Comply or be caught

This article is from the Regulatory & Compliance chapter of the 2015 Annual Review and is available for download here.


Yuhua Yang of Llinks Law Offices highlights the critical need to have compliance controls in check, the punishments for corruption and bribery and the administrative duties of all FIEs in China

1. Anti-corruption and bribery have become a huge focus in China, and that peaked during the GSK scandal in 2014. Which other significant corporate cases from the past year reflect this crackdown?

The Chinese government has substantially strengthened its anti-corruption enforcement regime since Xi Jinping rose to the leadership in 2012. Xi's campaign, targeting so-called “tigers and flies”, has resulted in arrests and trials of high-level state officials and prominent executives of state-owned entities (SOEs) and multinational corporations.

Since the GlaxoSmithKline (GSK) scandal in 2014, multinationals General Electric, Philips and Siemens have also reportedly been investigated over allegations they paid kickbacks to hospitals when selling their medical equipment.

These cases are significant for several reasons. Firstly, the government has signalled that it is serious about tackling corruption and reminded foreign businesses that they are not immune to China's laws. Secondly, the government has demonstrated its willingness to protect the strategically significant pharmaceutical and medical equipment industries. Thirdly, the government has responded to public pressure to bring down the high costs of medicine and healthcare in China, which had been inflated through the widespread payment of kickbacks within the industry.

Corruption investigations involving large SOEs in China's oil and gas industry have also drawn attention, mostly due to their relationship to ousted former Politburo Standing Committee member Zhou Yongkang. Zhou, who was convicted in 2015 of bribery and abuse of power, maintained a large patronage network among SOEs in the oil and gas industry. These investigations have resulted in the downfall of many senior executives and managers at these enterprises and have also extended to other industries. Approximately 26 large SOEs are said to be under investigation.

2. What are the latest regulatory developments in anti-corruption and bribery laws? What are the penalties/punishments for violating them?

The most significant recent development in Chinese anti-corruption and anti-bribery laws was the Supreme People's Court and Supreme People's Procuratorate, Interpretation on Certain Issues Concerning Specific Application of the Law in Handling Criminal Cases involving Bribery (2013) (Interpretation). The Interpretation does not contain any new penalties or punishments, but clarifies Article 390 of the PRC Criminal Law, which deals with sentencing for the crime of bribery.

Article 390 Where a party commits the crime of offering bribes, he/she shall be sentenced to a fixed-term imprisonment of not more than five years or criminal detention. Where a party offers a bribe to secure illegitimate benefits and the circumstances are serious or a grave loss is caused to the state interests, he/she shall be sentenced to a fixed-term imprisonment of not less than five years but not more than 10 years; if the circumstances are particularly serious, he/she shall be sentenced to a fixed-term imprisonment of not less than 10 years or life imprisonment and may also be sentenced to confiscation of property.

A briber who, before he/she is prosecuted, voluntarily confesses his/her act of offering bribes may be given a mitigated penalty or exempted from penalty.

An individual or entity is criminally liable if a bribe of at least Rmb10,000 is made to a state functionary with the intention of seeking improper benefits. For the purposes of Article 390, “serious circumstances” are present when the bribe is between Rmb200,000 and Rmb1 million or between Rmb100,000 and Rmb200,000 with certain aggravating circumstances, while “a grave loss is caused to the state interests” when the bribe results in direct economic loss of at least Rmb1 million. “Particularly serious circumstances” include where the bribe is at least Rmb1 million; the bribe is between Rmb500,000 and Rmb1 million with certain aggravating circumstances; and/or the bribe causes direct economic loss of at least Rmb5 million. Lastly, the Interpretation expands the definition of “seeking improper benefits” to include seeking “competitive advantages in economic, organisational and personnel management and other activities in violation of the principle of fairness and justice.”

It seems there have been no major regulatory developments in anti-corruption and anti-bribery since 2013, although it is worth mentioning that in October 2014, the CCP Central Committee issued the Decision on Several Major Issues Concerning the Full-scale Promotion of Government by Law (Decision). In this Decision, the Central Committee urged the National People's Congress to speed up enactment of the PRC Anti-corruption Law, with the hope that it would lead to an effective institutional solution to the prevention and punishment of corruption and bribery. Moreover, in February 2015, the Supreme People's Procuratorate issued an opinion on implementing the CCP Central Committee's Decision, vowing to push for the enactment of the Anti-corruption Law and to clear up the relevant judicial interpretations.

