Global Law Firm Retreats From China Ahead of Data Crackdown (1)

Global law firm Dentons is splitting from its Chinese operations to comply with impending data regulations, one of the more significant withdrawals by a Western company as Beijing intensifies a campaign to curb leakages of valuable information.

Dentons, a law firm with partners from the US to Europe, is separating this month from its mainland arm in response to government mandates that tighten cybersecurity and data handling. Partner Beijing Dacheng Law Offices will gain full independence to serve domestic clients, Dentons said in a memo to clients.

The global agency becomes the latest Western firm to resort to drastic measures to comply with sweeping restrictions on the handling and transfer of data within and beyond China that will take effect later this year. Among other things, Beijing’s new data security regime gives President Xi Jinping’s administration the power to shut down or fine companies that leak or mishandle sensitive information. Penalties include fines and suspensions.

Xi’s administration has tightened control over the hoard of information produced by the nation’s companies, considered critical for steering the economy as well as future technologies such as AI. But the broad and vague nature of new regulations has spurred concerns about compliance, and the penalties for falling short. Morgan Stanley, for one, is shifting more than 200 technology developers — about a third of the tech cohort — out of mainland China after the country tightened access to troves of data stored onshore.

Read more: Morgan Stanley Moves 200 Tech Experts From China on Data Law

Every business has been forced to weigh the costs of complying with cybersecurity and data security laws with the benefits of operating in the world’s No. 2 economy, said Tom Nunlist, a Shanghai-based associate director at Trivium China who focuses on tech policy.

“The fact is that we will see more companies separate out their operations — maybe break partnerships — because of this,” he said. “The data security related regulations, data export security assessment stuff is extremely strict. Or at least it can be extremely strict. It’s been an absolute nightmare for everyone to deal with.”

Financial institutions, automakers, electronics firms and consumer retailers are among the more active multinationals in the country. Volkswagen AG, General Motors Co., Starbucks Corp., Intel Corp., Tesla Inc. and Apple Inc. are some of the largest household names with extensive Chinese operations.

But banking in particular is considered one of the more sensitive sectors because of its integral economic role, and is party to valuable data on Chinese borrowers.

Morgan Stanley’s remaining staff on the mainland have started to build a standalone China system to comply with local regulations. The new infrastructure, which may cost hundreds of millions of dollars, will be incompatible with its legacy global platforms as the lender overhauls its Asia strategy of handling client records.

The twin moves coincide with Beijing’s growing willingness to go after foreign firms it accuses of violating local regulations. The government has imposed restrictions for instance on Micron Technology Inc., and regulators have this year launched investigations into consultancies such as Bain and Mintz.

Read more: Data Rules Risk Making China ‘Digital Island,’ Companies Say

Dentons’s split was first reported by the Financial Times and specialist site Law.com. The law firm signed a deal in 2015 to link up with Dacheng Law Offices to create what was at the time the world’s largest legal firm. Among Dacheng’s clients were some of the largest state-owned enterprises, including PetroChina Co. and China Telecom Corp.

Denton’s move was “in response to an evolving regulatory environment for Chinese law firms in China — including new mandates and requirements relating to data privacy, cybersecurity, capital control and governance,” the firm said in the memo.

Dacheng will instead operate as a separate and independent legal entity under a “preferred firm” relationship with Dentons.

The new data security regime “will damage China’s links with the rest of the world in ways that might be difficult to perceive,” Nunlist said. “That really is going to be a cost of implementing the data security vision that China has laid out and frankly, I’m not sure that the Chinese government has fully reckoned with that reality.”

(Updates with analyst’s commentary from the fourth paragraph)

--With assistance from Colum Murphy.

To contact the reporter on this story:
Sarah Zheng in Hong Kong at szheng244@bloomberg.net

To contact the editors responsible for this story:
Peter Elstrom at pelstrom@bloomberg.net

Edwin Chan, Vlad Savov

© 2023 Bloomberg L.P. All rights reserved. Used with permission.