Big Four auditors shut down legal ops in China

The so-called ‘Big Four’ auditing giants have shut down their legal affiliations in China following intense regulatory scrutiny, according to an investigation by Law.com International.

In a major development for Asia’s legal industry, PwC and Deloitte confirmed that they had closed their associated Chinese law firms. KPMG and EY have also closed, Law.Com reports, and both no longer have operational local law-firm websites. 

Several lawyers in the region said that the decisions were made after the firms were raided by local regulators. All four firms declined to comment on the raids.

Dissolved

PwC's two associated Chinese law firms were Rui Bai in Beijing and Xin Bai in Shanghai. In a statement, PwC said: "The partners of Rui Bai Law Firm and Xin Bai Law Firm dissolved their partnerships earlier this year and are no longer part of PwC's network of law firms."

"While there is no longer a PRC licensed network law firm in mainland China, we remain focused on supporting our clients," the statement continued. 

PwC's China tax services, which provide non-regulated corporate and regulatory services, remained operational, a spokesman said.

Deloitte confirmed that its China practice, Qin Li Law Firm, had ceased operations in Shanghai. 

KPMG and EY declined to comment to Law.Com when asked about closures.

Several lawyers said that the firms had dissolved their Chinese law firms on the mainland, Chen & Co Law Firm and Shanghai Rui Wei, and their respective websites were no longer functional.

Foreign law firms are not permitted to provide legal advice in China. Over the past few years, many international firms – including the Big Four – have allied themselves with domestic law practices, in the hope of being able to provide a more prolific China offering.

The Big Four started affiliating with local law offices in 2018 and, through those affiliations, advised more holistically on China deals, Law.Com reports.

Departures

None of the closures were made public, but they have been the topic of much debate in the local market as scores of employees have started to trickle back to local and international law firms.

The latest to defect include Jia Weiheng and Cody Cheng, who were partners at Deloitte's Qin Li, who have joined domestic law firm Han Kun Law Offices.

Barbara Li and Steven Kou, who were partners at Rui Bai, also recently joined Reed Smith and Chinese practice Global Law Office, respectively.

Earlier this year, Echo Zhao, who was a partner at Rui Wei, moved to Jingtian & Gongcheng.

In March, Dentons also took on a Rui Wei lawyer, Wu Xuqing, as a partner for its Shanghai office. One of KPMG's Shanghai counsel, Kaitian Luo left in January to set up his own practice, Puran Law Firm.

According to one partner who defected from one of the Big Four firms, their senior management had been told by local Chinese regulators that they needed to reconfigure their local legal function and services.

A decision was later made to entirely liquidate their practices instead, though it is unclear if the decision to close was forced upon regulators, they said.

Some of the Big Four’s affiliated Chinese lawyers were given the option of integrating with the general advisory and consulting business, but the catch was that they would not be able to practice Chinese law or provide any legal services.

Staff were not informed of the reasons behind having to close, the partner said.

Unfortunate

“It’s unfortunate and sad,” the partner added. “Things were going well, and we were building a strong reputation in the market. I would have preferred to stay but I won’t be able to practise law, so where’s the point in that?”

“Having practised as part of a [Big Four] and at other law firms, there are real advantages in having all the other bells and whistles,” said another partner, who left an affiliated practice last year.

"Our tech offering is miles ahead of all the other firms, but the reality is that we are competing with law firms that have been on the ground for a long, long time," the partner said.

"But it just always feels like there's a regulatory cloud overhanging."

Local sensitivity

Lawyers in the greater Chinese market say that there is heightened sensitivity there now about financial auditing and data security, so what happened with the Big Four and their Chinese practices wasn’t entirely surprising.

"The issue at hand has been the same issue for a long time now," said one Beijing-based partner at a US law firm. "How will the accounting firms provide legal advice without compromising data security, not to mention it's a conflict galore," he added.

The Big Four firms are familiar with resistance against their expansion into the legal sector. They are prohibited from advising on US law, and from offering legal services on American soil, the largest legal market in the world.

In 2019, they were ordered to refrain from engaging in any law practice in India.

Stunted growth

Their stunted growth in legal business has helped influence EY’s decision to separate its audit business, consequently ridding itself of its biggest burden – direct conflicts-of-interest issues for companies to which it wishes to provide legal services, Law.Com reports.

In China, though, lawyers are sceptical that the situation will take a more positive turn for the Big Four anytime soon – not, at least, until US-China geopolitical tensions ease, which won’t be in the foreseeable future, lawyers say.

“They have their cake and want to eat it too,” said one US firm partner. “Well, China says no!”