How to Prevent and Deal with Corruption in Your China Business
Foreign companies and multinationals in China can be vulnerable to internal corruption. Lapses in judgment or inadequate defense procedures may make them liable for crimes committed by employees. It is therefore imperative that all companies in China understand the types of behavior that are illegal under China’s criminal and anti unfair competition laws. In this article, we discuss China’s legislation on commercial corruption and offer advice on preventing acts of fraud, embezzlement, and bribery in China-based businesses.
Commercial corruption can be a serious crime in China, and the consequences of committing it can lead to major fines for the company and imprisonment for the individuals involved, as well as causing serious damage to a company’s reputation.
The number of corruption cases that are investigated in China has been rising ever since the launch of a concerted anti-corruption campaign, which has implicated officials of all levels, as well as private companies, including multinationals.
As we will discuss in this article, individual acts of corruption by an employee can in some cases be seen as an act of corruption by the company itself. For this reason, it is important that companies in China have a clear understanding of the types of behavior that constitute commercial corruption in China, and have policies and procedures in place to deal with any cases that may arise.
Below we provide an overview of China’s legal framework penalizing the different types of commercial corruption in China, including possible punishments and legal liabilities. We also give advice on policies and measures that companies can implement to prevent, detect, and deal with cases of commercial corruption among their employees.
China’s anti-corruption campaign
China launched a concerted anti-corruption campaign in 2012. The campaign has reached all levels of government, as well as state-owned and private companies. According to the Central Commission for Discipline Inspection (CCDI), the top control organization for the Chinese Communist Party (CCP), the anti-corruption campaign has seen the investigation of 4.6 million people and brought legal action against more than 200,000 officials at all levels of government.
Although the anti-corruption campaign has focused mainly on state corruption and public officials, the campaign has also touched upon the private sector, including foreign companies and multinationals. The most high-profile bribery case involving a foreign MNC was the 2014 case in which the British pharmaceutical company GlaxoSmithKline (GSK) was fined RMB 3 billion (US$490 million) for bribing doctors and hospitals to promote its products.
The crackdown on corruption in all areas of the government and economy is also set to continue. In the 20th Party Congress report, President Xi Jinping vowed to continue pursuing corrupt officials and entities.
Types of commercial corruption under Chinese law
The main pieces of legislation penalizing commercial corruption in China are:
- The Criminal Law of the PRC (the “Criminal Law”) (1979; revised 2020)
- The Anti Unfair Competition Law the PRC (the “Anti Unfair Competition Law”) (1993)
- The Supervision Law of the PRC (the “Supervision Law”) (2018)
The Criminal Law penalizes extortion and bribery of a public official, commercial bribery, and embezzlement. This Law states that foreigners who commit a crime against the State of China or a Chinese citizen outside of Chinese territory are still liable for punishment under the Criminal Law, provided the crime is punishable by minimum fixed-term imprisonment.
In 2021, the Criminal Law was amended to increase the penalty for bribery in the private sector to be equal to that of the public sector. Previously, the penalty for bribery for “non-state functionaries” was lower than for state functionaries.
Meanwhile, under the Anti Unfair Competition Law, commercial bribery is classified as an “act of unfair competition” and is punishable by law.
In 2018, China passed the Supervision Law and established a new government body, the CCDI, to act as an anti-corruption supervisory body over all levels of government. The Supervision Law gives the CCDI the power to investigate officials for corruption, outlining the scope of its responsibilities and tools to bring cases to a conclusion. Notably, it also enables the CCDI to seek international cooperation to extradite individuals that are involved in corruption cases who may have left or fled China, or seize, freeze, or confiscate their overseas assets.
Extortion, embezzlement, and passive bribery committed by a company employee
Extortion, embezzlement, and passive bribery by a company employee are punishable under articles 163 and 271 of the Criminal Law. The article criminalizes the following behavior by company employees:
- Demanding money or property or illegally accepting another person’s money or property in return for the benefits they seek for such person;
- Unlawfully taking possession of the money or property of their company; and
- Accepting rebates or service charges of various descriptions and taking them into their own possession.
Articles 163 and 271 were revised in the 2021 amendment to adjust the penalties based on the amount of money involved and the seriousness of the crime’s consequences. The penalties for bribery by a company employee are now:
- For crimes involving a “relatively large” amount: Sentencing to fixed-term imprisonment of up to three years or criminal detention, and imposition of a fine;
- For crimes involving a “huge” amount or other serious circumstances: Sentencing to fixed-term imprisonment of between three and 10 years and imposition of a fine;
- For crimes involving a “particularly huge” amount or where there were other “particularly serious” circumstances: Sentencing to fixed-term imprisonment of at least 10 years or life imprisonment and imposition of a fine.
