CHINESE SOES & CORPORATE COMPLIANCE

WANG Zhipei (王之霈) [1]

I. INTRODUCTION

II. CHINA’S CORPORATE COMPLIANCE LAW

A. Laws Regarding SOEs’ Corporate Compliance

B. Relevant Regulations for Party Supervision of SOEs

C. Summary

III. WEAKNESS IN CHINA’S SOEs’ CORPORATE COMPLIANCE

A. Unique Challenges for SOEs Anti-corruption Efforts

1. Case Analysis

2. Deficiencies Reflected in SOEs’ Compliance Program

B. Cases Investigated by CCDI

IV. HOW CHINESE SOEs CAN IMPROVE THEIR CORPORATE GOVERNANCE

A. Analyze Business Risk According to Industry Characteristics and Implement Business Process Standardization

B. Clear Delineation of Functions and Establish a Sound Accountability Mechanism for Every Individual

C. Establish a Compliance Incentive Mechanism Through Legislation

V. CONCLUSION

I. INTRODUCTION

Since the 18th National Congress of the Communist Party of China, the corporate behavior[2] of Chinese SOEs has received continuous attention.[3] In today’s era, corporate compliance is the general trend internationally. Under the current international mainstream anti-corruption compliance laws, a complete and adequate compliance system can not only help companies identify and prevent compliance risks but can also avoid legal penalties and regulatory risks in the course of business operations, and at the same time improve corporate governance as a “self-management” mechanism.[4]

For Chinese SOEs, proactively establishing an effective compliance system can help enterprises prevent, mitigate, and even exempt them from punishment by both domestic criminal and administrative penalties and overseas regulatory agencies when they follow the national “go global” strategy. It is also an effective measure to prevent SOEs from being sanctioned by international financial institutions.[5]

Part II of this essay will introduce and comment on China’s corporate governance law; Part III will use a set of cases that Chinese SOEs being sanctioned by the World Bank and cases investigated by the Central Commission for Discipline Inspection (“CCDI”) to analyze deficiencies in Chinese SOEs’ compliance programs. Part IV will provide information regarding establishing a workable compliance system for a Chinese SOE based on discussions with in-house lawyers in SOEs, compliance lawyers, and scholars. Also, this part summarizes the experience of several SOEs that have successfully instituted compliance programs and provides suggestions to Chinese SOEs on improving their corporate governance based on the Chinese corporate environment and overseas compliance experience.

II. CHINA’S CORPORATE COMPLIANCE LAW

On June 3, 2021, the Supreme People’s Procuratorate (SPP) held a press conference on the theme of “supervise and urge corporate compliance management under the law.” Lin Qingmiao (林庆苗), director of the State-owned Assets Supervision and Administration Commission of the State Council  (SASAC), pointed out at the press conference that SASAC will further increase publicity and training for SOEs and accelerate the establishment and improvement of a compliance management system with Chinese characteristics and in line with SOEs.[6] Since the 18th National Congress of the Communist Party of China, China is paying more and more attention to strengthening the internal corporate governance of SOEs to prevent corporate fraud. However, “corporate compliance” has a short history. China is still in its transition period to develop corporate compliance for SOEs into a mature legal system. Current Chinese laws and regulations regarding compliance are relatively general. It not easy to put forward clear and unified requirements and standards for SOEs to comply with all mandatory documents.[7] This part will present and comment on laws and Party regulations relevant to SOEs’ corporate compliance.

A. Laws Regarding SOEs’ Corporate Compliance

Corporate compliance first originated in the United States and has now become the governance method for companies worldwide.[8] As for China, corporate compliance is an “exotic product” that was introduced ten years ago. It was not until 2018 that China’s administrative regulatory authorities began to promote the establishment of a comprehensive compliance system in enterprises.[9] China’s emphasis on corporate compliance domestically began with financial companies and then gradually reached all central SOEs. In 2018, SASAC issued “Guidelines on Compliance Management for Central SOEs (for Trial Implementation)” (see “Table 1 Laws Regarding SOEs’ Corporate Compliance”). It provides a framework for the construction of a compliance system for central SOEs. China has not yet promulgated many laws and regulations related to the compliance of non-central SOEs.

However, besides the mandatory requirements for central enterprises to establish a compliance system, China is still in its transition period to develop corporate compliance for other SOEs into a mature legal system. China’s current laws and regulations of compliance generally serve as guidance or frameworks since no penalty will be posed even if a company failed to comply. Instead of obligating the SOEs to follow it, the guidance gives SOEs discretion whether to form an effective internal control system. Moreover, it does not yet have clear requirements for SOEs to establish a compliance system. There are no clear “visible” rewards for SOEs that have a compliance system or actively carry out compliance when it comes to government law enforcement.[10] For example, there is no written law to reward SOEs that take the initiative to implement compliance and does not regulate how SOEs actively investigate internal bribery issues to apply leniency standards.[11] Thus, SOEs generally lack the motivation to initiate compliance.

Please find Table 1 below, which presents the main content of and comments on current laws on SOEs’ Corporate Compliance in China.

