Deloitte Dabbles in Chinese Legal Practice

, The Asian Lawyer

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The Chinese affiliates of the Big Four accounting firms got some unwelcome news last week when a U.S. Securities and Exchange Commission judge ruled that they should be suspended from auditing U.S.–listed companies for six months. The judge said they “willfully” failed to cooperate with SEC investigations of securities fraud at certain Chinese companies.
 
The suspensions are under appeal—the audit firms point out that Chinese law prohibits them from turning over certain documents to foreign regulators–and may not take effect for months, if ever. But the whole affair has thrown a cloud over how Deloitte Touche Tohmatsu, PricewaterhouseCoopers, KPMG and Ernst & Young conduct audits in China.

So maybe it’s a good thing at least one of them has found a sideline practicing law there.

With little fanfare, Deloitte opened its own domestic law firm in Shanghai at the beginning of last year. The seven-lawyer Qin Li Law Firm doesn’t bear the Deloitte name, but two of its senior staffers—practice leader Patrick Yip and partner Clare Lu—are simultaneously partners at Deloitte, and the firm’s website discreetly links to those for Deloitte China and Deloitte Legal.

Earlier this month, Ernst & Young also launched a China legal group. According to a spokesman, the group now has 60 lawyers in Beijing, Shanghai and Hong Kong, though he was unable to say if they were actively practicing law. KPMG and PwC also have a number of legal professionals on staff in Hong Kong and China but say they are not practicing law.

The Big Four have long delved into some areas of law, most obviously those that touch on taxation. Roughly 15 years ago, there was widespread concern among firms about the big accounting firms making a big push to establish so-called multidisciplinary practices (MDPs) combining law, accounting and other professional services. The much greater size of accounting firms—Deloitte had $32.4 billion in global revenue last year—suggested they could devote massive resources to competing with law firms.

But, owing in part to the fallout from the Enron scandal, in which Arthur Andersen provided the company both audit and consulting services, MDPs remain prohibited in most of the United States and eventually faded there as a competitive threat to law firms. The Big Four were able to press on in many other countries though.

Qin Li’s Lu says the new Chinese firm is an extension of Deloitte Legal, which operates in much of Europe, Africa and Latin America, as well as Australia and parts of Asia.

“Here in China, people always know us for our audit work, but Deloitte Legal has over 1,200 lawyers worldwide,” she says. “It’s a different service line, just like our audit practice, tax practice and financial advisory practice.”

Lu says Qin Li was opened in response to demand from audit and tax clients, especially those in Europe. “Our clients came to us asking for tax advice, and sometimes they would want us to provide other services like drafting contracts,” she says. “Because we didn’t have a legal division here, we couldn’t.”

While referrals from Deloitte’s audit side will likely provide most of Qin Li’s clients for some time, Lu says the law firm eventually wants to attract its own clients and expand its offerings beyond tax law to practice areas including litigation and arbitration, employment law, intellectual property law and general corporate law.

Lu returned to Deloitte from Chinese firm practice to help launch Qin Li. After working as a tax professional at Deloitte from 1997 to 2003, she was a partner at Shanghai firms Richard Wang & Co. and, more recently, Llinks Law Offices. Practice leader Yip, who is actually based in Hong Kong, has worked at Deloitte for over 20 years. Another partner, Nora Fu, joined Qin Li from Shanghai-based DiamonDLegal & Partners, where she advised on both corporate matters and litigation.

That Deloitte can operate its own Chinese law firm—Lu says the arrangement was approved by the Ministry of Justice—may come as a surprise to many lawyers with international law firms. Foreign law firms are explicitly barred from directly or indirectly investing in, managing, operating, controlling or taking equity interests in Chinese law firms. International firms are also not permitted to practice Chinese law themselves, though there is a broad loophole allowing them to advise clients on “the Chinese legal environment.”

But those rules may not apply to accounting firms. “It is a bit of a legal vacuum,” says Andrew Godwin, associate director of the center for Asian law at Melbourne Law School and a former partner with Linklaters in Shanghai. “As far as I am aware, there are no regulations expressly restricting the form or nature of cooperation between a Chinese law firm and an international accounting firm. At the same time, there are no regulations expressly permitting such cooperation.”

Deloitte, like the rest of the Big Four, is a professional service network rather than an integrated partnership. Member firms within the network are independent legal entities that don’t practice jointly or share liabilities. Service is provided by individual member firms instead of the New York–based parent.

Some international law firms also operate in China through independent local entities, though in somewhat less straightforward ways. Last November, U.K. firm Clyde & Co took advantage of a Chinese government initiative allowing joint operation between Hong Kong and mainland law firms, and used its Hong Kong office to enter into such a venture with West Link Partnership in Chongqing. In 2007 Chicago-based McDermott Will & Emery formed an alliance with MWE China Law Offices, a cobranded Chinese firm. King & Wood Mallesons is allowed to practice Chinese law both because of its Swiss verein structure and because, despite its overseas combinations, it is still generally perceived as a Chinese firm.

Godwin says accounting firms are not on the Chinese government’s “regulatory radar the same as foreign law firms.” But he says Qin Li will still have limits. “The reality remains that Chinese law firms must operate independently, and this probably means that although they may be able to access and utilize certain systems and resources within the global network, they are limited in terms of what they can share in the other direction.”

Lu says the Chinese government is supportive of the arrangement between Deloitte and Qin Li because it is helping a Chinese law firm, albeit one created by Deloitte, gain international experience. “Without an international network like Deloitte’s, Chinese law firms will still be considered foreign firms when they go overseas,” she says.

Could the Chinese government’s approval of Qin Li signal that it is becoming more open to easing restrictions on foreign firms practicing local law or merging with local firms?

James Zimmerman, managing partner of Sheppard Mullin Richter & Hampton’s Beijing office, doubts any law firms will try to do what Deloitte has done without an explicit greenlight. “Foreign law firms may move in this direction if the Ministry of Justice provides the guidance,” he says. “But I am skeptical until carved in stone. Without rules, the ministry could always backtrack.”

If they are serious about internationalizing the Chinese profession, they would embrace that kind of integration, says Godwin. “International experience indicates that the most effective way of encouraging the internationalization of the local profession is to allow integration between local firms and foreign firms,” he says. “It is only in this way that local firms and local lawyers can enjoy the full benefits of being part of a global practice.”

Email: azhang@alm.com.

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