MOFCOM strengthening the supervision of FIE filing and opening the door to joint enforcement

On December 13, 2016 the Chinese Ministry of Commerce (“MOFCOM”) issued a Notice on Efficiently Implementing the Supervision and Inspection of FIEs’ Establishment and Alternation Filing, which includes supervision and inspection guidelines (“Circular 954”) taking immediate effect on the same day. This Circular 954 will have a significant impact on foreign operation in China and below is more detail.

Key Message – to strengthen the post-filing supervision

Following the recent developments in the PRC legislation on amendment of the FIE laws and the new FIE filing process (which replaces earlier approval practice), official procedures to handle the establishment and corporate change of FIEs have been greatly streamlined. Via this reform, FIEs and their foreign shareholders have been generally given the liberty to define the effectiveness of, for instance, an equity transfer agreement and articles of association, which was previously subject to the requirement of MOFCOM approval. The launch of Circular 954 obviously aims at better controlling potential abuse of such liberalization in practice, by stressing FIE filing supervision and inspection an explicit power and responsibility of MOFCOMs at various levels.

Main measures

  • Spot checks and “whistle-blowing”

MOFOCM and its local departments (jointly as “MOFCOM”) will initiate spot checks as the main measure to ensure the compliance of FIE’s filing requirement, including to discover any case which should have gone through national security review procedures but failed to do so. Any violations against MOFCOM filing rules trigger administrative punishment such as being ordered to correct, a fine up to CNY 30,000 and public accouchement. The spot checks under Circular 954 also help to ensure that any administrative punishment imposed by MOFCOM has been properly enforced. Such checks must be organized at least twice a year, which can be conducted – with at least 3 working days prior written notice, – by means of on-site visit or pure paper form check. Targets are to be chosen on a random basis (e.g. 3% of FIEs solely according to their filing numbers or at another appropriate percentage based on factors such as investment scale and industries).

A highlight to be noted is that a spot check could be triggered by written reports from any individuals or entities as far as such reports are real name and fact based.

  • Joint force mechanism

Circular 954 formulates a plan to set up step by step and streamline a joint force mechanism among various governmental authorities, e.g. public security administration, state-owned assets watchdog, customs, tax authorities, securities regulators, foreign exchange control administration and the company registration authorities (i.e. AIC). This mechanism includes information sharing and encourages joint enforcement. MOFCOM is obliged to report any possible incompliance or violation circumstances to other competent authorities as far as they are concerned. This kind of joint conference mechanism is not new under Chinese law (e.g. already under the national security review procedures) but could greatly improve enforcement efficiencies.

To avoid any potential abuse of administrative power due to the enlarged scope of power under Circular 954, MOFCOM is obliged to observe the PRC Administrative Punishment Law and relevant provisions during its inspection and law enforcement procedures. FIEs’ normal operation shall not be interfered with, and smooth channels for complaints are required to be made available to the public.

Recommendations

Foreign investors and the management of FIEs shall pay attention to the practical and potential impact of Circular 954, in particular they are recommended to keep an eye on the below two aspects.

Compliance regarding investment access procedures: the general abolishment of the prior MOFCOM approval enables easier and quicker investment access and corporate changes of FIEs. Since investment in sensitive sectors/areas including related incorporation changes still require approval (see our earlier article on the new Foreign Investment Guidance Catalogue by Cara MENG and Florian Ranft: https://china.taylorwessing.com/en/a-more-structured-world-the-birth-of-fie-negative-list), it is up to the foreign investors and FIEs to check out exact procedures (i.e. filing or approval) to follow and keep compliant. This more business friendly approach also brings disadvantages, i.e. potential ignorance of statutory requirements either intentional or due to misunderstanding. Therefore, foreign investors and FIEs management must have a clear understanding on procedural impact by carefully examining categorization of their respective project against applicable catalogues, and complete the correct procedures as required by statutory rules. Any incompliance will face a bigger chance of being investigated due to the new mechanism brought by Circular 954.

Compliance in all other aspects: in addition, more efforts shall be paid to your China FIE operation with regard to general compliance level. Due to the new joint force mechanism under Circular 954, any incompliance in areas other than investment access area (e.g. safety operation, tax, customs, foreign exchange) will also face the risk of being reported to the competent authorities in charge resulting in law enforcement and related legal consequences. Therefore, instead of solely focusing on investment access and incorporation change compliance, it is highly recommendable for local management to set up a systematic audit mechanism which shall be regularly updated and implemented to ensure your China operation’s comprehensive health status. Only when you stay clean and compliant, you are prepared for the impact of Circular 954. For more detail in this regard, contact our compliance experts who would be glad to share further insight with you.