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Due Diligence in China: Why databases aren’t enough

For due diligence on third parties, what’s adequate? Simple searches of databases often serve as a baseline. But are the databases available in the marketplace defensible as the right tool for the job?

If the due diligence target is in a non-English speaking country, database-only searches on the subject will miss out on potentially significant information available only in the local language.

China is a good example of where database searches as a sole source of information may miss relevant derogatory information. There are countless reports in Chinese media of corruption, investigations, legal actions, and similar issues that aren’t published in English. As a result, the names never make their way to most databases. 

Further, transliterations of Chinese names into English simply do not work as a reliable means of conducting searches. And the Chinese justice system has literally thousands of courts spread across the provinces and municipalities. Many court records, at least in a basic form, are available online only if you can read and write Chinese and know where to focus your search.

Similarly, Administration for Industry Commerce (AIC) records are generally online and contain company registration information. While useful for insuring the target company in question is indeed a registered entity in China, important details such as shareholding are often only released through in-person visits to local AIC offices.

A recently conducted review of a Chinese entity Zhengzhou Coal Industry Group illustrates the sort of information available in the public domain in China that would not likely be picked up from database searches alone. 

While some important information was picked up from English media as this is a very high profile entity, issues surrounding social accountability, additional corruption issues and litigation were not present in the databases.  Similarly, identifying the corporate ownership through official sources revealed additional companies that would have gone unreported.

A copy of the report on Zhengzhou Coal Industry Group can be downloaded here.

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Paul Johnson is CEO of ethiXbase360 Due Diligence. He can be contacted here.

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2 Comments

  1. I agree. I was having the same issue when I was doing a compliance project for my client. You can simply translate Chinese business entity into English. Also, a lot of local Chinese business entities were registered under different names, meaning that the real owners will never be showed on the paper. There is a network that associated with those hidden owners who are either government officers or family members.

  2. Due Diligence is a serious task for all types of risk based activities. Most corporations have misconceptions and even shrug off when you mention that word “Due Diligence”, It involves serious investigative work both physical having boots on the ground coupled with equally conducting exhaustive investigative work over book, records, and data bases. For what I have seen since 2002 when FCPA was brought on to the front burner, all most all rushed to their books not knowing the physical investigative work with boots on the ground is equally important. Like every enactment has its legal and financial sides, Due Diligence also has its physical investigative work on one hand, books, records and data bases on the other hand. It is high time C suite and all other professionals involved in FCPA, UK Bribery Act, Ley de Anti-corrupción de México and other countries’ laws on the same subject should recognize it.


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