The social credit system in China has left many foreign enterprises worried about their status of compliance and managing situations that could potentially lead to bad social credit. Responding to requests for greater clarity and transparency on how the system works, the State Administration for Market Regulation recently released two new documents on the administration of China’s social credit system for companies. The documents clarify the types of violations and dishonest behavior that can land a company on the country’s corporate blacklist, and what recourse they have to restore bad social credit.
The State Administration for Market Regulation (SAMR) released two documents on the management of the social credit system, the Administrative Measures for Market Regulation of the Seriously Illegal and Dishonest Entities List (‘measures for violations’) and an announcement on the Administrative Measures for Market Regulation of Credit Restoration (‘measures for restoration’), on July 30 and August 1, respectively.
The release of these sets of measures follows amendments to the social credit system’s scope and punishments. The new measures aim to clarify the types of violations that can land a company on the ‘Seriously Illegal and Dishonest Entities List’ (‘”seriously dishonest” entities list’), a kind of blacklist that punishes companies for legal infringements and fraudulent behavior, in particular, that which leads to harmful consequences for the wider society or markets.
Companies that are added to the seriously dishonest entities list are subject to a variety of punishments in addition to fines and penalties levied for the individual infractions. These are typically restrictions on market access, fiscal funds, and preferential policies, increased regulatory inspections, and disqualification from streamlined bureaucratic procedures. Crucially, companies included on the list are publicly named and shamed through the National Enterprise Credit Information Publicity System, meaning potential partners and consumers will be able to see their violations.
The measures for violation will go into effect on September 1, 2021, replacing the Interim Measures for the Administration of the List of Seriously Illegal and Dishonest Enterprises, which were released on December 30, 2015.
The measures for violation also provide a brief overview of the action companies can take to either dispute a decision to add them on the seriously dishonest entities list or remove them from the list after a certain period of time.
The second document, the measures for restoration, extrapolate upon these provisions, revealing more details into the procedures for restoring a company’s social credit, and for removal from both the seriously dishonest entities list and the “list of enterprises with abnormal operations”.
The list of enterprises with abnormal operations is a list that keeps track of companies that fail on administrative duties, such as filing annual reports and keeping registration information up to date, or that have engaged in fraudulent administrative practices, such as filing false documents or obscuring administrative information. This is different from the “seriously dishonest” entities list, which punishes companies for directly violating industry laws and regulations and engaging in fraudulent practices.
In an effort to standardize the management of the seriously dishonest entities list, the measures for violations outline the types of infractions that will generate bad credit for a company, resulting in inclusion on the list.
The first criteria that can land a company on the seriously dishonest entities list is receiving a “relatively severe” punishment from the relevant market regulation authorities for violating laws or administrative regulations.
A relatively severe punishment is defined as:
To be liable for a relatively severe punishment, the violation of the law or regulation must have been committed in a malicious manner, under serious circumstances, or have caused serious social harm.
The measures for violations stipulate that the SAMR is the body responsible for organizing and guiding the management of the seriously dishonest entities list, whereas market regulation departments at the county level and above are responsible for the list’s management.
In addition to the “relatively severe” punishment criterion, the measures for violations offer a much narrower and more clearly defined framework for behavior deemed “illegal or dishonest”, with particular focus applied to key industries, such as food production, pharmaceuticals and medical devices, and ‘special equipment’.
Special equipment is a legal term defined in China’s safety laws as equipment that poses relatively high risks to personal and property safety, such as boilers, pressure vessels and pipes, elevators, and large-scale amusement facilities, among others.
Violations and Dishonest Behavior that Can Lead to Inclusion on the “Seriously Dishonest” Entities List
Source: Administrative Measures for Market Regulation of the Seriously Illegal and Dishonest Entities List, China State Administration for Market Regulation
Companies are placed on the entity list for violating laws and regulations or engaging in dishonest practices summarized in the table above – but only, according to these measures – if the violation is done with malicious intent or under serious circumstances, or results in considerable damage to society.
Market regulation authorities are required to assess a number of factors in determining whether a company’s behavior constitutes a malicious and deliberate violation. This includes looking at the subjective intent, frequency of the violation, how long the violation persisted for, the type of punishment levied and the size of the fine, the value of the goods involved, damage to the health and well-being of the population, damage caused to assets, and the impact it had upon society.
If a company can provide evidence to prove that a violation was not done intentionally, then it will not be added to the list.