Table 1 “Laws Regarding SOEs’ Corporate Compliance”

B. Relevant Regulations for Party Supervision of SOEs

In China, Party inspections are a crucial method for investigating corruption in SOEs. The Central Commission for Discipline Inspection (“CCDI”) is elected by the National Congress of the Communist Party of China. It is the highest disciplinary inspection agency of the Communist Party of China.[12] The central inspection team investigated the corruption of China Southern Airlines Corporation and China National Petroleum Corporation and required them to initiate compliance systems.[13] The Party and supervisory agencies also have issued detailed regulations on the performance of the duties of SOEs and their leaders. (see Table 2 “Relevant Regulations for Party Supervision of SOEs”) It can be said that those regulations cover most of the operating risks of SOEs. However, from the perspective of guiding and motivating SOEs’ compliance, those regulations mainly have the following problems:

(1) The regulations are relatively fragmented. Generally, one regulation only focuses on one topic. It does not provide a complete and systematic plan for establishing the internal compliance system of SOEs;

(2) The penalty provisions in the regulations do not directly penalize SOEs for failing to develop an effective compliance system. They penalize behavior such as violations of state-owned asset management requirements or auditing requirements. Moreover, the penalties do not recognize SOEs’ efforts in compliance. Thus, they do not positively encourage SOEs to establish a compliance system;

(3) The regulations make no special regulations regarding the supervision of overseas operations of SOEs.

Table 2 Regulations for Party Supervision of SOEs

C. Summary

The establishment of China’s SOE compliance system is still in its early stages.[14] Current corporate compliance laws and regulations of SOEs merely serve as guiding documents and thus are not compulsory. Moreover, these laws and regulations do not provide a unified, comprehensive, and practicable plan to form a systematized compliance program within SOEs. In addition to severe administrative and criminal penalties for fraudulent acts by SOEs, Chinese legislation has not incorporated the compliance of SOEs into the corporate governance of SOEs through legislation. Besides that, current legislation also fails to offer a reward to companies with a compliance system or take the initiative to implement compliance. For example, Chinese current criminal law does not provide incentives to companies that actively carry out compliance. It does not regulate the application of leniency standards to companies actively investigating internal bribery issues and does not encourage companies to conduct internal investigations actively.[15]

III. WEAKNESS IN CHINA’S SOEs’ CORPORATE COMPLIANCE

A. Unique Challenges for SOEs Anti-corruption Efforts

Special characteristics of Chinese SOEs, such as SOEs’ long-term monopoly position and obvious resource advantages, have brought unique challenges to anti-corruption controls.[16] Firstly, SOE managers and staff are susceptible to temptation. Because they are paid a relatively fixed salary, face substantial material benefits, and generally, exercise great decision-making power without internal oversight, SOE leaders may be tempted by various material benefits .[17] Capital-intensive and resource-intensive are the most distinctive characteristics of SOEs, and SOEs have always been the leading force for Chinese capital to invest overseas.[18] As SOEs often have monopoly positions in critical areas and industries, they have significant bargaining power in bidding choices and are vulnerable to bribes from bidders and lower-level distributors.[19] Thus, employees of SOEs are more prone to corruption.

Secondly, the SOEs’ business forms are more diversified, and their business operations are complex. Among the 22 provincial SOEs supervised by the Disciplinary Inspection and Supervision Team of the Zhejiang Province SASAC, many are involved in steel, construction, energy, finance, and transportation.[20] Moreover, many of their transactions involve risk. Taking the bidding of engineering projects as an example, false bidding, bid-rigging and similar risky behavior may occur. Not only that, the restructuring and reorganization of SOEs, project investment, property transactions, capital operations, material procurement, financial management, and overseas investment operations are all weak links where the risks of corruption are more prominent.[21]

Finally, according to reports, corruption problems mainly occur at the junction of the public and private sectors.[22] The nature of an SOE is between a public organization and a private organization. Because SOEs have very close ties with government departments but are also corporate entities, this may facilitate corruption.[23] Moreover, the transactions of SOEs may involve state secrets. Thus, most information will not be disclosed to the public.[24] Moreover, all these make the corruption of SOEs hidden. The difficulties mentioned above of SOEs in anti-corruption are more evident when SOEs conduct commercial activities abroad.

B. Deficiencies revealed in Chinese SOEs’ Compliance Programs In International Financial Institution Sanctioning

1. Case Analysis

We can find out the deficiencies revealed in Chinese SOEs’ compliance programs through analysis of World Bank (and other international financial institution) cases. According to the “Listing of Ineligible Firms and Individuals” updated by the World Bank in January 2021, more than 130 Chinese companies were debarred and thus ineligible to participate in World Bank-financed contracts for a specific period.[25] Most of them are SOEs. As for the grounds of debarment, besides cross-debarment and a controlled affiliate of a sanctioned entity, most Chinese companies were sanctioned because they violated “Procurement Guidelines” 1.14(a)(ii) and 1.16(a)(ii) (see “Figure 2 World Bank Listing of Ineligible Firms and Individuals-Chinese Companies.”[26]). Article 1.16 (a)(ii) is regarding “Fraud and Corruption,”[27] “fraudulent practice is any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.”[28] 1.14 (a) is regarding “Misprocurement,” for example, the Bank concludes a contract has not been awarded in accordance with the agreed provisions of the Loan Agreement, or there are willful dilatory conduct or other actions of the Borrower resulting in unjustifiable delays, or involves the engagement of a representative of the Borrower, or a recipient of any part of the Loan proceeds are in fraud and corruption.

