpensive exercise. Accordingly, prior to the New Law, most foreign NGOs in China did neither. The good news then was that the local Chinese enforcement agents were willing to turn a blind eye – they had bigger fish to fry: they were busy chasing the counterfeiters who were selling fake wine, poisonous dog food or harmful baby formula which led to sensational international headlines and pressure from Beijing to put a stop to these activities. The fake NGO status was problematic but at least it did not lead to any deaths. With the law and enforcement agents in China willing to let it slide, a fake NGO was in fact a smart and lucrative business model especially for foreign companies in the following industries: finance, environment, agriculture, tourism, and education.

 

Things have taken a drastic turn since January 2017. This is how it worked before and after the New Law:

Company Savoy Chester is a UK educational company. In 2000, it registered an NGO in Hong Kong which was quite easy.  In 2010, it decided to enter the Chinese market and China’s NGO requirements as discussed above were much tougher. As such, Savoy Chester simply set up a local for-profit Chinese company which is very easy to set up and requires very little capital commitment.  Once the Chinese Savoy Chester company is up and running, the company markets itself as the: “International Association Providing British Style English Education” (sounds NGO-ish).  In some instances, Savoy Chester uses its registered Chinese name but omits the ending characters which are for-profit companies. Under the NGO-ish disguise, Savoy Chester has been successful in attracting millions of eager parents and their children to attend their classes, conferences and even competitions. The non-profit status is appealing in this context because it allows Savoy Chester to stand out from the hundreds of other money-sucking (and mostly illegitimate) companies trying to make a quick profit.  The catch here is that Savoy Chester is indeed an NGO; but its NGO was granted in Hong Kong, not China. Its status in China is nothing but a simple for-profit LLC registration. This, prior to 2017, was an “acceptable norm”.  However, since January 2017 ‘things have changed dramatically’!

Under the New NGO Law, the local enforcement agents are no longer able to turn a blind eye.  Once its fake NGO status is exposed, Savoy Chester is subject to a series of unpleasant consequences such as revocation/suspension of its business license, confiscation of its properties and/or even business profits. A violation of China’s New NGO law requires the involvement of Chinese policemen – the so called PSB. This is never something to take lightly because for serious cases, arrests and detentions are a real possibility.


If you think the New Law is all talk and no action, think again.  A former Canadian diplomat, Michael Kovrig, was arrested in China in December 2018.  The reason given by Beijing was that Mr. Kovrig’s employer – ICG (International Crisis Group) – held itself out as an NGO but it did not comply with the necessary procedures as required under the New Law.

One may argue Kovrig’s detention was triggered by the political standoff/issues with the US, Canada and China and the recent arrest of Huawei’s CFO.  That may all be true but why give Beijing an easy excuse to send the police to your door?

Since 2017, because of its powerful implications, the NGO law has become an effective legal tool in China to be used either offensively or defensively (or both). While the world is busy watching China’s recent new laws concerning its E-Commerce, internet domain registration, and advertising rules, NGO has become a less sexy but potentially a more powerful weapon to have in your IP arsenal in China. Just think about the leverage you could have if you could have the choice to expose your opponent’s less than legitimate NGO status.

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