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Article: Latest Developments in Corruption Enforcement in China

October 01, 2015
Business Litigation Reports

The past quarter has been an active one for Chinese government enforcement activities, and the year ahead promises more of the same. Recent developments include: the strengthening of Chinese bribery laws, increased action against and investigation of StateOwned Enterprises and their private sector business partners, further publication of Administration of Industry and Commerce (AIC) enforcement actions against multinational companies, and actions against company employees for receiving bribes and kickbacks. Set forth below are some of the most noteworthy developments of the last quarter and potential movement in the months to come.

Ninth Amendment to the 1979 Chinese Criminal Law Increases Penalties for Bribery Offenses
On August 29, 2015, Amendment IX to the Chinese Criminal Law (the “Amendment”) was passed by the National People’s Congress Standing Committee. The Amendment will take effect on November 1, 2015. Since the release of the initial draft Amendment for public comment in November 2014, the Amendment has undergone three rounds of intensive review, revision, and discussion, as its provisions are particularly important to strengthening China’s anticorruption laws. The Amendment’s revisions to existing criminal law include increasing penalties for bribery offenses, reducing mitigating factors, removing the monetary threshold amount that triggered criminal liability, and substantially broadening the scope of criminal bribery offenses. Whereas Chinese criminal law previously focused more on the acceptance of bribes, the Amendment includes provisions that specifically criminalize the offering and payment of bribes. Furthermore, the Amendment substantially limits the circumstances under which a confessing bribe offeror may be exempted from criminal liability. The Amendment also adds an employment restriction targeting white-collar professions—if an individual utilizes his or her profession to commit a crime, the individual may be prohibited from participating in that profession for three to five years following the completion of a jail term or release on parole. The terms of the Amendment are a significant demonstration of the Chinese government’s ongoing and proactive efforts to target and deter corruption, both internally and at multinational companies.

Internal Anti-Corruption Enforcement and Whistleblower Activities Are on the Rise
The recent increase in internal anti-corruption enforcement actions in China has been accompanied by, and is partially fueling, an unprecedented rise in whistleblower activities. Chinese government units and large State-Owned Enterprises (“SOEs”) have been targeted for aggressive investigations and penalties. The Central Committee of the Communist Party of China recently approved and initiated the year’s second round of special anti-corruption inspections, which immediately followed the completion of the first round of special inspections in June 2015. The second round of inspections, completed in September 2015, targeted 26 SOEs and government units across key industries and sectors including commodities, transportation, defense, aviation, and construction. As with the previous round, the Central Commission for Discipline of the Communist Party of China (“CCDI”), will publish its findings by posting an official report on CCDI’s webpage. In addition to public announcements that welcome anti-corruption whistleblower reports, the CCDI has created, and made publicly available in June 2015, a mobile application (with photo and video submission capabilities), as well as an online message board, specifically designated as corruptionand public funds-related reporting channels. The availability of the new anti-corruption reporting channels is expected to further increase whistleblower activity and subsequent investigations in China. These growing internal whistleblower and enforcement activities expose multinational companies that have Chinese SOE and/or state-related dealings to increased risks of also becoming enforcement targets.

Chinese Regulators Implement Publication of Corporate Penalties and Blacklisting Decisions
Following the 2014 promulgation of new regulations requiring public disclosure of various administrative violations and sanctions, including bribery-related violations, the Administration of Industry and Commerce (the “AIC”) has implemented online publication systems in most major cities and provinces in China. As of the last 12 months, the AIC websites of Beijing, Shanghai, and Shenzhen have actively published decisions and penalties for various violations. The published details include the company name, the violation and/or problematic conduct, the regulatory authority behind the decision, and, in certain cities, the penalty amount. To date, at least 28 of the AIC’s published decisions and penalties have been against multinational companies for commercial bribery offenses. Many of these multinational companies are in the import and export sector, and several are in the medical devices industry. A number of other large multinational companies, such as major retailers and pharmaceutical companies, have been issued published penalties on non-bribery bases. It should be noted that companies in the medical and healthcare sector in China are subject to additional public disclosure requirements as well as regional blacklists pursuant to the regulations of the National Health and Family Planning Commission (the “NHFPC”). Under the publication and blacklisting system, which has a very broad scope and criteria, any company in the industry with a bribery-related offense, charge, or penalty, could be subject to a two-year ban on the sale of goods or services to all publicly-funded hospitals and healthcare institutions in the province where the conduct occurred. The NHFPC is then required to publish and/or republish these regional blacklists. As of September 2015, the NHFPC has republished regional blacklists from Sichuan, Chongqing, and Hainan, listing 12 domestic companies. For multinational companies, these publication practices by the AIC and by the NHFPC also carry the potential for negative media attention as well as risks of anti-corruption liability in other jurisdictions.

Chinese Stock Market Fluctuations Trigger Investigations and Regulatory Intervention
As a result of China’s recent stock market selloff, China’s benchmark Shanghai Composite Index has fallen approximately 38 percent since its eight-year peak in June 2015. The market fluctuations have elicited strong reactions from Chinese regulators— notably, proposed revisions of margin trading and short selling rules and a wave of investigations into “malicious” short selling. The China Securities Regulatory Commission has proposed new securities regulations that could potentially ease volatility in margin trading by allowing for more flexible contracts and the tightening of lending requirements. Contemporaneously, China’s Ministry of Public Security has initiated numerous highprofile investigations in connection with the market fluctuations. According to various media reports, at least 10 financial institutions have become the investigation targets of the Public Security Bureau for suspected violations of short selling laws. In August 2015, Chinese authorities reportedly detained Li Yifei, the chairwoman of the China unit of the world’s largest publicly traded hedge fund, Man Group Plc, as part of their investigation into market volatility. Li, however, later denied the reported detainment and her involvement in the investigation. Other senior executives at securities firms have also become targets of investigations. The scrutiny and intensified enforcement by Chinese regulators will likely continue through the implementation of the China Securities Regulatory Commission’s proposed securities law revisions.

Former Employees of Chinese Tech Giant Detained in Bribery Probe
The two largest Chinese internet companies, Tencent Holdings Ltd and Alibaba Group Holding Ltd, have been implicated in a bribery investigation by Chinese regulators. In June 2015, the Public Security Bureau detained several former employees of Tencent, including current Alibaba executive, Patrick Liu. Shortly after, Tencent stated in a press release that it first uncovered improper practices by its online video department employees through an internal investigation in 2014 and reported the matter to local authorities. The internal investigation found that the individuals potentially accepted kickbacks from online video providers; the Chinese authorities believe the amount of kickbacks may have totaled millions (RMB). The developments in this investigation signal that domestic Chinese companies are gradually becoming more attuned to their own internal anticorruption practices and could potentially begin adopting more robust compliance programs and selfreporting mechanisms.