Figure 2 World Bank Listing of Ineligible Firms and Individuals-Chinese Companies

2. Deficiencies Reflected in SOEs’ Compliance Program

As a condition for releasing from sanctions, the companies and their affiliates have to commit to enhancing their integrity compliance programs in a manner consistent with the principles set out in the “World Bank Group Integrity Compliance Guidelines.”[29] It can be deduced from the guidelines the deficiencies that Chinese SOEs have in their compliance program.

a. Leadership

As “Summary of World Bank Group Integrity Compliance Guidelines,” (“Summary Guidelines”) emphasizes the importance of “creating and maintaining a trust-based, inclusive organizational culture that encourages ethical conduct, a commitment to compliance with the law and a culture in which misconduct is not tolerated.”[30] It can be divided into three parts:

(i) The active support and commitment of senior management and the party’s Board of Directors or similar bodies to the integrity and compliance department;

(ii) Make compliance a mandatory duty for all individuals at all levels of the party;

(iii) Make sure oversight and management of the compliance program is the duty of one or more senior corporate officers, with an adequate level of autonomy.[31]

According to comments from several in-house lawyers of SOEs that the author interviewed, if the leadership itself attaches great importance to constructing the compliance system and corporate compliance culture, it will be more efficient than external requirements and mandatory regulations. This commitment to establishing an effective compliance program must start at the top of the SOE. Senior management should articulate zero-tolerance of any corporate fraud, supported by policies and procedures that will put this commitment into action.[32]

Hunan Construction Engineering Group (“Hunan Construction”) is an excellent example of senior management’s active support and commitment. Hunan Construction was released from debarment in 2017 because the World Bank recognized its integrity and compliance system.[33] This can not work without the support of the highest level of the company. Hunan Construction has overcome numerous obstacles and made a brand-new positioning of the compliance management system. (See more details in part V)

In many SOEs, the business units and the compliance department conflict. The business department is the core of the company’s profitability. On the contrary, the compliance department not only cannot generate profits but also is very costly. Establishing a compliance program requires financial support such as hiring personnel, conducting training, hiring legal consultants, etc.[34] Moreover, company leadership often believes that the compliance process will weaken the flexibility of the business department to conduct business activities and thus harm corporate profitability. Therefore, not every SOE has a compliance department, and even some SOEs do not have an in-house lawyer.

b. Risk Assessment and Reviews

The foundation for implementing and maintaining an anti-corruption program is the assessment of corruption risks.[35] The primary objective of the corruption risk assessment is to understand the risk exposure better so that informed risk management decisions may be taken.[36] According to the Summary Guidelines, a compliance system requires the company to carry out an initial (or updated) comprehensive risk assessment relating to the potential for the occurrence of fraud, corruption, or other misconduct in the party’s business and operations, taking into account its size, business sector, location(s) of operations and other circumstances particular to the party; and review and update this risk assessment periodically and whenever necessary to meet changed circumstances.[37] To be released from the debarment by the World Bank, Hunan Construction also launched a compliance risk assessment. Hunan Construction’s compliance committee conducted regular assessments of compliance risks and classified each department, branch, and subsidiary of Hunan Construction into high, medium, and low-risk levels.[38]

SOEs generally lack systematic and effective risk assessment and reviews mechanism. In the recent feedback from the Zhejiang Provincial Party Committee on the inspection of provincial SOEs, issues such as “irregular bidding and high operating risks” were frequently raised.[39] Because SOEs engage in a broad range of businesses and have complex business behavior, assessing the risk of corporate fraud in advance is an important step in preventing and controlling corporate fraud.[40]

c. Internal Controls

To mitigate the risks in operation, companies should establish a system of internal controls.[41] The goal of the internal control system is to provide guarantees for the effectiveness and efficiency of the company’s operations, the reliability of financial reports, and to ensure that the company complies with laws, regulations, and internal policies.[42] As for Chinese SOEs, firstly, as affirmed by numbers of in-house lawyers in SOEs, the power is often over-concentrated in the hands of significant leading cadres, and a small number of substantial leading cadres override the organization and engage in “one-talk.”[43] There often is no mutual restriction among decision-making power, execution power, and supervision power within SOEs. For example, some departments and positions have a great deal of power. A few people in a particular section can manage hundreds of millions or even billions of dollars, and they are dogmatic.[44] Secondly, the division of power between various departments is not clear enough. In some cases, there is no separation between public sectors and private sectors, and there is no separation between politics and business. There is a phenomenon of “being both a referee and an athlete.”[45]

According to the Summary Guidelines, internal controls also can be divided into three parts:

(i) Financial: an effective system of internal controls comprising financial and organizational checks and balances over the party’s financial, accounting, and recordkeeping practices, and other business processes. Make sure external audits provide an objective assurance on their design, implementation, and effectiveness and to bring to light any transactions which contravene the compliance program;

(ii) Contractual obligations: employment and business partner contracts should include express contractual obligations, remedies, and/or penalties concerning misconduct;

(iii) Decision-making process: establish a decision-making process whereby the decision process and the seniority of the decision-maker are appropriate for the value of the transaction and the perceived risk of each type of misconduct.[46]

B. Cases Investigated by CCDI

We can also discover the problems exposed by the compliance of SOEs through an analysis of cases that CCDI investigates. CCDI is the highest disciplinary inspection agency of the Communist Party of China[47] and party inspections are an essential method for investigating corruption in SOEs.They often expose corruption in SOEs. In the classic case of the inspection of China Southern Airlines and China National Petroleum Corporation by the Central First Inspection Team, the following problems were mainly found:[48]

