It is therefore imperative that all companies in China understand the types of behaviours that are illegal under China’s criminal and anti unfair competition laws. This article discusses China’s legislation on commercial corruption and offers advice on preventing acts of fraud, embezzlement and bribery in China-based businesses.

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. 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 (£350,000) for bribing doctors and hospitals to promote its products.

What are the most common types of commercial corruption in China?

Some of the most common types of corruption seen in commercial settings are those involving bribery authorised 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 favours, such as the promise of more orders, better promotional channels or increased website traffic.

Bribery committed by individual employees, meanwhile, is more commonly conducted for personal interest and can include acts of nepotism by people in sales, purchasing or management positions buying products or services from relatives or friends.

The main pieces of legislation penalising 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 penalises 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 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. 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.

How to prevent corruption in your company

There are a few steps that companies can implement to reduce the risk of corruption among employees.

Reimbursement policy
Formulating a detailed reimbursement policy can help identify suspicious behaviours 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.

Code of conduct for hiring vendors
To prevent favouritism 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.

It is also advisable to delegate the responsibility of hiring vendors to several employees and implement 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 can be 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 reduces the ability of the company to maintain independent oversight over how it is used and increases the risk of its misuse.

What to do if you discover corruption in your company

There are several steps that a company should take in the event that an act of embezzlement, fraud or bribery is discovered, 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 labour 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 jeopardising 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.

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A version of this article was first published as ‘How to prevent and deal with corruption in your China business’ by Dezan Shira & Associates’ China Briefing.

The post How to Prevent and Deal with Corruption in Your China Business appeared first on Focus - China Britain Business Council.

Since coming to power Xi Jinping has made it his mission to clamp down on official corruption. Xi pledged to crack down on both “tigers and flies” – everyone from senior officials to civil servants – and he has followed through on his promise. Since the end of 2012, over a million party officials have been disciplined. Some of those “tigers” included members at the most senior levels of government – Standing Committee member Zhou Yongkang and Politburo member Bo Xilai were two of the estimated 120 high-ranking officials to fall victim of the anti-corruption purges.

And the crackdown hasn’t just been limited to public officials. Significant numbers of executives from state-run companies as well as other private sector workers and business owners have also been accused of, or charged with, corruption and financial irregularities. In 2014, Xi further extended the anti-graft drive, by launching ‘Operation Foxhunt’, a global campaign to work with foreign governments to repatriate corrupt officials who had fled China to live abroad.

Last month saw the establishment of a new body to monitor potential corruption by “all public servants exercising public power”. The National Supervision Commission (NSC) will take over from the Communist Party’s Central Commission for Discipline Inspection (CCDI), which was previously in charge of anti-corruption. Now the NSC will sit above them and look for bribery, embezzlement or other corruption amongst any public workers rather than just more senior public officials. Teachers, doctors and other public sector workers will all now be open to prosecution, which could mean a prison sentence or even a death sentence in extreme cases.

“The number of people who believed corruption in Chinese corporations was widespread dropped eight points”

It was also reported by the Financial Times last month that the anti-corruption drive has spread to Hong Kong after staff at subsidiaries of a Mainland Chinese company in Hong Kong were required to handover “personal travel documents to the company or face unspecified punishments.” It is in breach of Hong Kong law for a company to force staff to hand over travel documents but this move has caused further concerns that the legal barriers between Hong Kong and Beijing are being eroded.

The new agency will supervise three times as many people as the older watchdogs and international organisations, including Amnesty International, have said that the NSC is a threat to the human rights of Chinese people. This in part is due to its scope but also because it has higher powers than the Supreme Court.

In an economy where public servants are often paid relatively low base salaries, there has been a long tradition of receiving ‘gifts’ in exchange for a favour – jumping the queue in a hospital or having extra tuition to improve grades in school. For many public sector workers, these ‘gifts’ will be removed but their salaries will not increase.

However, there is evidence that the anti-corruption drive may well be working. According to the “15th Global Fraud Survey” published by accounting firm EY last month, the number of respondents who believed corruption in Chinese corporations was widespread, dropped eight points to 16 per cent this year compared with the figure in 2014.

This is not evidence of an actual reduction of corruption but it does show that the perception of corruption within Chinese companies is reducing. For a long time, companies from China have struggled with an association of corruption. This news will certainly help go towards improving their image.

The post A new anti-corruption commission has been established with even wider powers appeared first on Focus - China Britain Business Council.