HONG KONG/BEIJING (Reuters) - In the early afternoon of Monday, Aug. 4, ten men in suits and casual business wear barged into a busy office at Mercedes-Benz’s east China sales office, near Shanghai’s Hongqiao international airport.
“People were starting a new week and were just back from lunch, when the men arrived,” said a person familiar with the scene. “They didn’t have the slightest idea they were coming to rip the office apart and question people for data and information for the next 10 hours,” he said, adding the men were antitrust investigators from China’s National Development and Reform Commission (NDRC).
Such U.S. and European-style “dawn raids” have become a powerful weapon for China’s increasingly aggressive antitrust enforcement agencies, the NDRC and the State Administration for Industry and Commerce (SAIC), allowing them to seize evidence that may aid broader probes into antitrust violations or corruption.
Several major foreign companies have been raided in recent months - from car and drugs manufacturers to technology firms such as U.S. software giant Microsoft Corp - as China steps up enforcement of a 2008 anti-monopoly law.
The raids have spawned a cottage industry in preparing multinational companies on some basic do’s and don‘ts in the event of a surprise visit.
Companies are giving staff practical coaching, including holding mock raids, and bringing in legal experts to train them on how to handle intense, on-the-spot questioning, negotiate cultural hurdles, and make contingency arrangements to source emergency legal advice.
“We’re seeing an increase in the sophistication of the enforcement agencies, and personnel,” said Marc Waha, a partner in the antitrust practice at law firm Norton Rose Fulbright in Hong Kong. “They’ve spent a lot of time with other agencies in Germany and Europe learning about conducting investigations and the value of onsite inspections. That’s why we’re seeing more active enforcement.”
Companies operating in China have few rights with respect to dawn raids, and laws about what evidence can be seized - such as original documents and files rather than copies - are ambiguous.
Critically, legal privilege, which in the United States and Europe protects communication between a company and its legal adviser and is regularly used to withhold evidence, is generally not recognised in China.
“In China, there’s very little guidance out there, it’s much more Wild West because it’s all so new,” said Mark Jephcott, head of the Asia competition practice at Herbert Smith Freehills in Hong Kong.
The SAIC and NDRC did not respond to requests for comment.
Raids typically involve 10-30 antitrust agency officials arriving unannounced at a company’s premises, usually early in the morning, and searching desk drawers, computers, files, lockers, safes and even vehicles, lawyers familiar with the process said.
Raids by uniformed SAIC officials are generally regarded as relatively professional, while the NDRC and local Development and Reform Commissions can be more heavy-handed and often arrive in plain clothes, they said.
Either way, “it’s very stressful and unpleasant,” said Jephcott, who has been present at several raids, both as a former EU antitrust official and as a legal adviser.
Amid the initial chaos of a corporate raid, it’s important to remember basic Chinese customs and courtesies, said Liyong Jiang, a partner at Beijing-based law firm Gaopeng & Partners, and a former official at the Ministry of Commerce, China’s merger control agency.
Exchanging business cards and offering tea or coffee, and maybe ordering in lunch, too, are important gestures of cooperation, he said. “It doesn’t matter what you offer, it’s the gesture that’s important. It’s the Chinese way.”
Having the regulators’ business cards can also help a company’s lawyers track down officials later for further communication - not always a simple process due to the bureaucracy at China’s state agencies. Sitting down to a take-away lunch can help senior managers and lawyers chat with officials and build a rapport, Jiang said. “They’ll be less stringent - they are human, too.”
That may not work for everyone, though.
Another of those with knowledge of the Mercedes-Benz raid said the investigators, backed up by two or three computer technicians, went through the office “cubicle by cubicle and room by room ... questioning senior managers ... and downloading information from computers.”
“Those investigators didn’t take any breaks. They didn’t drink tea or eat snacks or dinner,” the person said, adding the officials only left at 11 p.m. “It was a very serious affair.”
Dawn raid training - through seminars, online courses and one-on-one coaching for frontline staff such as receptionists and security guards - aims to mitigate blunders, help companies contain the inspection and bring out officials’ human side.
Lawyers recalled instances when well-meaning but naive employees made the situation worse - such as receptionists turning away officials because they didn’t have an appointment or, worse still, allowing officials to roam the premises unchecked. In other examples, jittery employees deleted personal emails in what the Chinese authorities later construed was an attempt to obstruct the investigation.
“It’s a detailed exercise,” said Eva Crook-Santner, a member of the antitrust practice at law firm Baker & McKenzie in Hong Kong. “We guide clients through a dawn raid, focusing on all job functions - from the security guard to the IT team.”
Employees are trained how to handle intense questioning. This is key in China where an individual cannot refuse to answer a question on the basis they may incriminate themselves. Failing to respond constitutes a fine-able obstruction. Sometimes, lawyers said, staff wanting to appear helpful can share too much.
“Staff have to respond very carefully,” said Jephcott. “They have to cooperate fully, but try to limit themselves to factual answers.”
Simple IT resource planning can also help things go more smoothly. In China, officials will often take off with original documents and files. Having a high-performance photocopier and back-up hard drives can help provide copies of evidence, lawyers said.
Officials can sometimes show their human side.
One lawyer, who didn’t want to be identified, recalled how an official on one raid spent more time flirting with the secretarial staff than searching for incriminating evidence.
Editing by Ian Geoghegan