The Big Four auditing giants have quietly 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 they have closed their associated Chinese law firms. KPMG and EY have also closed, according to people with knowledge of the matter, and both no longer have operational local law firm websites.
Several lawyers in the region said the decisions were made after the firms were raided by local regulators. All four firms declined to comment on the raids.
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 provides non-regulated corporate and regulatory services, remains operational, a spokesperson said.
Deloitte confirmed that its China practice, Qin Li Law Firm, has ceased operations in Shanghai.
KPMG and EY declined to comment when asked about closures.
Several lawyers said the firms have dissolved their Chinese law firms on the mainland, Chen & Co Law Firm and Shanghai Rui Wei, and their respective websites are no longer functional.
Foreign law firms are not permitted to provide China law advice. 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.
Departures
None of the closures were made public, but they have been the topic of much debate in the local market as scores of their 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 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 by 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 will 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.
“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 practiced 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 China market say there is heightened sensitivity in China at the moment around financial auditing and data security, so what happened with the Big Four and their Chinese practices weren’t entirely surprising.
“The issue at hand has been the same issue for a long time now,” said one Beijing-based partner at a U.S. law firm. “How will the accounting firms provide legal advice without compromising data security, not to mention it’s a conflict galore,” he added.
Just last month, Deloitte’s Chinese affiliate suffered a $20 million penalty over U.S. Securities and Exchange Commission (SEC) allegations that the firm broke American auditor rules in reviewing some of its clients’ financial reports.
The SEC alleged that in audits between 2016 and 2018, Deloitte’s China affiliate requested at least 12 clients to select their own samples of financial statements for review and create documents that shows the auditor had tested the financial statements without providing proof that it had.
The Big Four firms are familiar with resistance against their expansion into the legal sector. They are prohibited from advising on U.S. 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.
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 it wishes to provide legal services.
In China, though, lawyers are skeptical that the situation will take a more positive turn for the Big Four anytime soon, not at least until U.S.—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 U.S. firm partner. “Well, China says no.”
