Lawmakers call for probe into McKinsey's China business, Plus VW marketing chief deported from China for drug use -- China Boss News 10.25.24

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Leading Republican lawmakers are calling for a US Justice Department investigation into American mulitnational consulting firm McKinsey for failure to disclose potential conflicts of interest in its work in China and for the Pentagon, the Financial Times reported.

In a letter sent to the US Justice Department, the head of the House select committee on the Chinese Communist Party and two US senators argued that McKinsey's work for Chinese state-owned enterprises, including blacklisted companies helping build military bases in the South China Sea, poses a national security risk.

They also claim McKinsey did not disclose these potential conflicts of interest as required by law and questioned the accuracy of statements made by McKinsey's global managing partner, Bob Sternfels, who told Congress earlier this year that the firm never had the Chinese central government as a client.

McKinsey has faced previous legal challenges for its work with Purdue Pharma and a general slowdown in the consulting sector.

Despite the controversy, McKinsey has stated that it stands by its partner's testimony and is shifting its focus away from state-owned enterprises and government agencies in China toward multinational clients.

Why it matters

No ‘safe’ sectors

McKinsey's troubles might be seen as the canary in the coal mine for Western industries deeply intertwined with the Chinese government.

Even world class leaders in the education sector are not safe from congressional allegations of misconduct.

Last week, the Chairman of the House of Representatives Select Committee on the Chinese Communist Party (CCP), John Moolenaar, accused Harvard of “fail[ing] to stand up to CCP influence” on its main campus in Boston.

The incident that caught his attention occurred on April 20, 2024, during a speech by Chinese Ambassador Xie Feng at the Harvard Kennedy School of Government.

Harvard student Cosette Wu protested the Chinese government's human rights abuses, leading to an assault by a pro-CCP agitator while Harvard officials stood by.

Then, another student protester, Tsering Yangchen, was later harassed by the same graduate student who forcibly removed them from the event.

The graduate student had no authority to act as security, and his actions amounted to assault, a felony under Massachusetts law, according to the Select Committee's online statement.

Despite this, Harvard placed the two student protestors on disciplinary probation but took no action against the graduate student, even apologizing to him for his involvement in the incident.

Moolenaar publicly criticized Harvard for the unequal treatment and vowed to join "other congressional leaders to address the growing foreign influence on US campuses."

Rise of the CCP whistleblowers

As China rises in importance to policymakers, there's more incentive to discuss "lessons learned and mistakes" made by foreign firms in the Middle Kingdom.

Silicon Valley Bank's (SVB) collapse is well-known, but you may not have heard about Ken Wilcox, who helped build the bank's foundation.

Last week, Fortune interviewed Wilcox about his soon-to-be-published book "The China Business Conundrum," in which he says that SPD Silicon Valley Bank (SSVB), SVB's China branch, did not collapse due to mismanagement like its parent company but was gradually taken over by the CCP.

As he told it, Wilcox met a key contact for establishing SSVB during a 2009 event on a luxury cruise along the Huangpu River in Shanghai.

"I remember very clearly that we got onto the boat, and this guy who seemed as big as a bear lumbered up to me and immediately shook my hand. Then he grabbed me and gave me a big hug, which was shocking because Chinese people typically don't hug," Wilcox said.

Wilcox discovered that his new friend, the CCP's secretary in Shanghai's Yangpu district, wanted to transform the area into a knowledge-based industry hub and saw SVB as holding the key. He met with CCP officials, hoping to start a joint venture with a Chinese tech-focused bank.

Despite not initially grasping the concept of “guanxi,” or mutually beneficial business relationships in China, Wilcox participated in discussions with CCP officials, only to later learn that his friend was starting a competitor using SVB's business model.

Although Wilcox said he felt deceived, one can imagine that the bank's shareholders and their lawyers might have been outraged - had they been told.

After explaining that in China, a man wearing a green hat signifies his wife is having an affair, Fortune's Will Daniel, who interviewed Wilcox, said Wilcox gave “a wry laugh that would probably send shivers down the spines of many U.S. executives with businesses in China."

At any rate, Wilcox's experience in China is hardly the exception.

Put another way, think of those many publicly traded companies who used China's distance and mystique to obscure their red-flagged (pun intended) dealings to the board and shareholders at home.

You'd be surprised at just how pervasive this is. Or maybe not.

But following the stories of some well-known executives and firms - also see here and here - will barely scratch the surface.

For his part, Wilcox acknowledged that the CCP's actions were not based on mutual benefit but rather on their advantage. Imagine that.

"Many CEOs have figured out the same stuff I figured out, but they are reluctant to talk about it because they don't want to admit that they got duped. I'm not the only person who knows this stuff in the book by any stretch; I'm just one of the few people that feels comfortable talking about it," he said.

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