Electronic Chops in China: Unauthorized Use and Legal Risk Management
Electronic chops are a convenient alternative to their physical counterparts. China Briefing explores the regulatory framework and risk management relating to the use of electronic chops in China.
A company seal, or ‘chop’, is an important component of doing business in China, as it is integral to the administration of a company and the key to legally authorize documentation. This essentially means that whoever is in possession of the company chop holds ultimate authority over a company.
An electronic chop is the digital version of its physical counterpart, and can be used for online transactions, including financial and contractual ones. For this reason, the misuse of electronic chops is a common issue met by many companies in China, which can have severe financial and legal implications.
An updated version of China’s Electronic Signature Law was released in April 2015, which clarifies and standardizes the legal validity of electronic signatures, of which electronic chops fall under the jurisdiction.
This article explores how to correctly deal with and avoid the misuse of electronic chops by employees, and how to keep compliance with the updated Electronic Signature Law.
Although an electronic chop generally acts in the same way as an electronic signature, which relies on an encrypted digital signature as a verification method, in some cases, the image of the electronic chop can easily be lifted and used outside of the scope of intended use, and subsequently circulated to unauthorized users.
The re-appropriation of an electronic chop is often not malicious, such as an employee using it when their supervisor is unavailable, but can have serious security implications.
This is a problem met by many businesses, especially those who sign contracts with external parties on a regular basis, and when the legal representative bearing the chop is absent.
Many legal liabilities for the company and legal representative can arise from the misuse of an electronic chop, as the disclosure of confidential electronic chop security data can constitute a criminal offence.
In most court cases involving misuse of electronic signatures, parties who make unauthorized disclosure are generally held responsible for any loss, usually finding improper storage methods or user misuse the culprit for disputes.
According to the updated law, an electronic chop is as legally binding as a real chop or handwritten signature if the electronic chop’s creation data is exclusively owned and controlled by the signatory at the time of signing.
In addition, if any subsequent alteration to the electronic chop and any relevant data is made, it must be detectable.
The law also stipulates that a signatory must properly keep and retain all electronic chop creation data, and if they become aware that such data has become compromised, must promptly inform any relevant parties and cease to use the electronic chop and data.
It is evident from the law that proper and secure management of the electronic chop creation data – the encrypted data that accompanies the electronic chop – is emphasized in order to maintain its security and validity. This is a key control point for guarding against misappropriation and unauthorized use of an electronic chop.
A company may designate personnel to be responsible for the management of contract signing, as well as develop management practice for properly tracking and logging the use of electronic chops. This way, unauthorized use can be quickly and effectively identified.
A company should ensure that relevant provision is made in the employee handbook for the use of electronic chops, including regulation and disciplinary measures in case of misuse.
The legal validity of an electronic chop is important because it is a means of confirming the actual party and signatory who signed the document, and the original document recognized by the signing party. Meaning that, in regards of the law, it proves the signatory understands and recognizes the content of the contract, acting as evidence of the intention between signing parties.
It is therefore of paramount importance for a company to ensure that its electronic chop is not abused by unauthorized employees, even if done in convenience, i.e. when the legal representative or signatory is absent.
A company should have a sound chop management system in place, as well as provision in the employee handbook in order to avoid such problems.
Legal repercussions of such misuse can be severe, and related disputes are notoriously hard to solve, due to the rapid advancement of electronic signature technology outpacing the speed of regulatory reforms.
China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Dalian, Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong. Readers may write email@example.com for more support on doing business in China.