The thresholds for “relatively large”, “huge”, and “particularly huge” amounts are not entirely clear. A previous official interpretation of the Criminal Law from 2016 set the threshold for “relatively large” at RMB 60,000 (US$8,406) and “huge” at RMB 1 million (US$140,103). However, a more recent set of regulations on standards for criminal case filing and prosecution appears to lower the bottom threshold to RMB 30,000 (US$4,203), which analysts have interpreted as meaning a “relatively large” amount. So far, there have been no official interpretations released clarifying what the “particularly huge” amount will be.
Bribing a company employee
Article 164 of the Criminal Law deals with the bribery of a company employee. It penalizes the act of giving money or property to any company employee “for the purpose of seeking illegitimate benefits”.
This crime is punishable by fixed-term imprisonment in the following circumstances:
- If the crime involves a “relatively large” amount: fixed-term imprisonment of up to three years or criminal detention; and
- If the crime involves a “huge” amount: Sentencing to fixed-term imprisonment of between three and 10 years and imposition of a fine.
The threshold for “relatively large” and “huge” amounts were previously set in an official interpretation from 2016 at over RMB 60,000 (US$8,406) and between RMB 2 million (US$280,206) and RMB 10 million (US$1.4 million) respectively. However, the regulations on standards for criminal case filing and prosecution mentioned in the section above also appear to lower the bottom threshold to RMB 30,000 (US$4,203) for crimes committed by individuals, which analysts have interpreted as meaning the “relatively large” amount.
Bribery committed by a company
Article 164 of the Criminal Law also outlines penalties for companies that bribe another company’s employees. In this scenario, the company will be fined and the persons who are directly in charge and the persons who are directly responsible for the crime are liable for the above fixed-term imprisonments for individuals who bribe company employees, outlined in the section above. However, the threshold for legal liability for companies offering bribes is higher than for individuals, set at RMB 200,000 (US$27,963) rather than RMB 30,000 (US$4,194), according to the regulations on standards for criminal case filing and prosecution.
The law also states that any briber who confesses to the bribery voluntarily prior to prosecution may be given a mitigated punishment or be exempted from punishment.
Under Article 8 of the Anti Unfair Competition Law, companies are banned from resorting to bribery in the process of selling or purchasing commodities “by ordering money or goods or by any other means”. Offering bribes in this case also includes acts such as offering off-the-book rebates in secret to another party, company, or individual. In addition, any company or individual who accepts any such bribe is liable for a crime.
Article 22 states that if the above behavior constitutes a crime, then the company and persons involved will be investigated for criminal liability, and punished in accordance with relevant laws. However, companies may still be liable for a fine even if the activity does not constitute a crime. In this situation, companies may be fined between RMB 10,000 (US$1,410) and RMB 200,000 (US$28,213) depending on the circumstances, and have all of the illegitimately gained income confiscated.
The Criminal Law also penalizes acts of bribery of state institutions and state functionaries by private companies. Under Article 391, companies that give money, property, rebates, or service charges to a State organ, State-owned company, enterprise, institution or people’s organization for the purpose of securing illegitimate benefits are liable for a fine. The persons directly in charge and persons directly responsible for the crime are also liable for fixed-term imprisonment of up to three years or criminal detention.
Meanwhile, under Article 393, companies that offer these kinds of bribes to state functionaries are liable for a fine, but the persons directly in charge and directly responsible are liable for up to five years of fixed-term imprisonment or criminal detention.
Bribery or embezzlement committed by an individual
In addition to the above penalties, the Criminal Law also penalizes individuals who bribe State functionaries (Article 389), take into possession any illegally obtained gains derived from bribery (Article 393), or generally offer bribes, whether to secure illegitimate benefits or not (Article 391). These clauses are not directly aimed at company employees, but an employee who commits these crimes on their own accord could in some cases implicate the company they work for.
Under articles 389, 390, and 391, penalties for bribery by individuals are:
- A fixed-term imprisonment sentence of up to five years or criminal detention for the crime of offering bribes.
- A fixed-term imprisonment sentence of between five and 10 years for the crime of offering bribes to secure illegitimate benefits if the circumstances are serious or if heavy losses are caused to the interests of the State.
- A fixed-term imprisonment sentence of at least 10 years or life imprisonment and confiscation of property if the crime is especially serious.
Under Article 389, if a person offers money or property to a state functionary through extortion but gains no illegitimate benefits from the act, it is not regarded as having offered a bribe. In addition, a person may have their sentence reduced or be exempted from punishment if they voluntarily confess to the crime prior to the investigation.
Common types of commercial corruption in China
Some of the most common types of corruption seen in commercial settings are those involving bribery authorized by senior management, which often involves gaining benefits that are in the interest of the company itself. This may involve bribery of clients or channel partners in exchange for services or products, including tangible and intangible favors, such as the promise of more orders, better promotional channels, increasing website traffic, and so on.
Bribery committed by individual employees, meanwhile, is more commonly conducted for personal interest and commonly includes acts of nepotism by people in sales, purchasing, or management positions buying products or services from relatives or friends.
