According to the latest statistics from China’s Ministry of Commerce, outbound direct investment by Chinese enterprises in 2018 was $129.8 billion, up 4.2 percent year-on-year. Among them $15.6 billion was invested in countries along the Belt and Road, up 8.9 percent year-on-year.

From these figures, we are pleased to see that increasingly more Chinese enterprises have entered the international market, especially in the wake of the Belt and Road Initiative (BRI) that was proposed in 2013 for promoting global cooperation. But as late-comers and newcomers, Chinese enterprises face many difficulties and challenges.

One big problem is that due to lack of comprehensive understanding on various laws and regulations of host countries. For example, South Africa has issued an important policy in 2003 known as Black Economic Empowerment (BEE). A big Chinese company entered the market of South Africa for many years but it didn’t have the opportunity to bid for the government-funded projects because it failed to meet the criterion made by the BEE.

This typical case shows how important it is for overseas projects to comprehensively understand and strictly abide by the laws of the host countries. Any flaws in the operation and practice will entail high risks that would lead to termination or nullification of contracts and projects. It will result in heavy losses and profound adverse impact on the company’s reputation.

Given the dissimilarities, complexity and sometimes even intricacy of legal systems in foreign countries, it is very essential for Chinese enterprises to set up a comprehensive compliance management system, which covers all legislation, rules and regulations related to business operations, including but not limited to anti-corruption compliance, competition and anti-monopoly rules compliance, financial rules compliance, and, in particular, anti-money laundering, trade rules compliance, especially compliance with export control and economic sanctions provisions, data protection compliance and intellectual property compliance.

To achieve this goal, enterprises need to enhance their awareness of the importance of compliance review which should be carried out by different departments and at various stages.

Experience shows that three lines of defense and review would be effective within an enterprise if the business operations department, compliance or legal department and the internal audit department are all involved in the whole procedure to conduct review of the project on hand.

By doing so, potential risks and hidden dangers will be eliminated or at least reduced significantly in most cases.

When investing in overseas projects, it is very important for enterprises to fully understand the laws and regulations related to the project, including laws, regulations and policies of the target country of investment, laws and regulations of China on overseas direct investment, and relevant bilateral and international treaties.

In this regard, due diligence investigation into the invested entities and cooperation partners is a must and should be carried out thoroughly. Before signing the formal contract and making the final decision on the investment projects, Chinese enterprises should make sure the legal qualifications, existence and operation status of the invested entities, as well as whether the target asset has any dispute, judicial measures or major defects.

What’s more, enterprises should bear in mind the clear strategic plans for overseas investment projects. They should not only design a tailored transaction structure in the preparatory stage, but also plan the matching plan in the operation stage, otherwise the possibility of failure is high.

To prevent the aforementioned legal risks, professional law firms -- Chinese, international and local -- are all needed. It would be perfect if they form a team with Chinese lawyers as coordinators to help the Chinese investors deal with all legal matters. But the fact is that only a very few Chinese lawyers have rich experience in overseas projects, especially in the so-called Belt and Road countries. The big challenge is to have more experienced and qualified Chinese lawyers represent clients in the overseas projects.

Paying attention to legal compliance and the corresponding risks faced by Chinese enterprises, the Chinese government should formulate relevant laws. Further, the government should clarify the responsibilities of relevant departments in terms of guiding and supervising Chinese enterprises' overseas investments. Considering that China’s outbound direct investment stock totaled $1.8 trillion by the end of 2017 and second only to US, there is urgent necessity to set up a special agency that provide related services to protect China’s huge overseas interests. A global hotline or call center for the overseas Chinese companies in need is probably a good beginning to start with. In the long run, the government should coordinate relevant departments, such as the National Development and Reform Commission, the Ministry of Commerce, the Ministry of Foreign Affairs, the State Administration of Foreign Exchange and other overseas agencies and trade associations to form a unified and concerted mechanism for protecting overseas interests of Chinese enterprises.

Yunchuan Jing is founding partner of Beijing Gaotong Law Firm, and executive president of the Swiss-China World Silk Road Association.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.