The process for adding a company to the seriously dishonest entities list has also been made much more transparent. The measures stipulate that before adding a company to the seriously dishonest entities list, the relevant authorities must inform the company of the reason and basis upon which it is being penalized, as well as the rights that the company still enjoys. The authorities are also obligated to remind the company of the disciplinary measures and inform them of the conditions under which it can be removed from the “seriously dishonest” entities list, as well as the relief measures available to it.
When a company has been added to the seriously dishonest entities list, it is subject to a number of heightened administrative measures. These include:
One of the major concerns voiced by critics of the social credit system was a lack of clarity in how a company could claw its way out of the proverbial hole and restore its image as an honest market entity.
The measures for violations serve to quell some of these concerns, dedicating several articles to explaining term limitations of the seriously dishonest entities list and measures companies can take for their removal from it or dispute the decision to be included on the list.
Meanwhile, the second document, the measures for restoration, provide a more detailed description of the procedures that companies need to take to restore their social credit and be removed both from the seriously dishonest entities list and the list of enterprises with abnormal operations.
Companies that find themselves on either of these lists can apply for their early removal after one year from the date of the listing. To be eligible for early removal, a company must have:
To be eligible for removal from the list of enterprises with abnormal operations, a company must have:
Companies will be removed from the “seriously dishonest” entities list after three years from the date of the initial listing. At this point, its position on the list will no longer be publicized and relevant measures will be lifted. However, if other restrictions were imposed on the company, for example, restrictions on business activities, operations, and employment, and these restrictions are imposed for a period longer than three years, then the company will not be able to resume normal operations until those restrictions have been lifted.
Companies that wish to apply for their early removal from the entities list must submit the following documentation to the market regulation authorities:
The authorities must inform the company within two business days from the date of receiving the application whether the case has been accepted for consideration and must make a decision on the removal of the company from the list within 15 business days of accepting the case. If it does not accept the application, it must inform the applicant and state the reason for the refusal.
If a company is approved to be removed from the seriously dishonest entities list, the authorities must stop the publicizing of relevant information within three business days and remove the relevant restrictions and management measures.
If the decision to include a company on the seriously dishonest entities list is based upon administrative penalties that are later revoked or found to be illegal or invalid, then the market regulation authorities must withdraw the decision to include the company on the list and complete all relevant remedies within three business days.
However, if a company deliberately submits false documents or obscures the real situation, then the market regulation department can revoke the decision to remove the company from the seriously dishonest entities list and restart the clock for the publicizing of the information.
Companies can apply for reconsideration or file a lawsuit if they are unsatisfied with the decision to be included on or removed from the seriously dishonest entities list.
In addition to clarifying exactly how companies get on and off the seriously dishonest entities list, both sets of measures go a considerable way to standardizing a system that has been criticized for being too fractured and unpredictable. Previously, a reliance on local government departments to interpret and enforce the regulations raised concerns over discrepancies in enforcement.
Although the new measures still place the onus on local market regulation departments to manage the lists, including making decisions on which companies that are registered within their jurisdiction go on and off the lists, the measures now stipulate that these decisions must be reported to departments higher up the administrative ladder, such as to the relevant municipal or provincial government departments. This helps to strengthen top-down control of the activities and gives higher-level departments more oversight of the decisions to include and remove companies from the lists.
Both sets of measures were also released along with an additional document providing guidance to government departments on how to interpret and implement the measures. This will likely also help to standardize the implementation of the seriously dishonest entities list across different areas of the country and give companies a clearer understanding of how to comply with regulations.
The requirements for companies to maintain good social credit are not markedly different from the standard requirements for operating in the country: Compliance with laws and regulations, honest and fair market practices, and adherence to local consumer, product, and quality standards.
At the same time, China’s determined advance to follow through this system despite concerns and criticisms shows that its tolerance for violations and disobedience is growing thin. The new measures also signify an acknowledgement of the shortcomings of previous regulations and represent a tangible step toward making the system fairer and more transparent.
However, vague and non-standardized laws and regulations, as well as the wide scope of regulations imposed on different industries, can still make it difficult to know what kind of behavior constitutes an infringement.
Foreign companies are not exempt from inclusion on the list, and due to the public nature of this punishment, a listing could have disastrous consequences for its business. Now, more than ever, it is imperative that foreign companies and investors understand the latest rules and regulations of the sectors they are operating in and take steps to ensure compliance, particularly when operating in sensitive industries, such as food products, pharmaceuticals, and special equipment.
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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