(i) The business process is not strictly regulated. For example, the bidding review procedures are not procedural and standardized; failed to identify and classify the enormous numbers of procurement and failed to analyze the risks in time, thus creating opportunities for corruption;[49]

(ii) Financial management disorder, such as the existence of multiple accounts set up by the company. Insufficient monitoring of overseas funds, for example, China Southern Airlines was found to open a total of 133 accounts overseas;[50]

(iii) Overseas investment decision-making and management are not standardized, and there is a risk of not being able to stay integrity. Some overseas investment project decisions have not been made through collective evaluation, SOE employees take advantage of their position to benefit from the acquisition of overseas projects and contracted projects. They do not follow procedures to determine suppliers, etc.[51]

V. GOOD EXAMPLES AND PRACTICAL SUGGESTIONS ON CHINESE SOEs TO IMPROVE THEIR CORPORATE GOVERNANCE

As mentioned before, China is still in its transition period to develop corporate compliance for SOEs into a mature legal system. China’s current laws have not established corresponding incentive and disciplinary mechanisms for corporate compliance. Many SOEs are not sufficiently aware of the importance of compliance, not only being sanctioned by domestic law, but some SOEs may also have brought their domestic business habits overseas when they go abroad and have been repeatedly sanctioned by international organizations or foreign law enforcement agencies.[52] In addition, although some SOEs have established compliance departments before they are sanctioned, their compliance departments are useless in the company’s operation, and they have little effect on the management of compliance risks and the correction of illegal activities.[53]

This part will combine the deficiencies in Chinese SOEs’ corporate compliance discussed in part III and provide information regarding establishing a workable compliance system for a Chinese SOE based on discussions with in-house lawyers in SOEs, compliance lawyers, and scholars. Also, this part summarizes the experience of several SOEs that have successfully instituted compliance programs and then provides suggestions to Chinese SOEs to improve their corporate governance based on the Chinese situation and overseas compliance experience.

A. Analyze Business Risk According to Industry Characteristics and Implement Business Process Standardization

This part summarizes the experience of several SOEs that have successfully instituted compliance programs and what can be learned from them. To begin with, as the Summary Guidelines recommends, when establishing a suitable compliance program, a company must carry out an initial (or updated) comprehensive risk assessment relating to the potential for the occurrence of fraud, corruption, or other misconduct in the party’s business and operations.[54]

Figure 3 Compliance System Flow-chart[55]

The “Compliance Management System Guide” gives a good practice of the Compliance system. As illustrated in the flow-chat above, “identify compliance obligations and assess compliance risks” is the core of the compliance program. Assess and identify the risk in business processes and help SOEs determine the scope of compliance and specific compliance policy. Only after understanding the corporate compliance risks through risk assessment can SOEs design a compliance system to prevent and control corporate risks in a targeted manner. However, many SOEs in China have not established an assessment mechanism for specific compliance risks, and they lack an understanding of “risk points.” Many SOEs usually formulate relatively vague compliance manuals or codes of conduct instead of evaluating the nature of the enterprise and critical risk areas and establishing a targeted compliance system.[56]

As one of the five central SOEs that carried out the pilot project of compliance management system construction in 2016, China Mobile is an excellent example of establishing a sound compliance program through risk assessment.[57] China Mobile considered that the large number of service contracts signed with third parties is the core compliance risk in business operation. First, China Mobile has established a complete online platform to make all contracts signed transparent online to control and mitigate the risk. Because the numbers of service contracts signed by China Mobile are large, most of them are of the same nature. China Mobile has developed a complete contract template. Any modification of the contract on the network signature will be automatically identified and marked in red and automatically sent to the legal department for review. If any significant contract modification is involved, it will be reviewed by management personnel.[58] Besides China Mobile, according to insiders, China Southern Airlines also spent 3-4 years sorting out all the risk points in its business before setting up corresponding regulatory facilities. One of the fundamental reasons is that both China Mobile and Southern Airlines have become a compliance model for SOEs because they have accurately identified their business risks and adopted corresponding risk prevention and management mechanisms.

Besides risk assessment, China Southern Airlines also adopted a standardized and process-oriented business management model and embedded compliance throughout the entire process. China Southern Airlines establish an “authorization process” system, handle business according to the process and strengthen cooperation between business departments and compliance departments.[59] (See Figure 4 “China Southern Airlines’ Compliance Structure”) Vertically, the China Southern group headquarters and its subsidiaries are required to have a 100% legal review rate for the preparation, conclusion, performance, change, and implementation for contract signing and major decision-making; horizontally, it shall coordinate with the procurement supply chain, finance, and auditing to supervising.[60]

Figure 4 China Southern Airlines’ Compliance Structure

According to the above two successful cases of SOE compliance, we can find that both SOEs carried out an initial comprehensive risk assessment relating to the potential for misconduct within the SOE. Moreover, they have adopted a standardized and procedural business model, which helps avoid the concentration of power and promotes mutual supervision and reporting between responsible persons in different processes. Furthermore, according to the nature of the industry and the evaluation results of different business directions, they come up with a very detailed compliance manual to provide regulations and guidelines.

