Top consulting firms test boundaries with China workarounds

Navigating Geopolitical Risks in Consulting

Feb 3 (Reuters) - Faced with a fraught geopolitical environment, global consultancies are turning to riskier ways to do business in China that some industry and legal experts say test the boundaries of Western sanctions and Beijing's drive to curb foreign involvement in sensitive sectors.

Engagements with Sanctioned Entities

Since 2023, China arms of KPMG and Bain & Co have pitched for — and the former carried out — work for a sanctioned Russian bank, while EY staff used a Chinese intermediary to pitch for a project for a state-owned client, according to company documents and four people familiar with their decision-making. Reuters is reporting these arrangements for the first time.

Use of Intermediaries in China

Western sanctions, including those imposed after Moscow's 2022 invasion of Ukraine, have hit a growing list of companies from Russia and other nations in recent years, increasing compliance obligations for firms doing business globally. Beijing, meanwhile, has restricted the work foreign consultants can do for state-owned enterprises and, in early 2025, introduced sweeping data-security regulations that further limit cross-border transfers of sensitive information.

Regulatory Scrutiny and Compliance

Reuters interviews with 10 current and former consulting-industry figures and a review of engagement agreements and company communications show how three of the world's largest consultancies have sought to maneuver around the evolving constraints, as they navigate Sino-Western tensions and a slowdown in the world's second-largest economy.

KPMG China, for example, agreed to help Russia's state-owned Sberbank set up its branch in China, which involved assisting with licensing, government inspections, IT assessments, and tax filings, according to an engagement letter dated November 6, 2023 seen by Reuters. The letter outlined a fee exceeding $400,000.

KPMG told Reuters the engagement "was accepted and conducted in accordance with all applicable laws and regulations." KPMG China "conducted checks to ensure compliance with sanctions laws, consistent with its normal procedures," it said, adding that Sberbank's representative office in Beijing "directly engaged KPMG China and directly made all payments to KPMG China for its work." Reuters has no evidence to the contrary. 

SANCTIONS RISK

The U.S. imposed sanctions on Sberbank, Russia's biggest bank, following Moscow's annexation of the Crimean Peninsula more than a decade ago and tightened them in response to Russia's 2022 invasion of Ukraine. The restrictions bar U.S. persons and entities from providing goods, services or technology to Sberbank, and secondary sanctions also apply, meaning a non-U.S. person or entity could be sanctioned for providing the same. 

A breach of secondary sanctions occurs where a non-U.S. person or entity has provided "material" support to a sanctioned entity, according to the U.S. Treasury. In determining whether support has been material, the Office of Foreign Assets Control has significant discretion, said lawyers from Steptoe LLP in a summary of the rules in industry publication Global Legal Insights.

Stressing that they weren't talking about specific cases described by Reuters, several sanctions experts told Reuters that working with a sanctioned entity in any capacity invites reputational and regulatory risk. 

"If you are a non-U.S. entity but doing business with an entity that's sanctioned or under a U.S. program with secondary sanctions, then you are taking on a tremendous, tremendous risk," said Daniel Glaser, global head of jurisdictional services for risk-advisory firm K2 Integrity.

Any determination of a breach would depend on the details of the engagement, added Glaser, a former assistant secretary for terrorist financing in the U.S. Treasury Department during the Obama administration.

While there may be ways to navigate transactions with a sanctioned firm, doing so is contingent on factors such as the nature of the transaction and the currency used, said Meg Utterback, a partner at King & Wood Mallesons. The U.S. sanctions regime has broad reach and parties should avoid any risk that U.S. authorities would perceive a transaction as an evasion of sanctions, she cautioned.

In another case involving the Russian lender, the China arm of U.S. consultancy Bain & Co pitched for a Sberbank market-analysis project on China's EV industry, according to communications seen by Reuters dated September 2024.

Sberbank wanted to understand the sector's development stage, penetration, market players, and receive forecasts on the industry. Bain's proposed fee was over $400,000 for three weeks of work, according to the communications. During talks, Bain said it could not receive payment from a sanctioned entity, and the use of an intermediary was discussed, but the consultancy didn't win the pitch and the project didn't go ahead, said a person with knowledge of the matter. 

Sberbank didn't respond to detailed questions from Reuters about the engagement with KPMG and the discussions with Bain. Bain declined to comment.

A U.S. Treasury spokesperson told Reuters the department takes sanctions enforcement extremely seriously but declined to comment on the instances identified by Reuters. 

The Kremlin didn't respond to a request for comment. Russian President Vladimir Putin has said Western sanctions are unjustified, and has called on Russian officials and companies to circumvent the restrictions and to expand into new markets.

China's finance and commerce ministries didn't respond to requests for comment about the consultancies' practices. The National Financial Regulatory Administration and the People's Bank of China, which oversee domestic lenders, didn't address questions about the examples detailed in this report.

U.S. civil fines for primary sanctions breaches can reach hundreds of thousands of dollars per violation, with criminal cases carrying higher penalties and potential jail terms. The U.S. hasn't sanctioned any global consultancies for their dealings in China. 

The EU and Britain also have sanctioned Sberbank, prohibiting the provision of some professional services, including management consulting. The EU and the UK government declined to comment.

SCRUTINY OF FOREIGN FIRMS

Starting around the turn of the century, foreign consultancies grew rapidly in China, whose 2001 accession to the World Trade Organization created demand for firms that could help multinationals and local players navigate new markets. Consultancies followed overseas investment into China and hired briskly, five consultants said.

Chinese rivals later gained ground by offering lower prices and fluency with local rules and business culture. In recent years, Beijing's emphasis on self-reliance and national security has made it harder for foreign firms to maintain their former dominance. China revenue growth for KPMG, EY, PwC and Deloitte – the "Big Four" accounting firms which also have consulting arms – has slowed sharply since 2022, according to data from the Chinese Institute of Certified Public Accountants.

In early 2025, Beijing introduced the Network Data Security Management Regulations, imposing security assessments on many companies that handle online data about individuals or organizations and restricting cross-border transfers of information without government approval. The move was designed in part to safeguard national security, according to state media. 

The deepening U.S.-China tensions have left global consultancies walking a "tightrope" in China, said George Yip, emeritus professor of marketing and strategy at Imperial College London and visiting professor at Northeastern University, Boston. 

Faced with shrinking opportunities in China, some global consultancies have turned to intermediaries to shield the consultancies' local units from scrutiny by Chinese and Western regulators, according to the 10 sources. 

In one such case, EY staffers in China used a third-party firm, Jindian Information Technology (Beijing), to pitch for a 100-day strategy project in April 2023 for the Chinese state-owned Chongqing Rural Commercial Bank, according to an engagement contract seen by Reuters. 

The contract was between Jindian and the Chongqing bank. But all of the 24 team members listed on the contract were employees of EY China and EY Parthenon, another arm of the consultancy, according to a person with direct knowledge of the matter. Reuters verified the identities of four of the individuals from details published on EY's website and on the staffers' public social-media profiles. They included partners in both entities.

In China, it isn't illegal for a company to use an intermediary to perform work that the company cannot undertake directly. This approach serves as a workaround to access projects that might otherwise be restricted by regulators or prohibited by the company's head office, several industry figures told Reuters. 

Neither EY nor the Chongqing bank responded to detailed questions from Reuters about the project and the use of an intermediary.

A spokesperson for Jindian said it had pitched for the project together with "foreign experts" from EY but it had not been accepted. 

(Reporting by Reuters staff; Editing by David Crawshaw.)