Global Investigations Review - The law and practice of international investigations

The Practitioner’s Guide to Global Investigations, Fourth Edition

China

Herbert Smith Freehills

General context, key principles and hot topics

1Identify the highest-profile corporate investigation under way in your country, describing and commenting on its most noteworthy aspects.

China’s gift-giving culture (guanxi), combined with an abundance of state-owned enterprises (SOEs), pose clear corruption risks. China has a unique enforcement environment and corporate investigations take many forms. The local domestic market is dominated by SOEs and President Xi Jinping’s anti-corruption campaign has targeted them, with large-scale investigations in a number of industries. However, these investigations have generally resulted in prosecutions and disciplinary actions against senior management personnel, rather than the SOEs themselves. For example, in 2018, both the former president of the People’s Insurance Company of China and the former general manager of the state-owned conglomerate, Sinochem Group, were separately prosecuted for corruption.

In relation to multinational corporations (MNCs), the highest-profile corporate investigation to date remains that of British pharmaceutical giant GlaxoSmithKline (GSK) in 2014. The trial resulted in GSK itself, and senior executives of its China branch, being found guilty of bribery. GSK was penalised with a fine of US$492 million by a Chinese court.

The pharmaceutical sector remains under considerable scrutiny by regulators and authorities, with a number of investigations under way. Of particular note is the announcement by China’s Ministry of Finance in June 2019 that 77 major pharmaceutical companies would undergo an audit over a two-month period, including the local branches of MNCs Sanofi, Eli Lilly & Co and Bristol-Myers Squibb Co. This announcement followed a filing by Kangmei Pharmaceutical Co that its 2017 results contained multiple ‘accounting errors’, which raised potential issues of corruption and bribery.

There have also been a number of significant corruption investigations announced in the technology sector in recent months, including suspected corruption by individual employees of Meituan Dianping and the head of the video platform Youku.

Activity in China has also been the focus of more US corporate enforcement actions than conduct in any other country since the enactment of the Foreign Corrupt Practices Act in 1977. These US-driven investigations have led to an increased number of concurrent or follow-on investigations by China’s criminal law enforcement authorities and regulators.

2Outline the legal framework for corporate liability in your country.

Corporate entities can be held criminally liable for giving bribes to state personnel (and persons closely associated with state personnel), non-state personnel, foreign officials, and state entities and enterprises. Corporate criminal liability generally attaches where the relevant misconduct is an exercise of ‘corporate will’ (i.e., the decision to engage in misconduct was a group decision or was made by the personnel in charge). For example, in the high-profile GSK prosecution, GSK was found guilty on the basis that its management encouraged bribery of doctors, hospitals and other institutions for the benefit of the corporate entity.

Amendments to the Anti-Unfair Competition Law (AUCL), which came into force in January 2018, revised the legal framework for civil bribery. Business operators, which includes corporates, can be found liable for civil bribery offences if they bribe individuals or entities to seek transaction opportunities or a competitive edge. Vicarious liability is expressly presumed.

3Which law enforcement authorities regulate corporations? How is jurisdiction between the authorities allocated? Do the authorities have policies or protocols relating to the prosecution of corporations?

By virtue of its control over SOEs, the Communist Party of China (CPC) is an omnipresent participant in the corporate enforcement arena. The CPC established the National Supervision Commission (NSC) in March 2018 under the Supervision Law 2018. It is China’s new ‘super graft agency’ and enjoys a status close to the cabinet. It has absorbed and extended the investigative and enforcement powers of the CPC’s Central Commission for Discipline Inspection. The NSC may detain individuals, interrogate them for up to six months, freeze assets, search premises with a warrant and seize evidence. Moreover, detainees are not entitled to legal advice as the NSC operates outside the purview of the Criminal Procedure Law of the People’s Republic of China of 1979 (as amended) (the Criminal Procedure Law).

The NSC’s jurisdiction focuses on corruption and bribery by individuals but it is likely that both SOEs and MNCs will get caught up in investigations initiated by the NSC, particularly given its ability to call on the services of other law enforcement agencies.