B. Clear Delineation of Functions and Establish a Sound Accountability Mechanism for Every Individual

Firstly, divide the powers of the internal departments of SOEs. Although China is vigorously promoting a compliance management system for SOEs, most SOEs have not accurately positioned compliance management. The independence and authority of the compliance department cannot be guaranteed. For example, there is no independent compliance department or it is set up under the disciplinary committee or is co-authorized with the audit department.[61] Many SOEs have not established a channel for the compliance department to report to the board of directors directly. Moreover, the management and sales department has great decision-making power, and it is easy to break through the control of the compliance department, which makes the compliance department ineffective.[62]

A sound compliance system requires a clear division of the functions of different departments within an SOE, granting sufficient authority to ensure compliance departments and providing their independence and autonomy in exercising their powers.[63] Hunan Construction was released from the debarment in 2017 because the World Bank recognized its integrity and compliance system.[64] To do that, a clear internal compliance organization system has been established: Hunan Construction has set up an Integrity and Compliance Committee on the board of directors, and the company’s general counsel concurrently serves as the chief compliance officer. Hunan Construction has established an independent compliance department and recruited several commissioners responsible for integrity and compliance. In this way, Hunan Construction’s business management, financial management, and compliance management are entirely separated, and ensured the effectiveness of the compliance management system.[65]

Secondly, establish a sound accountability mechanism for every individual and develop review mechanisms within SOEs. Dividing the functions and powers of the various departments of SOEs and assigning responsibilities to specific individuals will help all parties comply with laws and codes of conduct. The compliance responsibilities should be detailed enough to include the objectives, tasks, and measures to fulfil compliance requirements.[66] Moreover, suppose senior managers realize that they are responsible for the actions of their subordinates or anti-corruption work within the scope of their duties. In that case, they will be motivated to strengthen the supervision of their subordinates and improve compliance programs. In that case, they will be motivated to strengthen the supervision of their subordinates and improve compliance programs. Thus, senior managers should be required to take responsibility for the anti-corruption work within the scope of their duties. Those who fail to perform their primary responsibilities must be held accountable.[67]

However, the concept of “accountability” must permeate every employee of an SOE, not just senior managers. According to the survey conducted by PWC, the internal perpetrator of corporate fraud in mainland China, middle management accounts for 45%, and senior management account for 35%.[68] The middle and low classes of companies are more likely to commit corporate fraud because they have more direct contact with the company’s business than the senior management. To deal with this issue, taking China Southern Airlines as an example, China Southern Airlines has established a “contract life-long accountability system.” If there are any problems with the contract, the employee who signed the contract or the person responsible for the approval of the contract will have to bear the responsibility even after retirement.[69] In addition, SOEs should also keep records, evaluate, review the compliance program, and improve the compliance program constantly.

C. Establish a Compliance Incentive Mechanism Through Legislation

According to the experience of the development of compliance systems in other countries, if there is no criminal law incentive system for compliance, companies will lack strong motivation to implement compliance.[70] Among the 135 companies that have won the “2021 world’s Most Ethical Companies” announced by the Ethisphere Institute,” none of the companies in Mainland China have won the award.[71] On the contrary, 76% of the companies that won the award are American companies, a credit to the Foreign Corrupt Practices Act (FCPA). The FCPA tackles corruption successfully. It is not only because the FCPA has high penalties but also because if the company has an effective compliance mechanism, it can significantly reduce the possibility of being enforced by the FCPA, which significantly encourages companies to establish effective compliance mechanisms.[72] However, China’s regulatory agencies are still at the stage of deterring corporate fraud through penalties. Under China’s current legislation, in administrative supervision, the introduction of compliance incentives is only applicable to a minimal extent. There are no relevant legal provisions in China in criminal law that companies can use compliance as a defense. In addition, the Chinese Criminal Law has not established a corresponding incentive mechanism for companies to actively carry out compliance and internal investigations to reduce or exempt criminal penalties.[73] In short, Chinese law has not yet established a link between compliance, criminal law, and administrative law and has not directly transformed compliance into legal incentives. Companies lack the motivation to develop a comprehensive compliance mechanism.

It is worth noting that the “Guiding Opinions on Establishing a Third-Party Supervision and Evaluation Mechanism for the Compliance of Enterprises Involved in the Case (for Trial Implementation)” (《关于建立涉案企业合规第三方监督评估机制的指导意见(试行)》) (“Guiding Opinions”), issued on June 3, 2021,  is a key step in the transformation of China’s judicial practice from policy documents to the implementation of institutional norms since the concept of corporate compliance was put forward. The Guiding Opinions, issued by nine departments, preliminarily implemented the third-party supervision and evaluation mechanism for the compliance of the enterprises involved, and clarified that the evaluation results of the internal compliance of the enterprises will become an important reference for the procuratorate to handle cases. Article 4 and Article 14 of the Guiding Opinion have a provision under which if the enterprises and individuals plead guilty, and promise to establish or improve the corporate compliance system, they will receive conditional non-prosecution.[74] Though the guiding opinion is still in the trial stage and only has the effect of guidance, it is a good start to incentivize companies to establish a compliance program. This author believes that to encourage SOEs to establish and improve the compliance mechanism, the compliance mechanism and its implementation should be taken into consideration in law enforcement actions and penalties to encourage SOEs to take the initiative to develop compliance systems and control their compliance risks.

