The Chinese government is poised to infiltrate Microsoft and other American companies doing business in the country with “Communist spies” who could steal trade secrets, poach employees and even subject them to chilling intimidation tactics, The Washington Post has found.
A new version of Beijing's “Company Law” that came into effect on July 1 requires multinational companies with more than 300 employees in China to appoint “employee representatives” to the boards of directors of their Chinese subsidiaries, a crackdown that experts say has received little coverage in Western media.
Sources told The Washington Post that these “representatives” would likely be in regular contact with Chinese authorities, if not the Chinese Communist Party itself, giving Beijing direct access to the highly sensitive inner workings of American companies.
U.S. officials say the new rules, which could also require companies to set up local worker audit committees, could give the Chinese Communist Party a chilling tool to exert control over U.S. companies' employees.
“They [Chinese intelligence] “Congressional aides tell their staff, 'We need to talk to this person. If you want to enforce this person, tell us who this person is,'” a congressional aide who was briefed on the law told The Post. “'I have access to employee data. This is their wife. This is where they live. This is the school their kids go to.'”
A congressional aide, speaking on condition of anonymity, said corporate spies from Beijing could similarly infiltrate classified meetings or instruct employees to insert flash drives into certain computers to aid in the theft of intellectual property.
Directors spying for the Chinese Communist Party could gain compromising information about “pressure points” in the company if authorities try to exploit it, the sources said.
The new law also includes stricter “registered capital” requirements for corporate executives and increased liability for directors in cases of fraud or negligence.
According to Paul Rosenzweig, a former assistant secretary of homeland security, this is the latest effort by President Xi Jinping's government to tighten control over foreign companies.
“Previously they did it in a way that I would describe as external, that is, the government acting against the company,” Rosenzweig said. “Now they've added internal control, that is, employee representatives, who I would dare call a Communist spy.”
While China's overhaul of its company law applies to many companies, Microsoft is in the spotlight not only because it employs more than 10,000 people in China, but also because the company's software is deeply embedded in America's critical infrastructure.
Last year, a China-based group carried out a brazen hack of the Microsoft email accounts of Commerce Secretary Gina Raimondo and several other U.S. government officials.
Microsoft declined to comment for this article, but it has expanded its operations in China even as other big tech companies such as Google and Meta have reduced their presence in the region, and the company has sought to downplay China-related security concerns.
When asked in June by Rep. Carlos Gimenez (R-Fla.) whether the company was complying with a 2017 law requiring companies to cooperate with the Chinese Communist Party's intelligence services, Microsoft executive Brad Smith replied “we're not compliant,” suggesting the company was somehow exempt.
“There are two types of countries in the world: those that enforce all the laws they enact, and those that enact certain laws but don't necessarily enforce them. In this context, China and its laws belong to the latter category.” Smith says.
Jimenez told the Post he was not convinced by Smith's explanation and was particularly concerned about China's revised company law.
“Sooner or later, these companies are going to find themselves co-opted by the Chinese Communist Party and China,” Jimenez said. “The sooner we get out of China, the better it will be for the companies, but it will also be better for America.”
As reported by The Washington Post, US lawmakers have warned Microsoft that its cozy ties with China pose national security risks, in part because of the company's pursuit of advanced artificial intelligence.
Microsoft is reportedly considering closing two of its AI research labs in China due to perceived risks, including China hacking the facilities, stealing sensitive technology and poaching key employees to start rival companies.
According to the congressional aide, the enterprise law is one way China can “pressure itself to keep its AI labs open.”
“More realistically, they're not going to do that. What they're going to do is steal all the data, every bit of data,” the aide added.
“There are no private businesses in China,” Rep. John Moolenaar (R-Mich.), chairman of the House Select Committee on China, said in a statement.
“A warning to all Americans doing business in China: The Chinese Communist Party will abide by its total control at your expense,” Moolenaar added. “'Workers' Representatives' is a blatant attempt by the Chinese Communist Party to embed party cadres in American companies.”
“Congress has long known that Beijing steals sensitive business information and technology from companies doing business in China,” Sen. Marsha Blackburn (R-Tenn.) said.
“Beijing's latest move, which will embed Chinese Communist Party officials even more deeply into the companies, shows the extent of the government's control,” Blackburn told the Post.
Jonathan Bench, a partner at the law firm Harris Sliwoski and an expert on China corporate law, said director representation clauses “are certainly a new risk factor” for Western companies.
“I absolutely expect that CCP members will be chosen through a 'democratic election' through employee votes,” Bench said. “If CCP members are not directly elected, then no doubt designated employee representatives will report their details to one or more CCP executives, either internally or externally or both.”
Bench said it was unlikely that Microsoft or similar companies would be able to escape the law.
“We see no way around this legal requirement,” the bench added.
Some experts say concerns about China's corporate law reforms are overblown.
Adam Channer, an international investment lawyer at Kilton McConkie, said the employee director provision would be a “clumsy tool” that would allow the Chinese Communist Party to monitor Western companies, and noted that current law does not require directors to be members of the Chinese Communist Party.
The bigger problem, according to Derek Scissors, chief economist for the China Beige Book, is that American companies like Microsoft “have willingly put themselves in a market that is completely distorted and discriminatory.”
“None of the amendments are material because the Company Law will be interpreted in any way that the Chinese Communist Party sees fit at any given time,” Scissors said.