The NSC carries out investigations of suspected bribery by SOEs and state personnel before referring cases for potential criminal investigation or prosecution by the Ministry of Public Security, public security bureaux (PSBs), people’s procuratorates and the Supreme People’s Procuratorate. PSBs and people’s procuratorates are organs of state and constitute the police and investigative arms, and the prosecution service, respectively.

PSBs investigate, via the economic crime investigation units set up within the bureaux, criminal bribery offences, fraud, other financial crimes, and crimes relating to food and drug safety. People’s procuratorates, as prosecuting bodies, enjoy their own investigatory powers, but are primarily responsible for prosecutions. According to the Supervision Law, people’s procuratorates will prosecute if they are of the opinion that the facts of a crime have been ascertained and the evidence is concrete and sufficient. The authorities have published no policies specifically relating to the prosecution of corporations, although there are thresholds for the investigation of corporates (see question 4).

Distinct from law enforcement, other bodies exercise investigative, disciplinary and regulatory powers over corporates. For example, the State Administration for Market Regulation (SAMR) investigates potential violations of the AUCL and sanctions civil bribery. It is not unusual for multiple agencies to be involved in a single matter. If relevant and within their jurisdiction, authorities do not generally refrain from pursuing matters simply because the corporate is under investigation by another domestic body.

4What grounds must the authorities have to initiate an investigation? Is a certain threshold of suspicion necessary to trigger an investigation?

In practice, the authorities have considerable leeway in initiating investigations, both procedurally and substantively. The NSC in particular enjoys broad investigative powers, with no particular suspicion threshold stipulated in the Supervision Law.

The Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security have issued guidelines that prescribe minimum monetary thresholds for commencing investigations for certain financial crimes, including minimum thresholds for investigations of corporations.

The Criminal Procedure Law contains a general provision that investigative authorities should ‘promptly examine the materials provided by a reporter, complainant or informant, or any voluntary confessions by any suspect’. After initial examination and preliminary investigation, if they consider there are facts indicating criminal liability, they should initiate a formal criminal investigation. The Criminal Procedure Law contains no other insight on the threshold of suspicion required to trigger a formal investigation.

5How can the lawfulness or scope of a notice or subpoena from an authority be challenged in your country?

Assuming that the investigating authority is properly authorised to issue the notice, it is unlikely that a person will have a valid ground to challenge a notice, given that the concept of privilege is not recognised under Chinese law. Challenges to procedural issues may be raised, but such issues can usually be resolved through government actions (e.g., issuance of an amended notice with proper authorisation). In addition, even if a person refuses to produce documents, the investigating authority has broad power to search and seize evidence during an investigation.

6Does your country make use of co-operative agreements giving immunity or leniency to individuals who assist or co-operate with authorities?

Whether an individual is granted any leniency or immunity for assisting with authorities is generally a matter left to the discretion of the authority. However, both the Law on Administrative Penalty and the Supervision Law (enacted in March 2018) contain provisions for more lenient penalties to be available when an individual has assisted or co-operated with authorities.

Article 27 of the Law on Administrative Penalty provides that lenient or reduced administrative punishments will be provided to those who have won credit in helping administrative organs investigate unlawful acts.

Similarly, Article 31 of the Supervision Law provides that the supervision organs may issue a recommendation for lenient punishment when a person actively co-operates with the authorities, takes active measures or otherwise renders significant assistance in cases involving matters of major national interest.

7What are the top priorities for your country’s law enforcement authorities?

Recent cases against corporations highlight corruption, fraud, product safety, tax evasion, money laundering and terrorism financing as the key areas of focus. As noted in question 1, there has been an increased focus on investigating potential economic crimes in certain sectors, such as the pharmaceutical, technology and the financial sectors.

Cyber-related issues

8Does your country regulate cybersecurity? Describe the approach of local law enforcement authorities to cybersecurity-related failings.

The Cybersecurity Law (CSL) is the key legislation regulating cybersecurity. It contains a set of cybersecurity obligations and requires the authorities to take action against companies and management in relation to cybersecurity-related failings. A key regime under the CSL is the Multi-Level Protection Scheme (MLPS). This requires each network operator to be assessed and designated a particular level of security obligations. The MLPS will be implemented through technical standards and a regulation that is currently being drafted by the Ministry of Public Security.

