The Ecovis network lawyers assist clients in Hungary and many other countries. For companies looking to expand in China, German lawyer Richard Hoffmann, founder of Ecovis Heidelberg, can provide support.
With years of German and international experience, Richard Hoffmann has successfully assisted hundreds of companies in navigating the complexities of legal, tax and compliance issues in China, with his special knowledge of the Chinese business environment. The following is an English translation of Richard Hoffmann's article on the fight against corruption in China, published in English and translated with permission.
"In recent years, there has been an increasing number of cases of businessmen and celebrities getting into trouble for financial crimes or corruption. Examples are often in the news and often involve tycoons or people in the entertainment industry.
As China tightens regulations and penalties increase, foreign and multinational companies based in China need to be careful in the way they do business. Internal corruption and inadequate safeguards can make companies liable for crimes committed by their employees. Therefore, companies need to keep a number of things in mind and be aware of the different types of behaviour that lead to commercial corruption.
This section provides an overview of the basic legal framework in China and the different types of commercial corruption, and then provides useful insights for companies that are dealing with or trying to prevent corruption.
Under the chairman of the anti-corruption campaign, Xi Jinping
In 2012, when Xi Jin-ping first took office, he introduced and implemented the largest organised anti-corruption campaign China has ever seen, with the aim of cracking down on "tigers and flies" (a term used to refer to high-ranking officials and local civil servants). Since then, more than 4.5 million people have been investigated and more than 200,000 officials have been suspended pending trial, according to the Central Commission for Discipline Inspection (CCDI).
The public sector was initially the most affected by the start of the campaign, but slowly the crackdown on corruption in the private sector and foreign companies has been stepped up. In 2014, a major British pharmaceutical company was fined half a billion dollars for bribing doctors and hospitals to promote its products. This policy and the crackdown on corruption will continue, as President Xi Jinping said after the 20th Party Congress report that he will continue to pursue and root out corruption in China.
What are the different types of trade corruption in China?
Passive bribery, extortion and embezzlement by a company employee
The following conduct is punishable:
-taking unlawful possession of company money,
-Unlawful acceptance of money or property in exchange for favours.
Penalties for accepting bribes range from three years' imprisonment to a fixed term for "relatively large" amounts. In serious circumstances, up to 10 years' imprisonment can be imposed, while "particularly large" offences can carry a life sentence. All penalties include a fine.
Bribery of a company employee
Article 164 of the Chinese Criminal Code states that it is illegal to give money or property to a company employee and is punishable by up to three years' imprisonment, and in some cases up to 10 years' imprisonment, depending on the offence.
Bribery by a company
In the case of a company bribing an employee, Article 164 of the Chinese Criminal Code stipulates that the company and the person(s) directly committing the offence may be fined and imprisoned for a fixed term. Even if the activity does not result in a criminal offence, the company may still be held liable and fined between 10,000 and 200,000 yuan.
How can I prevent corruption in my company?
Of course, there are steps and procedures that need to be put in place in a Chinese company to reduce the risk of corruption among employees. Examples include:
-A clear policy on reimbursement
Employees should know what types of expenses are reimbursable and how the process works. Reimbursement strategies can help identify suspicious behaviour such as corruption or fraud. Details should be included in the staff handbook so that all employees have access to it.
-Corporate seal management
As they have a very strong legal basis in China, company seals can easily be misused by employees or third parties by signing contracts, permits, etc. without the company's knowledge. In addition, it is advisable to distribute the responsibility for the management of company seals (not giving too much power to one person). In foreign companies, the legal representative usually manages the seal, which makes it difficult for the company to maintain its independence as to how the seal is used.
What can I do as a company if the worst happens?
What to do depends on the seriousness of the infringement. However, there are several things and steps that a Chinese company should be aware of. An independent investigation should be carried out by an internal audit/compliance team or by a trusted external third party. Depending on the outcome, several types of action are possible:
-Persuading the employee to resign,
-Termination by the employer for the reasons involved (e.g. breach of contract, code of conduct, etc.),
-terminate the contracts of the suppliers concerned,
-Implement crisis management once the situation has been made public.
The consequences of non-compliance
In preventing corruption, it is essential for Chinese companies to build up their own defence mechanisms and learn how to deal with these circumstances when any form of corruption occurs. Bribery committed by an employee is considered as the company's own act and therefore subject to civil and criminal liability. An exception is when the employee's conduct does not promote competitive advantage or business opportunities.
If government agencies are involved in the investigation, Chinese companies must cooperate and provide the requested information. Concealment or obstruction can lead to more severe penalties (such as higher fines and penalties for those involved).
On the other hand, active cooperation can reduce the severity of the punishment or even eliminate it altogether under Chinese criminal code sections. Chinese companies are advised to focus on communication and support among all stakeholders to fully cooperate with the authorities during the investigation process.
Our useful advice
All in all, no one wants to find evidence of corruption in their own Chinese company. If it does happen, you need to know what the next steps are. Putting in place a detailed compliance system from the start is a good foundation and a significant step towards preventing corruption. Understanding and implementing the legal framework of Chinese law within the company and communicating this to employees is essential. It makes sense to employ an expert to oversee and ensure the company's compliance, with significant knowledge of the Chinese legal system, language and culture."
If you are looking to expand your company in China, contact Dr György Zalavári, lawyer at Ecovis Hungary Legal's international contact.