The domestic perspective

2014 marks the 22nd year of the PRC Anti-Unfair Competition Law and eighth year of the PRC Anti-monopoly Law. We have witnessed an unprecedented upsurge of enforcement actions of investigations and punishments against companies in recent years. Understanding how to respond effectively and appropriately to the relevant PRC enforcement agencies is of critical significance to the multinational corporations (MNCs) with businesses in China.

When the regulator comes knocking

First of all, any employee being investigated or informed of an investigation must immediately notify the company's management including sales leaders, financial officers, CEO, in-house lawyers and compliance offices. The management team must determine the preliminary risks and conduct a legal assessment of the case, as well as work out how to produce any documents or testimony as requested by the enforcement agency. Cooperation may also be needed from third party business partners and/or intermediaries.

Secondly, employing experienced counsel is recommended at the outset of the investigation, so they are able to provide an accurate risk assessment, formulate a response plan and to follow up with the agencies in an efficient manner. In addition, during the entire investigation process, the legal team of the company, including in-house lawyers and external legal counsel, should provide opinions on whether the investigation procedures conducted by the enforcement agencies, which can be the Administration for Industry and Commerce (AIC) or Public Safety Bureau (PSB), comply with the relevant PRC administrative rules and regulations. It is important to note compliance, especially regarding the search approval documents and identification certificates presented by the officers, as well as the search scope and authority over those employees and/or documents of the company being searched and detained.

A company under investigation needs to be cooperative, because, in criminal investigations, the PSB is able to summon witnesses without the consent of the company, pursuant to Article 64 and Article 122 of the PRC Criminal Procedure Law; and in administrative investigations, although the enforcement agencies may lack the power and authority explicitly provided in the relevant laws and procedures to conduct investigations against the company by force, they could nonetheless impose harsher punishments and cause negative, public exposure on an uncooperative company.

Evidence and compliance

In response to any enforcement agency's request to produce evidence, the company should prepare and submit the following documents or evidence to show the company is in full compliance under the relevant PRC law:

1. relevant documents as provided in the document request lists issued by the agencies to the company being investigated to the extent reasonable;
2. policies, internal controls, compliance requirements and procedures of the company with regard to the issues of the investigation;
3. any explanation, declaration or statement of the company's management team or its controlling shareholder to clarify the issues of investigation and its cooperation; and
4. relevant anti-commercial bribery or anti-monopoly trainings that have been provided to employees or its intermediaries.

In addition to the provision of these documents, any acts of self-disclosure, including offering unrequested but relevant evidence and making prompt corrections during the investigation, are encouraged and deemed as compliance efforts as well.

Preventing mistakes

During the process of responding to requests or orders of the enforcement agencies, companies have a right to raise a timely and reasonable objection to any investigation action that is in violation of the relevant PRC laws and procedures.

It is important to carefully screen and scrutinise documents, not only to avoid any irrelevant responses to the issues of the investigation but to also prevent detrimental consequences in other respects, such as a breach of confidentiality obligations.

Ensuring consistency between all documents is also critical, especially between any submitted documents and verbal or written testimonies of interviewees being interviewed by the agencies.

Lastly, companies must not only be able to deal with any emerging or urgent crises but also need to ensure compliance efforts are being made continuously. Such efforts include setting up an efficient internal whistle-blowing and reporting system and conducting internal investigations and taking disciplinary actions by experienced teams.


Haixiao (Helen) Zhang, Zhong Lun Law Firm, Shanghai

The international perspective

Investigations of foreign-invested enterprises (FIEs) in China by local regulators and the Public Security Bureau (PSB) have made headlines recently with investigations into GlaxoSmithKline and other pharmaceuticals companies for alleged criminal and, in some cases, antitrust law violations.

