Consulting Giants Test Limits with China Workarounds

In the face of a complex geopolitical landscape, global consultancies are adapting their strategies to continue operating within China. Increasingly, they are exploring ways to navigate Western sanctions while also adhering to Beijing’s regulations that limit foreign involvement in sensitive sectors.

Consulting Giants Test Limits with China Workarounds

Recent reports indicate that firms like KPMG and Bain & Co., along with EY, have involved themselves in projects with entities subject to sanctions. These arrangements have raised concerns among industry experts regarding compliance with both Western sanctions and Chinese rules.

Recent Developments and Key Players

Since early 2023, KPMG’s China operations have been engaged with Sberbank, a sanctioned Russian bank. Documents uncovered show that KPMG assisted with various logistical functions for Sberbank, despite its sensitive status. KPMG has insisted that its actions adhere to all relevant laws and regulations.

• KPMG’s engagement letter with Sberbank was dated November 6, 2023, with fees exceeding $400,000.
• Consultancy Bain & Co. proposed a market analysis for Sberbank’s Electric Vehicle sector, although that deal did not finalize.

The tensions stemming from U.S. sanctions against Sberbank began following Russia’s annexation of Crimea and were intensified after Russia’s military actions in Ukraine. These sanctions prohibit U.S. entities from engaging in business with Sberbank, raising stakes for any foreign firm that partners with it.

Sanctions and Regulatory Risks

Experts caution that collaborating with sanctioned entities poses serious reputational risks. Daniel Glaser, a risk management specialist, emphasizes that non-U.S. firms must be vigilant about compliance to avoid the perception of sanction evasion. With potential civil fines and criminal penalties, the risks multiply for consultancies operating in this precarious environment.

Legal Framework and Data Security Regulations

In tandem with the complexities of international sanctions, China has enacted stringent data security laws, set to fully take effect in early 2025. These laws further restrict how foreign consultancies can conduct business involving sensitive local data.

As the market for global consulting in China continues to evolve, the difficulties imposed by both Western sanctions and domestic regulations are compelling firms to seek creative workarounds. The use of intermediaries by firms like EY has been noted as a strategy to bypass direct regulatory scrutiny.

• In April 2023, EY used an intermediary to bid on a project with the Chongqing Rural Commercial Bank.
• The intermediary’s contract obscured the participation of EY staff, leading to questions about compliance.

While it is not illegal for companies to utilize third parties to perform restricted tasks in China, such practices can obscure the transparency of business dealings. As U.S.-China tensions escalate, global consultancies like KPMG, Bain, and EY continue to tread carefully, weighing the benefits of pursuing local opportunities against the risks of potential sanctions.

The Future of Consulting in China

Looking ahead, consulting firms face a tough challenge as they navigate the evolving landscape shaped by geopolitical tensions. Adapting to local regulations while managing the constraints of international sanctions will be crucial for their ongoing operations and reputation.