Ever since headline-making dawn raids by NDRC (National Development and Reform Commission) of P. R. China against several brand name Multinational corporations in 2014, international law firms have been busy in promoting their dawn raid practice to MNCs in China. In the legal arm race to win over clients, some international firms even develop dawn raid response APPs only to be disappointed in realizing dawn raids in China are not as dramatic or frequent as anticipated.
It is not that PRC regulators carry out fewer unannounced inspections or enforcement actions. To the contrary, MNCs and Chinese companies alike have experienced significant increase in on site regulatory actions in the last five years or so. We have every reason to believe PRC regulatory agencies will be more proactive in inspections and enforcement actions in the years to come.
If aggressive tactics and surprise effect in early morning hours are defining features of Dawn Raid, then the vast majority of MNCs in China experiences a different kind of regulatory inspection that is neither aggressive in tactics nor taking place in odd hours.
Imagine in a typical work day and during normal business hours, two uniform wearing officers from the local Fire Brigade come to visit your factory in the outskirt of Shanghai. They come without any fanfare and they are very polite. They demand to inspect the sprinkler system on the premise, which is such a reasonable and legal act no one at the factory could possibly reject. The officers point out deficiencies in the system but do not take any formal actions other than requesting further communications with the company management to get the deficiencies rectified in due course. The officers would never suggest that you send lawyers to negotiate with them. But only experienced local lawyers could help your staff at the factory to navigate the regulatory course leading to a satisfactory resolution of the matter.
Local counsel should first assess the true objectives behind such an unannounced inspection. Our experience is that sprinkler inspection or any safety related inspection at MNCs, which are on the rise, may be more than meets the eyes. Such inspection could be part of the local government’s efforts to push out unwanted industrial operations for new development initiatives or enhancing environmental protection. It could be carried in reaction to whistle blowing by a disgruntled employee or an overzealous competitor. It could be in reaction to a major work safety incident in your sector or in your area. In the wake of recent spat between China and South Korea, Japan and U. S. respectively, some MNCs perceived that safety inspection could be motivated to send a subtle message to relevant foreign governments. Safety inspection is the least controversial regulatory action. That is why it is a popular approach if there are additional driving forces besides the safety issue.
China’s safety regulations have been becoming more rigorous and elaborate. This allows the authority to predictably find deficiencies in production facilities that were built in earlier years. For manufacturing business which typically have low margins and little tolerance of disruption of operation, reworking sprinkler system can be cost prohibitive, which means the authority may exert unbearable pressure on the concerned company.
Obviously, not all regulatory inspections come in the form of sprinkler check. Government agencies may spot compliance problems in areas such as identifying Taiwan as a country on your official website; unsubstantiated claiming products as the best in violation of advertising law, among others.
Rectifying compliance deficiencies is always a negotiated process, which should be driven by finding a solution package that meets objectives of various stakeholders instead of emphasizing due process in abstract. In many areas of Chinese law, evidential standards or rules on burden of proof are still being developed. Privileged communications and documents do not exist in China anyway. As such, if lawyers’ strategy was to pick a fight over legal procedures, clients would end up paying a lot of legal fees without getting close to the final resolutions. Experienced lawyers know what an acceptable end game would look like and will guide efforts involving legal, regulatory, public relations and business operations accordingly.
Negotiation sometimes involve dealing with more than the specific regulatory agency showing up at the premise. For example, in our recent sprinkler case involving a manufacturing joint venture by South Korean and American investors, we brought in local township officials to help pushing back certain demands by the local Fire Brigade. Fire Brigades and local townships belong to different administrative systems and have different stakes in enforcing regulations against MNCs in their jurisdictions. We effectively leveraged that inherent difference and make local township our ally and interlocutor.
It is not that China lacks administrative law restraining governmental powers. Rather, in many areas, there is a great deal of discretion legally available to officials in exercising their administrative power. As counsel, our strategy is to lead officials using their discretion to craft solutions acceptable to our clients and other stakeholders, while always preserving the legal right and evidences to challenge unacceptable illegal administrative acts by officials.
To be sure, sprinkler inspection comes and goes. Regulatory compliance in China will continue to evolve. In different areas and at different stages of China’s social, economic and legal development, we will use our skills to protect clients’ legitimate interests with appropriate strategies in reaction to inspection and regulatory actions.