The penalties applicable in the case of a violation of the CSL include an order for rectification, warning, forfeiture of illegal income, fines, suspension of business, closure of website, withdrawal of operation permit or revocation of business licence. To date, most enforcement actions have focused on warnings and orders for rectification. However, with the MLPS regime being established, more enforcement actions are expected.

9Does your country regulate cybercrime? What is the approach of law enforcement authorities in your country to cybercrime?

Cybercrime is regulated under the Criminal Law of the People’s Republic of China of 1979 (as amended in 1997) (the Criminal Law), which punishes:

  • illegal invasion or control of computer systems (or providing programs or tools for such);
  • destruction of computer systems causing serious consequences;
  • refusal to discharge cybersecurity protection obligations despite administrative orders, resulting in serious consequences;
  • using information networks to commit certain crimes, such as fraud and the sale of drugs; and
  • abetting others in committing cyber-related crimes.

These crimes are punishable by fines and imprisonment for up to seven years. China’s law enforcement authorities have been focusing on infringement of personal data and intellectual property, cyberfraud, cybergambling, cyberpornography and online exam cheating. Law enforcement authorities receive many requests for assistance in cybercrime investigations from international agencies, such as Interpol, and counterparts overseas.

Cross-border issues and foreign authorities

10Does local criminal law have general extraterritorial effect? To the extent that extraterritorial effect is limited to specific offences, give details.

In general, the Criminal Law applies when either the act or the consequence of a crime occurs within China. Individuals who commit a criminal act are subject to the Criminal Law if they are located in China, regardless of their nationality, and Chinese nationals who commit crimes outside China are subject to the Criminal Law provided the punishment is more than three years’ imprisonment. The Criminal Law applies to companies organised under Chinese law, including joint ventures, representative offices of non-Chinese enterprises and wholly foreign-owned enterprises.

In late 2018, China passed an amendment to the Criminal Procedure Law to allow judgment to be delivered in corruption cases when the defendant is absent. The amendment is designed to tackle cases in which suspects escape justice by hiding overseas. The amendment allows prosecutors to proceed with a case if evidence against the suspect is ample and the crime is clear.

The bribery of foreign public officials by individuals and entities was criminalised in 2011 through an amendment to the Criminal Law. This has not been prosecuted in practice.

11Describe the principal challenges that arise in your country in cross-border investigations, and explain whether and how such challenges depend on the other countries involved.

In practice, cross-border investigations involving conduct in China are typically triggered by the US authorities (the Department of Justice or the Securities and Exchange Commission). The principal challenge is how to deal with Chinese laws on issues such as data privacy, state secrets, trade secrets and the absence of privilege, while seeking to co-operate with US enforcement authorities. The movement of evidence from China is particularly problematic. The divergence in both procedural and substantive law in these areas means that what the US authorities expect from a corporate investigation, and what the corporate can do and provide within the purview of Chinese law, are often at odds. This in turn leads to tension between complying with Chinese law and demonstrating co-operation, which is necessary for leniency, deferred prosecution or a declination in the United States.

While challenges are most often encountered in the context of US cross-border investigations, similar tensions may be encountered in relation to other jurisdictions who may be investigating corporate conduct in China.

12Does double jeopardy, or a similar concept, apply to prevent a corporation from facing criminal exposure in your country after it resolves charges on the same core set of facts in another? Is there anything analogous in your jurisdiction to the ‘anti-piling on’ policy as exists in the United States (the Policy on Coordination of Corporate Resolution Penalties) to prevent multiple authorities seeking to penalise companies for the same conduct?

Chinese law does not expressly recognise the concept of double jeopardy or anything similar, even for domestic criminal proceedings. In fact, under the Criminal Procedure Law, even if a case has been closed, it can be retried if there is new evidence suggesting that the facts relied on in the original judgment or sentencing were incorrect. In practice, it is not uncommon for a defendant to become a suspect again in respect of the same allegations after a court has delivered a not-guilty verdict.

