Corruption? Not in my business!

In recent years there have been an increased number of cases regarding business people and celebrities finding themselves in trouble due to financial crimes or corruption. You can frequently find examples in the news, and tycoons or individuals from the entertainment industry are often affected. Since policies are tightening in China and penalties are increasing, foreign companies as well as multinational companies located in China should consider this as very concerning for their own business. Internal corruption followed by inadequate defence mechanisms can make companies liable for crimes committed by their employees. Hence, there are a number of things companies should keep an eye on, and have a clear understanding of, regarding the various types of behaviour leading to commercial corruption in China.

Below is an overview of the basic Chinese legal framework and different types of commercial corruption, followed by legal advice for companies dealing with or wanting to prevent corruption.

The anti-corruption campaign under president of China, Xi Jinping

In 2012, when Xi Jinping first took office, he implemented and carried out the largest organized anti-corruption campaign China had seen, with the goal to crack down on “tigers and flies” (a synonym for high officials and local civil servants). Since that time, over 4.5 million people have been investigated and more than 200,000 officials have been stood down pending legal action, according to the Central Commission for Discipline Inspection (CCDI). Since the campaign launched, the public sector has been most affected, however the stamping out of corruption within the private sector and foreign companies is slowly coming into play. In 2014, a large British pharmaceutical company was fined half a billion dollars for bribing doctors and hospitals to promote their products. This policy and crackdown will continue, as President Xi Jinping stated after the 20th Party Congress report, to keep pursuing and removing corruption in China.

What are the different types of commercial corruption in China?

Passive bribery, extortion and embezzlement committed by a company employee

The following behaviour is classified as criminalization:

• Illegally taking possession of company money.
• Unlawfully accepting money or property, in return for providing a favour.

Penalties for receiving bribes start from three years fixed-term imprisonment for “relatively large” amounts of money. Under serious circumstances one will be sentenced up to 10 years of prison and “particularly huge” crimes can mean life imprisonment. All penalties include fines.

Bribing a company employee

Under Article 164 of the Criminal Code, it is stated that giving money or properties to company employees is illegal and holds a sentence of up to three years, or in some cases, up to 10 years of imprisonment, depending on the crime.

Bribery committed by a company

In the instance of a company bribing an employee, according to Article 164 of the Criminal Code, there will be a fine for the company and the individual/individuals who directly committed the crime, and they will be liable for a fixed-term imprisonment.

Even if the activity does not result in a crime, the company can still be liable and might receive a fine between 10,000 – 200,000 RMB.

How do I prevent corruption in my company?

Of course, there are steps and procedures one should implement in their company to reduce the risk of corruption among employees. Examples would be:

• Clear policy regarding reimbursement.
  Employees should know which types of expenses are eligible for reimbursement and how the process works. Reimbursement strategies may help to identify suspicious behaviour such as corruption or fraud. Details should be included in the staff handbook, so all employees have access.
• Managing company chops (company seal)
  With their very strong legal basis in China, company chops can easily be misused by employees or external parties to sign contracts, permissions and so on, without the company’s knowledge. To prevent wrongdoing, company chops should be stored in a safe place and under strict supervision. In addition, distributing the responsibility of managing the company chop (not giving one person too much power) is advisable. Usually, in foreign companies the chop is managed by the legal representative, making it difficult for the company to maintain independence over how the chop is used.

What can I do as a company if the worst case happened?

Steps to take depend on the severity of the violation. However, there are multiple matters and steps a company needs to be aware of. An independent investigation by an internal audit / compliance team, or a third-party company should be conducted. Depending on the outcome, there are several actions possible:

• Persuading the employee to resign.
• Terminating the employee for the reasons involved (e. g. violation of contracts, code of conduct etc.)
• Terminate the contracts of any vendors involved.
• Implement crisis management if the situation has already been revealed to the public.

Consequences for non-compliance

When dealing with corruption prevention, it is essential for companies to build their own defence mechanism and learn how to deal with these circumstances in case any form of corruption occurs. Bribery committed by an employee counts as an act of the company itself, and therefore undertakes civil and criminal liabilities. The exception would be if competitive advantage or transaction opportunities are not influenced by the conduct of the employee.

If government bodies are involved in the investigation, companies should cooperate and provide the requested information. Concealment or obstruction may cause harsher punishments (such as higher fines and penalties for the people involved). On the other hand, active cooperation may decrease the severity of the punishment or might even remove it entirely (based on clauses of the Criminal Code). It is advisable for companies to emphasise communication and support among everyone involved, in order to fully cooperate with the authorities during the investigation process.

Our legal advice

All in all, no one hopes to find corruption in their own company. If it happens, one should know what the next steps will be. Implementing a detailed compliance system from the start will provide a good base and is a significant step towards prevent corruption. Understanding the legal boundaries of Chinese law and implementing them into the company and communicating them to employees is essential. We advise recruiting a Supervisor for your company in China, to oversee and ensure the compliance of your company. A Supervisor will bring vast knowledge regarding the Chinese legal system, language and culture. Click here if you would like to know more.

Supervising expertise of Ecovis Heidelberg

Do you have any questions regarding the Supervisor role, or regarding tax, accounting, auditing or legal issues? Then please feel free to contact Richard Hoffmann in Ecovis Heidelberg or the ECOVIS Ruide China team.
Richard Hoffmann is experienced in the Supervisor role in China. Through years of experience and specific knowledge of the German, international, and Chinese business environment, Richard Hoffmann has successfully supported several hundred companies to navigate through the complexity of legal, tax and compliance issues in China.