3. Which sectors are especially vulnerable to non-compliant practices? Which industries are being targeted for scrutiny or investigation by the authorities?

Industries with one or more of the following characteristics tend to be vulnerable to corruption:

i) Industries which are heavily regulated by the government, where officials possess expansive discretionary powers and can influence business;

ii) Industries with high profit margins, which provide greater capacity for the payment of bribes; and

iii) Industries which are shielded from competition by the government, such as SOEs in natural monopoly sectors.

As discussed, the government has targeted the pharmaceuticals, medical devices/equipment and energy industries. Another target has been the country's banking sector, which satisfies all of the above criteria.

Public scandals concerning food safety, product safety and environmental protection have also attracted the attention of corruption investigators, often because they involve companies paying bribes to state officials to avoid regulatory obligations. These cases confirm that the government is vigorously pursuing corruption in order to address the concerns of its citizens and to maintain public support and social stability.

4. What is your advice to companies on maintaining compliance and correct market behaviour? What internal compliance controls or programmes should companies have in place?

Companies should have a robust compliance programme in place – a system of internal controls which provide reasonable assurances that employees are not violating anti-corruption and bribery laws and regulations.

Due diligence is especially important. Effective and probing pre-acquisition due diligence is necessary in order to avoid bearing any US Foreign Corrupt Practices Act (FCPA) liabilities of newly acquired businesses. For instance, following Pfizer's 2009 acquisition of Wyeth, the due diligence review found potential improper payments, prompting SEC and DOJ investigations. Wyeth paid millions of dollars to resolve the relevant charges. The DOJ declined to pursue charges against Pfizer, citing its due diligence and the prompt implementation of internal controls in Wyeth's entities.

Companies should also conduct due diligence on third parties they do business with, such as suppliers, contractors, consultants, PR/marketing firms, event organisers, travel agents, import/export companies, distributors and dealers. They should continue to monitor the behaviour of third parties during their business relationship and remain especially vigilant if they operate in a high-risk sector vulnerable to corruption.

Lastly, companies should be aware of the changing cultural and legal landscape. Providing valuable gifts, entertainment, travel costs and other forms of hospitality to government officials is no longer considered safe and appropriate in the current environment, so companies should closely monitor the provision of such gifts by company representatives and third parties to ensure compliance with the law.

5. What are the registration and filing requirements for foreign companies to establish entities in China?

Foreign investors must go through four stages to establish a company in China.

(1) The foreign investor must file an application for name pre-approval. Once the proposed name has been pre-approved, a bank account can be set up.

(2) The establishment of the foreign-invested enterprise (FIE) is subject to approval by the Ministry of Commerce (MOFCOM) or its local counterpart and the National Development and Reform Commission (NDRC), depending on the entity's size and industry. Proper documentation is required.

(3) Within 30 days of approval, the foreign investor must apply for establishment registration with the State Administration for Industry and Commerce (SAIC) or its local counterpart and be issued with a business licence. The issuance date of the business licence is the establishment date of the FIE.

(4) The company must make a corporate seal and register with the local tax and foreign exchange authorities. The Chinese government has been promoting measures to unify and simplify the registration procedures.

6. What administrative and reporting duties must foreign companies comply with once they are operational?

An FIE's administrative and reporting duties relate to company registration information and annual reporting, financial status and finance-related matters, taxation, foreign exchange and customs.

An FIE must report to the SAIC or its local counterpart if there are changes to its registered information, such as its name, address, legal representative, scope of business, type of enterprise, total investment and registered capital, term of operation, shareholders and equity interests, branches, directors, supervisors or managers. Changes to some of these items require prior approval from the original approving authority, i.e. MOFCOM.

Between January 1 and June 30 each year, FIEs must submit an annual report to the SAIC, disclosing their key corporate information to the public.

FIEs must report corporate income tax on a monthly/quarterly basis and submit audited annual financial statements by May 31 of the following year. Value-added tax and individual income tax need to be reported on a monthly basis.