China is also unlikely to recognise the double jeopardy concept in international criminal enforcement actions. Under the Criminal Law, a person may be investigated and prosecuted in China even if he or she has already been tried in a foreign country. However, those who have received criminal punishment overseas may be exempted from punishment or receive a mitigated penalty. However, we are not aware of informal negotiation or co-operation to afford corporate defendants relief in the face of enforcement actions in multiple jurisdictions.

There is no system analogous to the US ‘anti-piling on’ policy.

13Are ‘global’ settlements common in your country? What are the practical considerations?

We are not aware of any concluded global settlement involving China.

14What bearing do the decisions of foreign authorities have on an investigation of the same matter in your country?

Decisions of foreign authorities may be influential for a number of reasons. They may draw the attention of the Chinese authorities to the matter. They may also serve to make the issue newsworthy and therefore exert political pressure on the Chinese authorities to escalate the matter themselves.

Economic sanctions enforcement

15Describe your country’s sanctions programme and any recent sanctions imposed by your jurisdiction.

China does not have a comprehensive sanctions programme in the same way as other jurisdictions, such as the United States. Rather, the legal basis for its sanctions programme is found in a patchwork of laws and regulations. The Foreign Trade Law authorises China to take corresponding measures against any country or region in response to discriminatory measures. It also allows China to take action based on breaches of anti-monopoly or unfair competition laws. The Customs Law and the Regulations of the People’s Republic of China on Import and Export Duties (through which China imposes customs duties) also form part of China’s sanctions programme. The Ministry of Foreign Affairs issues circulars that serve as the legal basis for other organs at ministerial level to implement UN sanctions. Through the Ministry of Foreign Affairs, China also unilaterally threatens or imposes sanctions based on its foreign policy needs. For instance, in July 2019, China threatened to sanction US companies involved in selling arms to Taiwan.

China has released a draft of its Export Control Law, which seeks to bring China’s export control system closer to other regimes. The draft Export Control Law introduces four categories of controlled items: dual-use goods; military items; nuclear items; and other goods, technologies, services and items that are related to national security. The draft Export Control Law also provides for the maintenance of a blacklist of foreign importers and end users that have been found to violate the law. According to the draft Export Control Law, China may adopt retaliatory measures against any country that imposes discriminatory export control measures against China.

On 1 June 2019, the Ministry of Commerce announced an Unreliable Entities List, which has been compared to the United States’ Entity List. The Unreliable Entities List is understood to restrict the business of foreign companies in China that severely damage the legitimate interests of Chinese firms by not obeying market rules, violating contracts or blocking or cutting off their supply for non-commercial reasons. It is not known whether the Unreliable Entities List will be incorporated into the draft Export Control Law or whether it will continue as a stand-alone measure.

16What is your country’s approach to sanctions enforcement? Has there been an increase in sanctions enforcement activity in recent years, for example?

China’s approach to sanctions enforcement should be viewed in the context of its broader geopolitical status, particularly the ongoing trade war between the United States and China. Enforcement could increase in light of the draft Export Control Law and its possible incorporation of the Unreliable Entities List.

17Do the authorities responsible for sanctions compliance and enforcement in your country co-operate with their counterparts in other countries for the purposes of enforcement?

Generally no, unless this would be mutually beneficial.

18Has your country enacted any blocking legislation in relation to the sanctions measures of third countries? Describe how such legislation operates.

No.

19To the extent that your country has enacted any sanctions blocking legislation, how is compliance enforced by local authorities in practice?

Not applicable.

Before an internal investigation

20How do allegations of misconduct most often come to light in companies in your country?

Whistleblower reports (either internally to a compliance officer or colleague, or externally to a regulatory or enforcement agency) often trigger allegations of corporate misconduct. Internal audits may also identify misconduct. To a lesser extent, complaints by competitors, which may be channelled through media reports, can also cause allegations of misconduct to surface. Inspections by external bodies such as the SAMR or regulatory authorities may also flag issues.

Information gathering

21Does your country have a data protection regime?