VI. CONCLUSION

“SOEs are an important pillar of the national economy.”[75] From the perspective of legislative trends, China is beginning to realize the importance of corporate compliance in preventing corporate fraud in SOEs. “Corporate compliance” has a short history, and China still in its transition period to develop corporate compliance for SOEs into a mature legal system. In many cases where Chinese SOEs have been sanctioned by the World Bank and investigated by the CCDI, it can be found that SOEs still generally have a low level of awareness of the importance of compliance. The functions of various departments in SOEs are chaotic, and powers are concentrated in the hands of a few people, and they have not been established an effective compliance system. However, there are several SOEs that have successfully instituted compliance programs, and other companies can learn from them. For central enterprises, compliance is already a mandatory requirement. In the future, compliance requirements will also be implemented from central enterprises to other SOEs. Compliance is the future trend of China, and China is now exploring and gradually forming more detailed compliance laws and regulations.

  1. Wang Zhipei, a J.D/J.M. candidate at Peking University School of Transnational Law. Thanks for Professor Susan Finder’s advice and revision for the drafting of this article. Also, many thanks to those in-house lawyers and legal professions who are willing to share their insights for this article.
  2. “Corporate Fraud” in this essay refers to (1) financial statement fraud; (2) asset misappropriation; and, (3) bribery and corruption
  3. See “Seven Highlights of China’s Anti-Corruption in 2015,” Xinhua News Agency, https://www.ccdi.gov.cn/yaowen/201503/t20150312_135196.html
  4. See Preface, “OECD Guidelines on Corporate Governance of State-Owned Enterprises”, page 8.; see also Ying Qianwei, Yang Shanye: “External Supervision and Operating Efficiency of State-owned Enterprises” (“experience shows that good governance of SOEs is critical to ensure their positive contribution to economic efficiency and competitiveness.”)
  5. See Yin Yunxia and Li Xiaoxia: “The Motivation and Realization Path of Chinese Corporate Compliance”, China Law Review, Issue 3, 2020.
  6. See “the Supreme People’s Procuratorate held a press conference to supervise and urge the companies involved in the case to implement compliance management and implement strict management and love into practice,” Official website of Supreme People’s Procuratorate of the People’s Republic of China, https://www.spp.gov.cn/spp/zgjjxyfdcsaqyhggl/xwfbh.shtml.
  7. See Yin Yunxia and Li Xiaoxia: “The Motivation and Realization Path of Chinese Corporate Compliance”, China Law Review, Issue 3, 2020.
  8. See Chen Ruihua: “Basic Theory of Corporate Compliance (Second Edition)”, Law Press 2021
  9. Ibid.
  10. See Yin Yunxia, Zhuang Yanjun, and Li Xiaoxia: “Corporate Motivation and Anti-corruption “Radiational Law Enforcement Effect”, “Jiaotong University Law Science”, Issue 2, 2016.
  11. Ibid.
  12. Article 7, “Supervision Law of the People’s Republic of China,” administrative Supervision Law of the People’s Republic of China (“The National Supervision Commission of the People’s Republic of China is the highest supervisory authority.”)
  13. See “The second inspection team of the central government feedbacks the special inspection situation to PetroChina,” https://www.ccdi.gov.cn/special/zyxszt/2015dyl_zyxs/fkqk_2015dyl_zyxs/201506/t20150617_57981.html;see also “announcement from the Party Group of the Communist Party of China Southern Airlines Group on the inspection and rectification situation,” website of the Central Commission for Discipline Inspection and Supervision, https://www.ccdi.gov.cn/special/zyxszt/2014dsl_zyxs/zgls_2014dsl_zyxs/201505/t20150510_56042.html
  14. See Miriam Hechler Baer, Governing Corporate Compliance, 50 BCL Rev. 949, 961-62 (2009). See James R. Withrow, Jr., Making Compliance Programs Work, 7 Antitrust Bull for the earliest documented document. 877-887 (1962).
  15. See Yin Yunxia and Li Xiaoxia: “The Motivation and Realization Path of Chinese Corporate Compliance”, China Law Review, Issue 3, 2020.
  16. See Pu Xiaojing: “Industry Risk Index Makes First Appearance in 2014 Crime Report on Chinese Entrepreneurs: Monopolized Industry Still Proved to Be Most Susceptible to Corruption,” Chinese law Issue 5, 2015.
  17. See Yin Yunxia and Li Xiaoxia: “The Motivation and Realization Path of Chinese Corporate Compliance”, China Law Review, Issue 3, 2020.
  18. See China Discipline Inspection and Supervision News, “Observation | State-owned enterprises’ anti-corruption challenge,” 2019.04.13. https://baijiahao.baidu.com/s?id=1630653071761678790&wfr=spider&for=pc see also Source: Rhodium Group: US-China Economic and Security Review Commission, The Wall Street Journal. (“From 2005 to June 2012, Chinese companies invested in 492 overseas projects with more than 100 million U.S. dollars, and non-SOEs s accounted for only 11% of the large-scale foreign investment of Chinese companies.”)
  19. See Pu Xiaojing: “Industry Risk Index Makes First Appearance in 2014 Crime Report on Chinese Entrepreneurs: Monopolized Industry Still Proved to Be Most Susceptible to Corruption,” Chinese law Issue 5, 2015. (“China Unicom: some of them accept the benefits of suppliers in the aspects of their children studying abroad, employment, etc. Sinopec’s operations and management personnel of different levels and sectors use the resources and platforms they have mastered” to engage in the transfer and exchange of interests in project construction, material supply, oil product sales, joint ventures and cooperation, and overseas operations. China Southern Airlines Group Corporation has many problems with corruption in the marketing field, and there are problems with power and money transactions and transfer of benefits in the coordination of airline routes, flight schedule, and passenger and cargo sales.”)
