Despite the significance and depth of recent foreign investment in China, much of the country’s potential for foreign investors remains untapped. With a bourgeoning middle and upper class, an unprecedented demographic shift owing to the effects of the one child policy, and dramatic societal changes stemming from the reform and opening up policy, the flexibility and speed that private foreign investments can bring to China is a welcome addition to its economy.
Investment demand is strong and diverse in many areas where supply was traditionally not only monolithic and ruled by connections instead of ideas, but also slowed by stubborn bureaucracies and endless layers of required approval. As new entities, especially foreign entities, attempt to capitalize on China’s many fresh business opportunities, they are facing new compliance challenges, new risks and new penalties.
New foreign investors and entrants to the Chinese market are facing significant compliance risks that are endemic, difficult to understand and equally as difficult to stamp out. For many, the biggest challenge is not just identifying the current compliance problems and rooting out rotten apples. Instead, it’s the fatigue of having to start another cycle of compliance investigations when the new group of managers turns out to have the same problem as the ones they replaced. As an added difficulty, corruption and compliance scandals are at the center of a steady stream of recent government investigations, and the government has been imposing large, very public penalties that seem to correlate with the location of the company’s HQ being outside China.
While foreign companies traditionally focused on compliance with the anticorruption laws of their home countries, recent enforcement activity and public declarations in China make it clear that Chinese authorities expect the same level of attention to be paid to China’s anti-bribery regime. This regime is codified in a variety of Chinese laws that can often be difficult for foreign companies to navigate.
Key Chinese Laws
Article 164 of China’s Criminal Law provides that whoever gives money or property to any employee of a company or enterprise for the purpose of receiving unjustified benefits is subject to imprisonment for a maximum of three years. If the amount involved is especially large, the person can be sentenced to a term of imprisonment of not less than three years but not more than 10 years, and will be concurrently fined.
Owing to the uneven regional development of China’s economy, different geographical areas have set different thresholds to trigger the higher penalties, which might vary even within one province. For example, in Guangdong Province, the Guangdong High Court specified that the “especially large” threshold for the capital city, Guangzhou, is RMB 400,000, while the amount for the nearby city of Chaozhou is RMB 300,000.
“UNIT” BRIBERY OF A PUBLIC OFFICIAL AND A MANAGER’S RESPONSIBILITY
Article 393 of China’s Criminal Law provides that a “unit” that offers bribes for the purpose of securing illegitimate benefits, or gives rebates to a State functionary in violation of State regulations, in “serious” circumstances, will be fined. Additionally, the persons directly in charge of the unit, and other persons directly responsible for the offense, can be sentenced to imprisonment for no more than five years, or sentenced to criminal detention, which is similar to imprisonment, but less strict. As a result, individuals without corrupt intentions could ultimately be punished for failing to prevent the bribery.
Any person who takes into his own possession any illegal gains derived from such activity is also subject to criminal penalties.
BRIBERY OF A STATE-OWNED UNIT
Article 391 of China’s Criminal Law provides that whoever, for the purpose of securing illegitimate benefits, gives money or property to a State agency or State-owned company, enterprise, institution or people's organization, or violates State regulations by giving certain rebates, will be sentenced to imprisonment for not more than three years, or criminal detention.
Notably, Article 391 imposes penalties where money or property unlawfully went to a unit, rather than an individual. This is in contrast with the anti-bribery laws of other countries, which target individuals who compromise their duties to the people or companies in whose interest they are supposed to be acting. Article 391 targets entire organizations, such as subsidiaries, that might compromise their duties to a higher group.
Where a unit commits the offense, the unit can be fined. The persons who are directly in charge of the unit, and any others directly responsible for the offense, are also subject to punishment.
In addition to its criminal laws, China has administrative laws that address compliance concerns, including bribery and unfair competition. These include Article 9 of the Interim Rules on the Prohibition of Commercial Bribery, which imposes fines of between RMB 10,000 and RMB 200,000 for commercial bribery and requires disgorgement of unlawful profits. China’s Anti-Unfair Competition Law similarly provides financial penalties for bribery “in selling or purchasing commodities.”
The Necessity of Proactive, Systematic Local Compliance
Foreign entities investing in China will encounter compliance risks under both local laws and those in their home jurisdictions. The risk of significant fines, imprisonment and sometimes blacklists combine to ensure that compliance issues in China are not merely a cost of doing business, but have the potential to completely derail, disrupt and destroy even the largest of businesses or investments.
Proactive, systematic local compliance programs that are woven into the investment from the start are not only a recommended course of action to try to mitigate legal risks and keep the project from turning into one of the many recent newspaper headlines. They are also a necessary and essential element to protect the investment in the long term and ensure that strong returns are not lost in penalties and disgorgements.
Fortunately, compliance with China’s laws does not usually inhibit compliance with other countries’ laws, and the overlap is significant. Companies that strive to comply with the US Foreign Corrupt Practices Act and the UK Bribery Act will be well on their way to meeting baseline standards under Chinese law.