China’s data privacy regime has been evolving quickly, conferring broader rights on data subjects and imposing ever more regulation on companies operating in China. The CSL, which came into force in June 2017, attempts to harmonise China’s data privacy laws. Prior to the CSL, data privacy rights had been arranged in a patchwork of legislation (including the Criminal Law, the Civil Law and the Tort Law), and in industry-specific regulations (e.g., the banking, healthcare and securities sectors).

The CSL’s data protection provisions cover any data that is generated, collected or processed in China by network operators – this covers both domestic companies and MNCs. Data collection must comply with relevant laws and regulations and be for a legitimate and necessary purpose. Consent of the data subject to data processing is required. The Personal Information Security Standards, which came into effect in May 2018, provide the first general good practice guide on data protection, which may serve as a reference for both users and the authorities.

22To the extent not dealt with above at question 8, how is the data protection regime enforced?

The Civil Law protects the privacy rights and personal data of individuals, who can bring a civil law claim against the infringer in court. An illegal breach of personal data privacy rights could, in serious cases, give rise to criminal prosecution and penalties, including imprisonment and a fine. A breach of the CSL may trigger administrative penalties, including a fine, suspension of the business, closure of a website and revocation of an operation permit or business licence.

23Are there any data protection issues that cause particular concern in internal investigations in your country?

Investigations should always be conducted in compliance with applicable data privacy legislation (see question 60). In recent years, the Chinese authorities have taken an aggressive approach to data privacy violations in the context of internal investigations. For example, as part of an internal investigation, China Auto Logistics collected data about its employees, which the employees subsequently reported to the police. A number of executives of the company resigned following the investigation and the company announced that its securities would be delisted from the NASDAQ stock market in August 2018. Data privacy laws should therefore be borne in mind in the context of investigations and companies should handle relevant data with the utmost care when conducting or responding to an investigation.

24Does your country regulate or otherwise restrict the interception of employees’ communications? What are its features and how is the regime enforced?

Interception of employees’ communications by an employer is restricted and must be conducted in accordance with the law.

Interception by employers of employees’ communications on employees’ personal property is generally prohibited unless explicitly permitted by the employees. It is important for an employer to make clear to employees that they should not have work-related communications on their personal devices, to avoid potential risks of leaks of confidential work-related information.

Interception of employees’ communications on employers’ devices or systems is possible, subject to compliance with cybersecurity and data protection laws and regulations. Employees need to be made aware that communications on their employer’s devices or systems could be intercepted by their employer. This is usually dealt with at the onboarding stage. Additionally, prior consent from employees should be obtained for the collection, review, search, holding, processing and transfer of information and communications on employer devices or systems for employment-related reasons.

Dawn raids and search warrants

25Are search warrants or dawn raids on companies a feature of law enforcement in your country? Describe any legal limitations on authorities executing search warrants or dawn raids, and what redress a company has if those limits are exceeded.

Search warrants and dawn raids are a common feature of law enforcement in China. Pursuant to the Criminal Procedure Law, a search warrant issued by a chief prosecutor of a people’s procuratorate or the head of a PSB is normally required before conducting a search in a criminal investigation. However, in emergency situations, including when the person under investigation may conceal, destroy or transfer evidence of a crime, a search may be conducted without a search warrant.

The Supervision Law empowers the NSC to conduct broad searches and seizure with a warrant. The Criminal Law authorises investigators from people’s procuratorates and PSBs to conduct wide searches and to seize property and documents found during a search to prove a crime. Other authorities (e.g., the SAMR and antitrust law enforcement authorities) may also conduct searches within the scope of their competence and functions.

Chinese law imposes few limitations on authorities executing search warrants other than the requirement that the search should be witnessed and recorded. Corporations subject to investigation may challenge the authorities’ decisions or action during a search (e.g., restriction of personal freedom, sealing up, seizing or freezing of property) before the courts.

26How can privileged material be lawfully protected from seizure during a dawn raid or in response to a search warrant in your country?