  20. See China Discipline Inspection and Supervision News, “Observation | State-owned enterprises’ anti-corruption challenge,” 2019.04.13. https://baijiahao.baidu.com/s?id=1630653071761678790&wfr=spider&for=pc
  21. Ibid.
  22. See “An Analysis of the Corruption and Anti-corruption of State-owned Enterprises,” China Discipline Inspection and Supervision News, https://www.ccdi.gov.cn/lswh/lilun/201404/t20140409_119395.html.
  23. Ibid.l
  24. See Xiao Dan: “Anti-corruption and building a clean government are important guarantees for the reform of state-owned enterprises,” Comparative Law Research. 2020, (01)
  25. See https://www.worldbank.org/en/projects-operations/procurement/debarred-firms
  26. As of January 1, 2021, the World Bank posed sanctions to 132 Chinese companies, the Grounds for the Debarment including: (i) 37/132: Controlled Affiliate of a Sanctioned Entity; (ii) 48/132: Corss-Dedarment; (iii) 32/132: Procurement Guidelines, 1.14(a)(ii); (vi) 5/132: Procurement Guidelines, 1.16(a)(ii); (vii) Other Grounds including: 1999, 2006 Procurement Guidelines, Fraudulent Practices; 2006 Procurement Guidelines, para. 1.14(a)(ii); 2006 CGL 1.22(a)(ii); 2011 CGL 1.23(a)(ii), etc.
  27. World Bank Borrowers, “Guidelines Procurement of Goods, Works, and Non-consulting Services” January 2011 Revised July 2014. “Fraud and Corruption 1.14 It is the Bank’s policy to require that Borrowers (including beneficiaries of Bank loans), bidders, suppliers, contractors, and their agents (whether declared or not), subcontractors, sub-consultants, service providers or suppliers, and any personnel thereof, observe the highest standard of ethics during the procurement and execution of Bank-financed contracts. In pursuance of this policy, the Bank: (a) defines, for this provision, the terms set forth below as follows: (i) “corrupt practice” is the offering, giving, receiving, or soliciting, directly or indirectly, of anything of value to influence the actions of another party improperly; (ii) “fraudulent practice” is any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation;”
  28. Ibid.
  29. See World Bank, “World Bank Group Debars China Railway Construction Corporation Ltd. and two subsidiaries” (The World Bank announced the nine-month debarment of China Railway Construction Corporation Ltd. (CRCC), a Chinese, state-owned construction and engineering company, and its wholly-owned subsidiaries, China Railway 23rd Bureau Group Co., Ltd. (CR23) and China Railway Construction Corporation (International) Limited (CRCC International). As a condition for release from sanction, the companies and their affiliates commit to enhancing their integrity compliance programs in a manner consistent with the principles set out in the World Bank Group Integrity Compliance Guidelines.) https://www.worldbank.org/en/news/press-release/2019/06/05/world-bank-group-debars-china-railway-construction-corporation-ltd-and-two-subsidiaries
  30. The World Bank, “Summary of World Bank Group Integrity Compliance Guidelines,” Art. 2. Responsibility.
  31. Ibid.
  32. See United Nations Office on Drugs and Crime: “An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide”, 2014.
  33. See Chen Ruihua: “Hunan Construction Engineering’s Compliance System,” Chinese Lawyer, Issue 11, 2019.
  34. See United Nations Office on Drugs and Crime: “An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide”, 2014.
  35. Ibid.
  36. “Anti-Corruption Ethics and Compliance Handbook for Business,” OECD – UNODC – World Bank 2013, page 10.
  37. The World Bank, “Summary of World Bank Group Integrity Compliance Guidelines,” Art. 3. Program Initiation, Risk Assessment, and Reviews.
  38. See Chen Ruihua: “Hunan Construction Engineering’s Compliance System,” Chinese Lawyer, Issue 11, 2019.
  39. See China Discipline Inspection and Supervision News, “State-owned enterprise corruption presents new characteristics,” 2019.04.26.
  40. See China Discipline Inspection and Supervision News, “Observation | State-owned enterprises’ anti-corruption challenge,” 2019.04.13. https://baijiahao.baidu.com/s?id=1630653071761678790&wfr=spider&for=pc
  41. See Biermann S. et al., “Compliance Intelligence”, 2009.
  42. See Committee of Sponsoring Organizations of the Treadway Commission, “Internal Control-Integrated Framework”, 1992.
  43. See People’s Daily, “Zhao Hongzhu: Further strengthen the power operation restriction and supervision system,” 2013.11.27. https://www.ccdi.gov.cn/special/szqh/yw/201311/t20131127_14210.html
  44. Ibid.
  45. Ibid.
  46. See the World Bank, “Summary of World Bank Group Integrity Compliance Guidelines,” Art. 6. Internal Controls.
  47. Article 7, “Supervision Law of the People’s Republic of China,” administrative Supervision Law of the People’s Republic of China (“The National Supervision Commission of the People’s Republic of China is the highest supervisory authority.”)
