By Julie Zhu
HONG KONG (Reuters) - CICC Capital, a unit of leading Chinese investment bank CICC, has stopped using Capvision Partners' services, three sources said, following an investigation into the "expert network" as part of Beijing's crackdown on national security.
Shanghai-based Capvision is the latest consultancy and due diligence firm to get caught in Beijing's sweeping crackdown on what state media describes as "intensifying" law enforcement push around sensitive corporate information.
In an internal memo issued on Tuesday, which was confirmed by sources with direct knowledge, CICC Capital's research division said it would ban all its teams from using Capvision for due diligence-related expert calls and inquiries.
The move by the flagship alternative investment arm of state-owned behemoth China International Capital Corp (CICC) comes with financial sector participants eager to understand if Beijing would expand its scrutiny into consultancies and their clients.
Those concerns have been partially fuelled by Chinese lawmakers passing a sweeping update to anti-espionage legislation last month, banning the transfer of any information related to national security and broadening the definition of spying.
CICC Capital's ban on Capvision will come into immediate effect, the memo said, adding its teams should also review previous dealings with Capvision. Its parent CICC was one of the underwriters for Capvision's aborted Hong Kong IPO last year.
CICC Capital's investment teams have also been barred from using Capvision for such expert calls or inquiries, said the sources, who declined to be identified as they were not authorised to speak to the media.
CICC Capital can still use other consulting firms for such practices, said two of the sources.
CICC, which handles media queries for the investment unit, declined to comment. Capvision did not respond to Reuters request for comment.
CICC Capital manages private equity funds and fund of funds and had 360 billion yuan ($52 billion) of assets under management as of the end-2022, according to the parent's website and 2022 annual report.
BEEFED UP SECURITY LAWS
Chinese police raided Capvision offices over what state media this week reported were national security issues.
Capvision, which runs China's largest expert network group and has offices in eight cities around the world, was singled out in a series of news reports including a 15 minute segment by state broadcaster CCTV on Monday.
The CCTV report said Capvision had accepted projects from overseas companies to source information, including "state secrets and intelligence" on sensitive sectors including defence and advanced technology.
The crackdown on Capvision comes on the heels of a raid on the Beijing office of U.S. corporate due diligence firm Mintz and ahead of changes to China's anti-espionage law from July 1 that could ensnare more companies.
Due diligence is essential for companies doing business in China, especially after a three-year lockdown under COVID restrictions and a series of U.S. sanctions on Chinese firms and individuals that have unnerved investors.
In a country where many firms use subcontractors for due diligence, the investigations in China have sent a chill across the business community, with some saying it's unclear where red lines stand, forcing them to rethink how they work.
"I think it's put a pause on using subcontractors as well as doing it yourself because they're afraid they're going to stick a finger in the wrong eye," said a person who works in due diligence with knowledge of the industry in China.
A source at an Asian fund in Hong Kong said it had put the brakes on all dealings with Capvision after the CCTV report and told staff who ever used the company's services to go through their records and "clean things up as much as possible".
Another source at a Hong Kong-based hedge fund said their compliance team had ordered them to temporarily cease dealings with Capvision after the CCTV report.
Capvision said after the report it would resolutely abide by China's national security rules and take the lead in ensuring the consulting industry was compliant.
China says it welcomes foreign investment as long as firms abide by its laws.
"Obviously it's the clearest signal yet that the crackdown is targeting the broader industry," a source at a risk consulting firm in Shanghai told Reuters.
"(We) may start to review our operations to make sure we are compliant with the government's latest messaging," said the source, who declined to be identified due to the sensitivity of the matter.
Some clients are standing by Capvision.
A China-based fund manager at a leading Chinese asset management company, who also declined to be named as he was not authorised to speak to the media, said he had not been asked by his firm to stop using Capvision services.
"I'm not too worried about it, we'll continue to use them, because we're not asking for anything sensitive connected to the military or government or anything."
($1 = 6.9121 Chinese yuan renminbi)
(Reporting by Julie Zhu and Shanghai newsroom, additional reporting by Xie Yu, Summer Zhen and Anne Marie Roantree in Hong Kong, Laurie Chen in Beijing and Engen Tham in Shanghai; Editing by Sumeet Chatterjee and Lincoln Feast)