Privilege in the common law sense is not recognised under Chinese law. Authorities therefore have wide powers to seize documents and, in practice, may demand documents that would be protected from disclosure in other jurisdictions. There is no right to resist the disclosure of legal advice or other categories of evidence.

While lawyers owe their clients a duty of confidentiality, this does not assist if documents are sought directly from a client or a third party rather than the lawyer. Moreover, under the Lawyer’s Law of the People’s Republic of China, this duty of confidentiality does not apply to communications aimed at or involving criminal acts causing harm to state security, public security or persons and property. Additionally, this duty may be overridden in the context of investigations. The authorities have a general power to collect or obtain evidence from relevant entities and individuals concerned with a case pursuant to a search warrant or court order.

27Under what circumstances may an individual’s testimony be compelled in your country? What consequences flow from such compelled testimony? Are there any privileges that would prevent an individual or company from providing testimony?

There is no right to privilege over documents (see question 26). Article 52 of the Criminal Procedure Law explicitly prohibits a suspect from being compelled to give evidence to prove his or her own guilt. This protection was introduced in 2012. It is ambiguous as Article 52 only limits the measures interrogators can use to force interviewees to talk. They still have an obligation under the Criminal Procedure Law to answer truthfully all relevant questions put to them. Owing to its imprecise scope and an apparent continued enforcement of the previous law, which afforded no such protection, this right is likely to be of limited use in practice.

Whistleblowing and employee rights

28Describe the whistleblowing framework in your country. What financial incentive schemes exist for whistleblowers? What legal protections are in place for whistleblowers?

Under the Provisions of the People’s Procuratorates on Reporting of Crimes 2009 (strengthened in 2014), whistleblowers who report crimes to the enforcement authorities are entitled to protection, anonymity and a right of appeal in the face of refusals to investigate. There is also a reward mechanism for whistleblowers who report crimes to people’s procuratorates, and various other financial reward schemes are scattered in sector-specific regulations. The Criminal Procedure Law also contains several measures that protect the personal safety of witnesses giving evidence in legal proceedings and their families, including keeping personal information about witnesses confidential, and adopting protective measures so that the witnesses’ appearance or voices are not made public.

An employee who is dismissed for whistleblowing would need to commence an action for wrongful dismissal against the employer, claiming either reinstatement or compensation. Retaliation by employers against whistleblowers in certain circumstances may constitute offences under the Criminal Law and Chinese labour laws. In such cases, the employee should report the matter to the people’s procuratorate and the labour authority, as applicable.

29What rights does local employment law confer on employees whose conduct is within the scope of an investigation? Is there any distinction between officers and directors of the company for these purposes?

Chinese labour laws are generally employee-friendly. In the course of an internal investigation, an employee must continue to be paid in accordance with his or her contract (salary and position are key terms that may only be altered with the mutual consent of the employer and the employee).

During an internal investigation, an employee may submit a dispute to the Labour Dispute Arbitration Commission for resolution. If the employee does not accept the arbitral award, the employee may generally institute court proceedings.

Officers and directors enjoy the same rights as employees. However, the employer may sue officers and directors in a civil action for breach of fiduciary duty separate from an employment claim. However, the employer cannot be compensated twice for the same damage.

30Do employees’ rights under local employment law differ if a person is deemed to have engaged in misconduct? Are there disciplinary or other steps that a company must take when an employee is implicated or suspected of misconduct, such as suspension or in relation to compensation?

If an employee is subject to a criminal investigation by a prosecutor of a people’s procuratorate, the employer may suspend the employment contract. If the employee is not convicted of a crime, he or she may ask for state compensation for lost salary and may request reinstatement. If the employee is convicted and sentenced for a crime, the employer may unilaterally terminate the employment on the sentencing date.

In general, as long as an employee continues to be paid his or her basic salary, the company can suspend the employee pending an investigation. As regards dismissal for refusing to participate in an internal investigation, an employee’s contract cannot be terminated at will. An employer must have permissible legal grounds, such as a serious violation of company policy by the employee, or if his or her misconduct has caused material damage to the company.

31Can an employee be dismissed for refusing to participate in an internal investigation?