FIEs must register their foreign exchange information with their bank. Normally for current account transactions over US$50,000, FIEs need to submit certain documents proving the authenticity of the transaction in order to purchase the foreign currency. For capital account transactions, FIEs must comply with State Administration for Foreign Exchange (SAFE) filing and registration procedures.

7. What is your advice for companies being investigated by the authorities?

Companies should cooperate fully with the authorities if they are under investigation. It is advantageous if the company can demonstrate that it has robust and effective internal controls and that any violations were the result of a particular officer's/employee's misconduct, and not the company as a whole.

If the company is at fault, it should consider making a confession. According to Article 7 of the Interpretation, where an organisation has committed bribery and confesses voluntarily before prosecution, the organisation and the relevant officeholders and employees may receive a mitigated punishment or be exempted from penalty. Obviously companies should seek legal advice before making any admissions and ideally engage lawyers to make representations on their behalf.

8. In-house legal and compliance teams are beefing up. What challenges do they face?

Companies are profit-driven entities. Resources are usually allocated to the profit-making sales and business development teams, whereas compliance teams – which are often seen as a drag on business – are starved of funds and human resources. This unfortunate political reality can be a real hindrance to the effectiveness of compliance teams.

Nonetheless, compliance teams are absolutely essential for companies operating in China – a country which merges an ancient culture that prizes gift-giving and guanxi with a concerted modern-day government campaign to stamp out corruption. Highly skilled compliance professionals are needed to help companies navigate the legal pitfalls while simultaneously achieving their commercial objectives.


Author biography

Yuhua Yang
Partner

Yuhua Yang graduated from Peking University with an LLB degree and a bachelor's degree in economics. She obtained her LLM degree from the University of Pennsylvania Law School and a Certificate of Study in Business and Public Policy from Wharton School in 2006. She has worked at various law firms in London and Hong Kong, as well as at Phillips Nizer LLP in New York.
Having studied at top law schools in both China and the USA and gained international experience, Yuhua is well versed in cross-border matters, serving both Chinese and foreign clients in fields as diverse as capital markets and corporate finance, M&A, inbound and outbound investment, international trade, private equity and venture capital, IP rights, restructuring, insolvency and bankruptcy, as well as dispute resolution with international elements.
Her practical and constructive advice in structuring complex transactions, efficient handling of transaction documents and full competence in English negotiations are highly valued by clients in cross-border business matters. She has acted for clients in a range of industries, including securities and funds, energy, environmental protection, infrastructure, internet and e-commerce, entertainment and media, education, manufacturing, real estate, tourism, hotel management, pharmaceutical and healthcare, trading and hi-tech.
Yuhua is qualified to serve on the board of a listed company as non-executive independent director.

通力律师事务所的杨玉华律师指出合规内控的重要性，贪腐的刑罚，以及中国所有外商投资企业当前的运营披露/报告职责

1. 反贪反腐败成为中国打击的重点，2014年的葛兰素史克丑闻更掀起反贪的高潮。去年有何其他重大企业个案反映有关打击行动？

自2012年习近平领导的新一届政府走马上任起，中国政府大力加强了反腐力度。习近平强调“老虎、苍蝇一起打”，诸多国家高级干部和国有企业及跨国企业的一些主要负责人员相继被捕及受审。

自2014年的葛兰素史克丑闻起，据报导跨国企业如通用电气、飞利浦及西门子均成为调查对象，被指在出售医疗设备时向医院提供回扣。

这些个案的重要之处在于如下几方面。首先，中国政府持续释放出严打贪腐的信号，提醒外资企业在华并无任何形式和实质意义上的特权。其次，政府已明确其保护具有战略意义的医药及医疗设备行业的意愿。第三，政府某种程度上需要回应公众压力，下调国内高昂的药物及医疗费用，而业界盛行的回扣做法无疑是导致医药医疗费用居高不下的重要原因之一。

涉及中国油气行业的大型国企反贪调查亦受到注意，主要是因为其与落马的中央政治局前常委周永康的关系。周永康在2015年因受贿及滥用职权等被定罪，而他在油气行业的国企中强大的派系网络亦受此牵连。经调查后，这些企业很多高级管理人员落马，也扩展至其他相关行业。约有26家大型国企据称正受到调查。

