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”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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