Furthermore, if, during an administrative investigation, it is found that the committed act reaches beyond the scope of administrative punishment and constitutes a criminal offense, the case will be transferred to the judicial authority for imposing criminal liability. In this case, both the company and the responsible personnel may face severe criminal penalties.

Surviving a regulatory investigation

To survive a regulatory investigation and avoid assuming any liabilities in China, it's crucial to keep the following four tips in mind:

A. Implement a well-functioning compliance program

A company needs to build up its compliance program consistent with not only PRC laws but also state policies, and keep the program up-to-date in order to reflect the changes in compliance standards. It is worth noting that an adequate compliance program should meet important record-keeping requirements.

B. Understand the nature and purpose of the investigation

It is necessary for foreign investors to learn that in China, an investigation led by government authorities may not be “hostile” or have a specific purpose, but could merely be a routine inspection, which can be triggered for various reasons. For example, the local government could demand inspections for a specified period of time in certain industries. Foreign companies must therefore understand the intent behind an investigation and be prepared accordingly.

C. Conduct internal investigations

For the purpose of better understanding their own business, it is necessary to conduct an internal investigation if certain “red flags” are raised or spotted. Foreign investors should closely examine their business partners and third party agents during an investigation. Furthermore, independent counsel or forensic experts are often necessary for conducting an effective internal investigation to understand the facts and assess the risks.

D. Initiate communications with the regulator

After the internal investigation and evaluation, companies, along with outside lawyers, may initiate communications with regulators in order to understand the authorities' opinion. If necessary, companies may voluntarily submit a letter of explanation in order to defend their position. It is important for the companies to appear cooperative with the regulators, and contain the damages and risks.

*Gary Gao is a partner and co-head of the compliance practice at Zhong Lun Law Firm. Jianwei (Jerry) Fang is also a partner at Zhong Lun and holds a J.D. from Columbia Law School and is duly qualified in China and the U.S. Both authors are former Chinese judges.

Gary Gao & Jianwei (Jerry) Fang

[email protected] / [email protected]

China has long been regarded as a high-risk jurisdiction in terms of anti-bribery and compliance. A number of multinational corporations (MNCs) have been investigated by Chinese and foreign regulators in recent years, for issues ranging from bribing healthcare professionals to providing high-level job opportunities to relatives of PRC government officials. In fact, out of the U.S. Securities and Exchange Commission (SEC)'s 26 FCPA enforcement actions last year, 14 involved business operations of MNCs in China. A recent report by The Lawyer highlights that China was singled out by the first edition of the Risk Advisory Group's Corruption Challenges Index as the country businesses face the most severe corruption challenges in—outranking 180 other nations for first place.

China's anti-corruption crackdown

Most anti-corruption investigations into MNCs have historically been initiated by foreign regulators, mostly arising from concerns of Foreign Corrupt Practices Act (FCPA) violations. PRC regulators rarely got involved. But the intensified anti-corruption campaign under the new leadership has seen China launch numerous investigations in recent years, directly impacting the business operations of MNCs in China. Moreover, as these domestic regulatory probes draw the attention of global media and foreign regulators, they may well trigger investigations in other jurisdictions. With the ever-increasing emphasis on and capability in law enforcement in today's China, domestic and foreign authorities may even coordinate and simultaneously launch anti-corruption investigations into MNCs in future.

Cross-regulatory investigations

In addition to anti-corruption probes, various administrative authorities are empowered to conduct administrative investigations. The scope of these include, but are not limited to, the following: antitrust, environmental, and tax revenue inspections. One important factor to bear in mind is that for each specific type of administrative investigation, a company could be investigated by multiple regulatory authorities simultaneously.

For example, the National Development and Reform Commission (NDRC), State Administration for Industry and Commerce (SAIC) and the Anti-monopoly Bureau of the Ministry of Commerce (MOFCOM) are the three main agencies responsible for antitrust enforcement, and each plays a different role in antitrust investigations. The NDRC is responsible for investigating price monopoly acts, while all monopoly agreements and abuse of dominant market positions—excluding pricing-related matters—are subject to investigation and punishment by the SAIC. And lastly, MOFCOM is the agency responsible for reviewing mergers that could potentially harm market competition.

Furthermore, if, during an administrative investigation, it is found that the committed act reaches beyond the scope of administrative punishment and constitutes a criminal offense, the case will be transferred to the judicial authority for imposing criminal liability. In this case, both the company and the responsible personnel may face severe criminal penalties.

Surviving a regulatory investigation

To survive a regulatory investigation and avoid assuming any liabilities in China, it's crucial to keep the following four tips in mind:

A. Implement a well-functioning compliance program

A company needs to build up its compliance program consistent with not only PRC laws but also state policies, and keep the program up-to-date in order to reflect the changes in compliance standards. It is worth noting that an adequate compliance program should meet important record-keeping requirements.

B. Understand the nature and purpose of the investigation

It is necessary for foreign investors to learn that in China, an investigation led by government authorities may not be “hostile” or have a specific purpose, but could merely be a routine inspection, which can be triggered for various reasons. For example, the local government could demand inspections for a specified period of time in certain industries. Foreign companies must therefore understand the intent behind an investigation and be prepared accordingly.

C. Conduct internal investigations

For the purpose of better understanding their own business, it is necessary to conduct an internal investigation if certain “red flags” are raised or spotted. Foreign investors should closely examine their business partners and third party agents during an investigation. Furthermore, independent counsel or forensic experts are often necessary for conducting an effective internal investigation to understand the facts and assess the risks.

D. Initiate communications with the regulator

After the internal investigation and evaluation, companies, along with outside lawyers, may initiate communications with regulators in order to understand the authorities' opinion. If necessary, companies may voluntarily submit a letter of explanation in order to defend their position. It is important for the companies to appear cooperative with the regulators, and contain the damages and risks.

*Gary Gao is a partner and co-head of the compliance practice at Zhong Lun Law Firm. Jianwei (Jerry) Fang is also a partner at Zhong Lun and holds a J.D. from Columbia Law School and is duly qualified in China and the U.S. Both authors are former Chinese judges.