2. 反贪反腐败方面有什么最新法规出台？违法未果的法律责任？

中国反贪反腐方面有重要意义的新近法规是《最高人民法院、最高人民检察院关于办理行贿刑事案件具体应用法律若干问题的解释(2013)》(《解释》)。《解释》并未设定新的刑罚，但明确了《中华人民共和国刑法》第390条有关犯行贿罪的处罚力度。

第三百九十条 对犯行贿罪的，处五年以下有期徒刑或者拘役；因行贿谋取不正当利益，情节严重的，或者使国家利益遭受重大损失的，处五年以上十年以下有期徒刑；情节特别严重的，处十年以上有期徒刑或者无期徒刑，可以并处没收财产。

行贿人在被追诉前主动交待行贿行为的，可以减轻处罚或者免除处罚。

如向国家工作人员提供1万元人民币或以上贿款，以谋取不正当利益，便要承担刑事责任。第390条所指的“情节严重”，是指贿款为20万元人民币以上不满100万元人民币，或在10万元至20万元人民币之间且有可加重处罚情节。因行贿谋取不正当利益,造成直接经济损失数额在100万元人民币以上的，即可认定为“使国家利益遭受重大损失”。“情节特别严重”包括贿款为100万元人民币以上，或贿款为50万元至100万元人民币之间且有可加重处罚情节，及/或贿赂引致500万元人民币以上的直接经济损失。最后，《解释》把“谋取不正当利益”的定义扩至“违背公平、公正原则，在经济、组织人事管理等活动中，谋取竞争优势的”。

自2013年以来，在反贪反腐方面并无重大立法变化，但值得注意的是，中共中央发出《关于全面推进依法治国若干重大问题的决定》(《决定》)。在《决定》中，中共中央促请全国人大加快《中华人民共和国反腐败法》的立法进程，期望对预防及惩治贪污腐败在制度层面提供更有效的解决方法。此外，2015年2月，最高人民检察院发出《关于贯彻落实《决定》的意见》，表达了推进健全反腐败法律监督机制、强化法律监督职能的明确方向和原则。

3. 哪些行业特别容易有不合规的行为？哪些行业是当局核查或调查的重点对象？

具有以下一个或多个特征的行业较易引起贪腐：

i) 政府管控的行业，官员拥有广泛酌情裁定权，可对业务经营产生决定性影响；

ii) 高利润行业，刺激行贿受贿行为发生；

iii) 竞争不充分的行业，例如自然垄断行业领域中的国有企业。

如上所述，当前政府格外关注医药、医疗器材/设备及能源行业。另一个目标行业是银行业，此行业亦符合以上所有条件。

有关食品安全、产品安全及环境保护的公开丑闻，也引起了反贪调查人员的注意，主要是因为涉事企业大多贿赂主管官员，以逃避相关法定义务。这些个案亦进一步明确了政府强力反贪的姿态，回应民众关注，维持公众支持及社会稳定。

4. 您对企业如何保证合规及正确的市场行为有何意见？企业应该拥有什么样的内控制度或程序？

企业应拥有健全的合规程序──内控制度，作为员工没有违反反贪腐法规的合理保障。

尽职调查尤其重要。在收购前进行有效深入的尽职调查是必要的，以免承担被收购企业在美国《海外反腐败法》项下的责任。例如，美国辉瑞在2009年收购惠氏时，尽职调查发现了可疑的不当支付行为，并向美国证监会及司法部自愿披露了相关情况，并配合政府的调查。惠氏支付了数千万美元以了解相关指控。美国司法部取消了对辉瑞的指控，表示辉瑞已适当进行尽职调查，并立即在惠氏实施内控措施。

企业也应对有业务往来的第三方进行尽职调查，例如供应商、承包商、顾问、公关/营销公司、活动举办公司、旅行社、进出口公司、分销商及经销商。企业应在有业务关系期间持续监察第三方的行为，如经营的业务涉及较易贪污的高风险行业，则更要特别留神。

最后，企业应留意文化及法律方面的时局转变。以目前的环境而言，向政府官员提供贵重礼物、娱乐、旅费及其他形式的款待行为，不再被视为安全及合适，因此企业应密切留意公司代表及第三方提供这些礼物的情况，以确保合规。