Key measures for preventing corruption in your company
There are a few steps and procedures that companies can implement to reduce the risk of corruption among employees. Below we suggest a few measures and policies that companies can implement.
Formulating a reimbursement policy can help identify suspicious behavior that may constitute fraud or corruption. This should include a detailed description of the types of expenses that are eligible for reimbursement and under which circumstances employees can be reimbursed, as well as details on expenses and scenarios that are not considered reimbursable. These details can be included in the staff handbook to ensure all employees are familiar with the policy.
It is also important to require pre-approval from higher-level management for any major expenses undertaken by employees so that the purpose and scope of the expense can be vetted beforehand.
Code of conduct for hiring vendors
To prevent favoritism when hiring vendors, it is important to implement a code of conduct that employees must follow when searching and vetting potential suppliers. This may include formulating vendor selection procedures and implementing mechanisms for conducting background checks to ensure there is no conflict of interest in hiring them.
Vendor selection procedures may include a basic checklist of information for employees involved in the hiring procedure, including information on referrals, to make it easier for supervisors to gauge the reason for hiring a given vendor.
It is also advisable to delegate the responsibility of hiring vendors to several employees and implementing a tiered approval procedure to avoid the decision being given to one sole employee. This will reduce the risk that one employee will seek to hire a certain vendor solely for personal benefit.
Management of company chops
Finally, it is also important to maintain firm management over the use of company chops to prevent their misuse. Company chops provide a strong legal basis in China and therefore can be easily misappropriated by employees to sanction contracts, processes, and more without the company’s knowledge.
To do this, it is advisable to form an internal policy for the use of company chops and ensure strict supervision of their use during daily operations. This policy may include measures such as implementing a tiered approval policy for the use of the company chop and ensuring the company chop is kept in a safe and never used without the knowledge or permission of the persons in charge.
It is also advisable to delegate the responsibility of managing and overseeing the use of the company chop to more than one employee to avoid giving too much power to one individual. Many foreign companies in China will often give the responsibility of managing the company chop to one employee, often the legal representative, which decreases the ability of the company to maintain independent oversight over how it is used and increases the risk of its misuse.
Steps to take upon discovery of corruption within the company
There are several steps that a company should take in the event that an act of embezzlement, fraud, or bribery is discovered among their employees, depending on the type and severity of the violation.
The first step is to initiate an independent investigation of the incident, carried out either by an internal audit and compliance team or by a third-party company.
Depending on the outcome of the investigation, the company can then decide how to proceed, which may include actions such as:
- Persuading the employees involved to resign;
- Terminating the employees involved for reasons such as severe violation of the labor contract, code of conduct, or staff handbook;
- Terminating contracts and services with vendors involved;
- Carrying out public relations or crisis management campaigns if the situation has been revealed to the public and caused damage to the company’s reputation;
- Reporting the situation to the police if it cannot be resolved between the parties involved.
Note that reporting a case of internal corruption to the police is an unlikely step to take in practice as it runs the risk of jeopardizing the company’s reputation and may implicate the company itself for legal liability. This step is usually only necessary if the company is required to defend itself legally in cases where its reputation or credibility is at stake.
In addition, although it is illegal under Chinese law, it is fairly unusual for the police to investigate cases of commercial corruption by individuals. Exceptions are usually made in cases where the activity causes harm to consumers, the State, or other stakeholders or the scope of the illegal activity is particularly large or egregious.
Consequences for non-compliance by companies
It is very important for companies to build a defense and response mechanism to both prevent and deal with internal corruption through some of the mechanisms discussed above. Under Article 7 of the Anti Unfair Competition Law, bribery committed by an employee can be deemed as the act of the company itself and the company therefore undertakes civil and even criminal liabilities.
Exceptions are made “where the business operator has evidence to prove that the conduct of the said employee has nothing to do with seeking transaction opportunities or competitive advantages for the company.”
In the event that an investigation is carried out by government bodies into the company, it is imperative that the company cooperates with the authorities and provides the information that it is asked for. Attempts to conceal or obstruct investigations by the authorities may lead to harsher punishment, including higher fines and penalties for the individuals involved
On the other hand, active cooperation and communication with the authorities can help to reduce the severity of the punishment, and in some instances remove the penalties entirely. The Criminal Law contains multiple clauses allowing for penalties to be reduced or removed in cases where the individuals involved voluntarily confesses to the crime prior to the investigation being carried out. This in turn may also lessen any potential penalties on the company. It is therefore also advisable for the company to communicate with individuals involved and where appropriate, provide support to individuals to cooperate with the authorities in the event of an investigation.
Uncovering, investigating, and dealing with instances of commercial corruption within a company can be complex and runs the risk of causing conflict within the organization or possible damage to the company’s reputation, either with employees or external stakeholders. For this reason, many companies choose to outsource audit and compliance responsibilities to a third party, who can help manage tensions and implement new procedures to help prevent illegal activity from taking place. For help with internal compliance and audit tasks, you can reach out to our professionals at email@example.com.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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