The Rise of Exit Bans and Hostage-Taking in China

Foreign entities doing business in China are facing increasingly grave risks. On top of the high-level geopolitical and economic risks to consider, the growing incidence of exit bans, which prevent foreign executives from leaving China if their company becomes involved in a dispute, imposes a very individual human risk. While there has been widespread media coverage of a few cases — the exit ban placed on a Singaporean executive from U.S. investigations company Mintz Group and the detention of five of its Chinese employees; the tit-for-tat detention of two Canadian businessmen in retaliation for U.S. fraud charges brought against a Huawei executive arrested in Canada — many companies operating internationally confront the reality of exit bans and commercial hostage-taking in relative obscurity.

This risk is increasing and unlikely to abate soon. Little in the ordinary course of business is more disruptive or volatile than the detention of company executives or employees abroad. Companies operating in China should prepare for these potential scenarios in advance.

Exit bans can arise from civil business disputes as well as more serious legal entanglements. Recent amendments to China’s counterespionage law, including vague, open-ended prohibitions on possessing “documents, data, materials, or items related to national security,” could easily encompass everyday business activities in any industry, exposing foreign executives to greater risk of arrest. The U.S. Department of State recently warned that the Chinese government “arbitrarily enforces local laws, including issuing exit bans on U.S. citizens and citizens of other countries, without fair and transparent process under the law.”

Someone subject to an exit ban for business reasons often receives no advance notice before being prevented from boarding an international flight at the airport. The person is typically interrogated but not given information about the reason for the exit ban or how to contest it.

Exit bans in cases of business disputes are typically lifted only after the foreigner accedes to the demands of their Chinese counterparty — which gains enormous leverage in the dispute by limiting the individual’s personal freedom. Even if the foreigner is willing to spend the necessary time and money to pursue the case in court while remaining trapped in China, a Chinese court is unlikely to rule in favor of the foreign party.

Consider Henry Cai, a native of China who moved to California with his wife in the 1980s and became a U.S. citizen. In 2012, Cai invested in a Chinese technology startup for an 8% stake and served as a director of the company. A few years later, when the startup faced cash-flow problems and defaulted on a loan, Cai traveled to China multiple times to deal with the situation. Then, in 2017, Cai was stopped at the airport and denied exit from China, at which time he realized that he had been implicated in a lawsuit filed against the company by its creditors. Six years later, he remains stuck in China, unable to pay the millions of dollars demanded to lift the exit ban. The human, emotional, and financial toll is high, for him in China and for his wife and their two children in California.

Another example is Brian Horowitz, a California businessman who purchased gas-powered blenders from a Chinese manufacturer. After a contract dispute arose because the blenders failed to meet California air-quality standards, Horowitz traveled to China to meet with the supplier. When he attempted to return home, he was detained at the Shanghai airport; the supplier had filed a contract claim against his company, and the court had imposed an exit ban without Horowitz’s knowledge. After two weeks, his wife wired $250,000 to the Chinese supplier to allow her husband to return home.

While exit bans in the case of business disputes are legal in China, foreign executives are also at risk of falling victim to illegal commercial hostage situations. In such cases, they might be confined in a hotel room or a company facility such as an office or factory. Holding commercial hostages is punishable by up to three years’ imprisonment. In practice, however, Chinese law enforcement often refuses to intervene in these situations unless violence occurs.

In one case, a senior executive of a U.S. jewelry company traveled to China to discuss a dispute with a manufacturer over a product order and a $650,000 payment. After the executive entered the manufacturer’s facility, her purse and passport were confiscated. She was then taken back to her hotel and guarded by employees of the manufacturer for five days. She escaped with the help of a U.S. lawyer fluent in Chinese who traveled to China, helped her evade the guards, and brought her to the embassy.

Another case occurred when a U.S. company sent two midlevel executives to visit a Chinese factory that produced goods for it. The U.S. company had already paid the manufacturer for the goods, but its executives learned that the factory workers were refusing to release the products because their wages had not been paid for months. The workers locked the executives inside the factory and demanded payment for their release. To free the hostages and obtain the goods, the U.S. company had to pay both the manufacturing company and the workers.

Commercial hostage-taking situations are usually resolved within days or weeks, whereas exit bans might not be lifted for months or years. Neither situation is officially tracked, and businesspeople often keep their predicaments confidential. Nonetheless, based on data from the governments of six countries (the United States, Canada, the United Kingdom, Germany, the Netherlands, and Australia) and media reports, we documented more than 100 business exit bans and commercial hostage situations in roughly the past decade. This is likely a significant undercount, given that government documentation on this phenomenon is not comprehensive, and not every case would have received media attention.

Take a Multifaceted Approach to Prepare for the Worst

The acutely personal nature and the geopolitical dynamics of these situations make them particularly challenging to plan for and to resolve. How much should you pay to free your colleague (or yourself) from being held hostage? How do you talk to your employee’s spouse about the reasons for their partner’s detention and your plan to negotiate for their return? Is it part of your job to engage with the media to bring about political pressure to free an employee?

To prepare for such a scenario, it’s critical that business leaders acknowledge the risk of this happening to their employees who travel to China, in addition to becoming more informed about it — such as by establishing a dialogue with others who have experienced it. They should also develop and maintain trusting relationships with U.S. consular officials abroad, Chinese officials and police chiefs in the cities where the company operates, federal and state government leaders in the U.S., members of local and national media, and applicable industry groups, such as the U.S.-China Business Council.

Companies should preassemble a crisis team and develop an action plan that assigns specific responsibilities to key employees and advisers in both China and their home country. This plan should include external communications, such as using social media to draw attention to the plight of trapped employees. And a company should consult with its business insurer to find out whether any relevant coverage is available to mitigate the financial impact of an exit ban or commercial hostage situation.

Executives with business interests in China should also pay close attention to accounts payable, contractual obligations, and the tone of business relationships to identify potential sources of conflict or disagreement. They should try to anticipate problems before they arise and should be especially vigilant about any outstanding debts or situations where a product has been delivered but, for any reason whatsoever, has not yet been completely paid for.

If a lawsuit has been or is suspected to have been initiated, or any debts are owed to a Chinese entity, companies should avoid having employees travel to China. If such travel is unavoidable, employees should remain in frequent communication so that others know their whereabouts and schedules, and they should avoid traveling alone. If a dispute has arisen but not yet materialized into a lawsuit, and employees must travel to China, consider suing preemptively in the U.S., assuming that a U.S. court has jurisdiction over the Chinese business. For example, if the U.S. company alleges a contract breach in a U.S. court, then the employee should carry documentation of the U.S. lawsuit, translated into Chinese, while abroad.

Leaders must also be prepared to support and help employees and their families. A crisis team set up in advance should have a plan for communicating honestly and sensitively with employees trapped abroad and with their families, as well as with employees throughout the company. Show that you care. Be transparent and truthful. These situations are emotionally draining, disorienting, and frightening; they are also opportunities to build trust, solidarity, and a culture of care. It is more about people than money.

Of course, it’s important to remain committed to helping affected employees and their families in tangible ways. Arrange for the delivery of personalized care packages to affected families; visit their homes, and meet face-to-face with them. Where possible, also send care packages to employees trapped abroad and facilitate calls with family members.

Scenarios like exit bans and commercial hostage situations are human rights and geopolitical issues that are also intensely personal business challenges. Business leaders are wise to prepare for such challenges by developing a comprehensive strategic approach.