5. 在中国设立外商投资企业的注册及备案要求有哪些？

外国投资者在中国设立公司，必须至少完成如下四个步骤。

(1) 外国投资者必须提交企业名称预先核准的申请。名称获得预核准后，即可开立银行帐户。

(2) 视乎企业的规模及行业，设立外资企业须由商务部门及发改部门批准/备案，须提交相关申请文件。

(3) 自取得批准之日起30日内，外国投资者必须向工商部门申请注册登记，并取得营业执照。营业执照签发之日为该外商投资企业成立之日。

(4) 企业须制刻公司印章，并到当地税务及外汇局办理注册登记。中国政府近期一直大力推行整合、简化商事主体注册登记的程序。

6. 外商投资企业注册成立并正式营运后，须履行哪些运营信息披露/报告责任？

外商投资企业的运营信息披露/报告责任包括公司登记信息及年度报告、财务状况及财务相关事宜、税收、外汇及通关事宜。

外商投资企业已登记/备案信息的任何变更，均须向工商部门申请变更登记/备案，例如企业名称、地址、法定代表人、经营范围、企业类型、投资总额及注册资本、经营期限、股东及股权、分支机构、董事、监事或高管人员。某些登记信息的变更还须经原审批机关(即商务部门)的事先批准。

在每年1月1日至6月30日期间，外商投资企业须向工商部门提交年度报告，向公众披露主要公司信息。

外商投资企业须按月/季报告/预缴企业所得税，并在下一年度的5月31日前提交已经审计的年度财务报告。增值税及个人所得税需每月报告。

外商投资企业须经其开户银行办理外汇登记。在一般情况下，对于超过5万美元(或等值外币)的经常项目交易，企业需提交文件证明交易的真实性，方能购汇。对于资本项目交易，外资企业须遵循国家外汇管理局的登记/备案程序。

7. 您对被当局调查的企业有何建议？

企业如被调查，应全面与当局合作。如企业能证明已设置有健全有效的内控制度、而违规只是个别管理人员/员工的不当行为，与企业整体无关，便对企业有利。

如企业确有违规/不当行为，应考虑自愿披露、自行供认。《解释》第7条指出，如单位行贿，在被追诉前主动交待行贿行为的，单位及相关责任人员可以减轻或免除处罚。当然，企业应在任何披露或供认前寻求法律咨询，理想的做法是聘请律师代理。

8. 企业内部法律及合规团队正日益扩充。他们面对什么挑战？

企业以利润为先。资源一般会优先分配到较直接贡献收入的销售及业务开拓部门，而合规部门经常被视为业务拓展的掣肘，资金及人手需求得不到充足支持。这个政治生态不幸是对合规部门有效运作的实质障碍。

然而，在中国经营的外资公司设有合规部门是至关重要的，中国的传统文化讲究礼尚往来、人际关系的维护，但现今又结合了政府重拳反贪的行动。富有技巧的合规专业人才有助公司在为商业目标进取的同时尽可能避免隐患。


作者简历

杨玉华
合伙人

杨玉华律师毕业于北京大学法学院，获得法学学士学位及经济学学士学位；并于2006年毕业于美国宾夕法尼亚大学法学院及沃顿商学院，获得法学硕士学位及商务与公共政策研修证书。杨律师曾在伦敦及香港的律师事务所以及纽约Phillips Nizer LLP律师事务所工作。
受益于国内外一流法学院的专业教育和国际执业经验，杨玉华律师长期专注于各类跨境业务，为诸多中外客户在资本市场和公司融资、收购兼并、外商对华投资、中资企业境外投资、国际贸易、私募股权投资和风险投资、知识产权、破产重整与清算及具有涉外因素的争议解决等领域长期提供高效服务。
在复杂跨境交易结构设计、大量交易文件处理、以英文进行重大商务谈判、及在跨境国际业务中为中外客户提供高附加值服务方面，广受客户认可。杨律师服务的中外客户所涉行业包括证券、投资与基金、能源、环保、基础设施、互联网和电子商务、娱乐传媒、教育、制造业、房地产、旅游业、酒店管理、医药及健康、贸易、科技等。
杨律师具有中国证监会认可的上市公司独立董事任职资格。