Administrative investigations of FIEs in specific industry sectors by local Administrations for Industry and Commerce (AICs), or local Customs have long been a feature of doing business in China. Faced with a government review, FIEs generally comply with the requirements of officials and provide all requested information, often without instructing lawyers. More often than not, the outcome of such reviews is payment of a penalty that is capped under relevant laws, which is absorbed into the cost of doing business. On rare occasions, an FIE instructs Chinese counsel to challenge an administrative penalty through the Chinese administrative and judicial review process. Until recently, criminal investigations of FIEs for corruption have been rare and antitrust investigations in relation to cartel activity are a new development. Further, criminal investigations of FIEs for corruption-related offences have raised the possibility of related investigations in jurisdictions where the FIE parent or investor may have exposure, such as the Foreign Corrupt Practices Act in the US or the Bribery Act in the UK.

Faced with potentially serious violations and complex legal and jurisdictional situations, in-house counsel must make quick decisions regarding an FIE's response to local government investigators and take appropriate measures to protect the company. In such circumstances, it may be appropriate to instruct both local counsel, whose role generally is to advise on local laws and directly interact with government investigators, and foreign counsel, whose role is to shadow the investigation to identify exposure under foreign laws and potentially to extend legal privilege. Both Chinese and foreign counsels are likely to agree on the procedures to be taken regarding the company's response to local government investigators; however, foreign counsel may recommend that additional procedures be undertaken in anticipation of subsequent offshore regulatory actions.

Typical responses and recommended procedures in relation to criminal and administrative investigations by Chinese authorities include:

• Designate at least one management member to interact with regulators or the PSB. Ideally, a core team of HR, IT, finance, legal/compliance and other relevant management should be formed to support the investigation.
• Inform head office immediately of any visit from authorities and bring external counsel on board as soon as possible. Since PRC law does not include the concept of legal privilege that pertains in common law jurisdictions, it is prudent to ask external counsel to sign a confidentiality agreement. Consider whether it is helpful for foreign counsel to engage local counsel in order to preserve legal privilege.
• Depending on the nature of the investigation (in some circumstances investigators may require a more discreet approach), communicate with employees as soon as possible, requesting them to be calm, polite and cooperative. It is important to take control of the situation and demonstrate that the company is working to support investigators in order to minimise the risks of overreaction by employees. Employees must also understand that the investigation is an internal matter and that it should not be discussed with persons outside the company.
• If the investigation is serious, ask compliance, legal or HR to set up specific whistle blower and counselling channels.
• Take a positive and compliant approach and move efficiently to make materials requested by authorities available, at the same time keeping a record and copies of relevant materials taken by investigators. Depending on the approach of the investigators, it may be possible to request time for the company to gather materials and/or make lists of potential materials that could be of interest to the investigators. In other scenarios, company personnel may have to stand back while investigators search for and remove documents, review computer accounts and remove hard drives.
• If there is a risk that investigators will remove laptops or desktop computers and if sufficient time is available, consider imaging hard drives of key employees, provided that imaging will not negatively impact the investigation.
• Issue a bilingual document retention notice, instructing employees to retain all company soft and hard copy documents, emails and SMS. Turn off any email auto-delete function on relevant servers.
• If employees are to be interviewed by authorities, brief each employee before their interview and encourage cooperation. If circumstances permit, discuss any potential violations with an employee before or after they are interviewed in order to understand the facts, but be careful not to interfere with the investigators' fact finding procedures.
• Work with external counsel to conduct a shadow review of the materials that government investigators have shown an interest in, or might be interested in. It is important to engage counsel who can mobilise quickly and efficiently. If the authorities are interested in the company's financial statements and sufficient information regarding the purpose of the investigation is available, consider engaging forensic accountants to review the companies accounting records. If it is important to preserve legal privilege, ask foreign counsel to engage the accountants in order to do so.

If the investigation is serious and high profile, and particularly if authorities decide to disclose the investigation in Chinese media, consider engaging experienced public relations professionals to manage the company's communications with the media.

While much can be done to smoothen the path of an investigation, some conduct is unhelpful and potentially high risk. It is important not to:

• Interfere with or try to control an authority's investigation;
• Destroy, hide or create documents in response to an investigation;
• Influence an employee's responses in an interview, even if the employee is confused; or
• Assume that you know what the investigators are looking for, unless they tell you.

Susan Munro, Steptoe & Johnson, Beijing