  48. See the website of the Central Commission for Discipline Inspection and Supervision, “Announcement from the Party Group of the Communist Party of China Southern Airlines Group on the inspection and rectification situation,” https://www.ccdi.gov.cn/special/zyxszt/2014dsl_zyxs/zgls_2014dsl_zyxs/201505/t20150510_56042.htmlSee “The second inspection team of the central government feedbacks the special inspection situation to PetroChina,” https://www.ccdi.gov.cn/special/zyxszt/2015dyl_zyxs/fkqk_2015dyl_zyxs/201506/t20150617_57981.html
  49. See “An Analysis of the Corruption and Anti-corruption of State-owned Enterprises,” China Discipline Inspection and Supervision News, https://www.ccdi.gov.cn/lswh/lilun/201404/t20140409_119395.html
  50. See the website of the Central Commission for Discipline Inspection and Supervision, “Announcement from the Party Group of the Communist Party of China Southern Airlines Group on the inspection and rectification situation,” https://www.ccdi.gov.cn/special/zyxszt/2014dsl_zyxs/zgls_2014dsl_zyxs/201505/t20150510_56042.html;
  51. See “The second inspection team of the central government feedbacks the special inspection situation to PetroChina,” https://www.ccdi.gov.cn/special/zyxszt/2015dyl_zyxs/fkqk_2015dyl_zyxs/201506/t20150617_57981.html
  52. See Fang Zheng (General Counsel and Chief Compliance Officer of Hunan Construction Engineering Group): “Compliance is an inevitable requirement for the international development of enterprises,” http://www.chceg.com/Info.aspx?ModelId=1&Id=2962
  53. See Chen Ruihua: “Basic Theory of Corporate Compliance (Second Edition)”, Law Press 2021; see also Wang Chile and Guo Lingchen: “The Whole Story of ZTE Incident, Reflections on Tickets”, Caijing Magazine, April 18, 2018.
  54. The World Bank, “Summary of World Bank Group Integrity Compliance Guidelines,” Art. 3. Program Initiation, Risk Assessment, and Reviews.
  55. Source: “Compliance Management System Guide” (GB/T 35770-2017/ISO 19600:2014, IDT)
  56. See Chen Ruihua: “Basic Theory of Corporate Compliance (Second Edition)”, Law Press 2021; see also Wang Chile and Guo Lingchen: “The Whole Story of ZTE Incident, Reflections on Tickets”, Caijing Magazine, April 18, 2018.
  57. See: “SASAC: Accelerate the establishment and improvement of a compliance management system with Chinese characteristics and in line with the actual conditions of state-owned enterprises,”https://mp.weixin.qq.com/s/VyvRUeNdas-TEDEEvuPogA
  58. See “Speech at the First Exchange Symposium of the Fifth Collaborative Group on the Legal Work of Central Enterprises” (China Mobile Communications Group Co., Ltd.) April 8, 2021.
  59. See “Speech at the First Exchange Symposium of the Fifth Collaborative Group on the Legal Work of Central Enterprises” (China Southern Airlines) April 8, 2021.
  60. Ibid.
  61. See Chen Ruihua: “Basic Theory of Corporate Compliance (Second Edition)”, Law Press 2021.
  62. See Wang Chile and Guo Lingchen: “The Whole Story of ZTE Incident, Reflections on Tickets”, Caijing Magazine, April 18, 2018.
  63. See OECD (2020), “Implementation Guide: OECD Guidelines on Anti-Corruption and Integrity for State-Owned Enterprises”, http://www.oecd.org/corporate/anti-corruption-integrity-guidelines-for-soes.htm
  64. See Chen Ruihua: “Hunan Construction Engineering’s Compliance System,” Chinese Lawyer, Issue 11, 2019.
  65. Ibid.
  66. See the Central Commission for Discipline Inspection and Supervision website, “Announcement from the Party Group of the Communist Party of China Southern Airlines Group on the inspection and rectification situation.”
  67. Ibid.
  68. See “Corporate Fraud – Practical Guide on Addressing Concerns from Regulators, External Auditors and Law Enforcement,” Fangda Partners / PwC Webinar.
  69. They were disclosed by an in-house lawyer—analogous to the accountability system for judges and procurators.
  70. See Ryan D. McConnell, Jay Martin, and Charlotte Simon, “Plan now or pay later: the role of compliance in criminal cases.”
  71. See “The 2021 World’s Most Ethical Companies® Honoree List,”https://www.worldsmostethicalcompanies.com/honorees/?fwp_country=united-states
  72. See Yin Yunxia and Li Xiaoxia: “The Motivation and Realization Path of Chinese Corporate Compliance”, China Law Review, Issue 3, 2020.
  73. See Wan Fangyi: “Compliance and Criminal Law: A Global Perspective,” China University of Political Science and Law Press, 2018 edition.
  74. Article 4: For enterprise-related crime cases that meet the following conditions at the same time, the People’s Procuratorate of the pilot area may apply this guidance according to the circumstances of the case: (1) The enterprise or individual involved in the case pleaded guilty and punished; (2) The enterprise involved in the case is capable of regular production and operation, promises to establish or improve the corporate compliance system and has the primary conditions for initiating a third-party mechanism; (3) The enterprise involved in the case voluntarily applies the third-party mechanism.Article 14: In the process of handling corporate-related crimes, the People’s Procuratorate shall use compliance materials such as written reports on compliance inspections organized by third parties, compliance plans of the companies involved, periodic written reports, etc., as approval or disapproval of arrests and prosecutions under the law. Or not to prosecute and change compulsory measures and other decisions and put forward sentencing recommendations or procuratorial suggestions and procuratorial opinions as an essential reference.
  75. Xi Jinping: “State-owned enterprises are an important pillar of the national economy,” Xinhuanet, http://www.szhgh.com/Article/news/leaders/2014-08-18/60228.html

 

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