Generally, if an employee refuses to participate in an internal investigation, this is not of itself a sufficient ground for summary dismissal. In practice, terminations are generally agreed privately on the basis of a payment to the employee. Liability for wrongful dismissal is twice the statutory severance.

Commencing an internal investigation

32Is it common practice in your country to prepare a document setting out terms of reference or investigatory scope before commencing an internal investigation? What issues would it cover?

This is likely to depend on the nature of the company. While investigations are not unusual, the management of a Chinese company is unlikely to conduct its investigation in such a structured fashion. Being a domestic company, management and the company’s lawyers are also likely to be less concerned about issues such as protecting privilege or procedures for transferring data and state secrets overseas. Such matters are likely to be of far less relevance. If, on the other hand, the company is an MNC, the China branch or its lawyers will generally prepare a document setting out the scope of the investigation, which is likely to include such issues.

The scope of any investigation plan will depend on the type and complexity of the issues being investigated, the level of detail needed to brief members of the board or management about the investigation, and the preferences of the company and professionals running the investigation. Generally, it will address who comprises the investigation team, the external lawyers or third-party experts (if any), and the objectives and scope of the investigation. The latter would cover who needs to be interviewed and the document types and date ranges to be searched (addressing privilege and dealing with state secrets and data transfers as appropriate).

33If an issue comes to light prior to the authorities in your country becoming aware or engaged, what internal steps should a company take? Are there internal steps that a company is legally or ethically required to take?

China’s culture is largely a collective, hierarchical one and it is likely that those within the company will report up internally. However, reporting externally is a different matter.

As part of the company’s internal investigation, any duty to report the matter to law enforcement authorities or regulators (in the case of a regulated entity, see below) should be kept under review.

There is a general duty on individuals and entities under the Criminal Procedure Law to report suspected crimes to the PSB, the people’s procuratorate or the court; however, there is no specific penalty for a failure to do so. Therefore, the provision lacks teeth and the obligation does not tend to be observed in practice.

If the company is a regulated entity, for example a financial institution, trading house, insurer or food and drug company, notification requirements are very likely to apply. If it is a domestic, non-regulated entity, it is not common practice that the company will report the issue externally.

In respect of MNCs operating in China, there may be more structured processes in place for reporting internally, as well as an awareness and culture of reporting externally. This may also be influenced by the approach of the lawyers representing the entity.

34What internal steps should a company in your country take if it receives a notice or subpoena from a law enforcement authority seeking the production or preservation of documents or data?

Under Article 54 of the Criminal Procedure Law, an investigating authority may request evidence from relevant entities or individuals. In practice, evidence collection might be accomplished by broad document seizure authorised under a seizure permit. However, it is also possible for an enforcement authority to issue notices for the provision of certain documents or data (especially when the person receiving the notice is not the direct target of the criminal investigation).

There are no strict rules regarding the preservation of documents or electronic data, or the issuing of litigation holds. However, intentional destruction or tampering with evidence is prohibited. Given that a domestic enforcement action could easily attract the attention of enforcement authorities in other countries, it is preferable that a proper litigation hold notification is issued and implemented.

The government is unlikely to allow the entity being investigated to propose its own custodians or search terms. Instead, it might ask the defendant to freeze all electronic data on the system and then conduct its own review of the data collected.

35At what point must a company in your country publicly disclose the existence of an internal investigation or contact from a law enforcement authority?

Privately owned companies and unlisted SOEs are generally not required to make public the existence of an internal investigation or contact from a law enforcement authority.

Under applicable securities laws, issuers and listed companies (including relevant SOEs) must observe their respective information disclosure obligations pursuant to applicable laws. Major investigations and litigation are generally required to be disclosed in annual and interim reports of listed companies. In addition, listed companies must generally immediately disclose any major event that may have a significant effect on the trading price of its securities.

36How are internal investigations viewed by local enforcement bodies in your country?

Internal corporate investigations, particularly SOE audits, are common in China. What is quite unusual is self-reporting to local enforcement bodies on the back of an internal investigation. Usually, internal investigations identify remediation steps that are actioned by the company and this concludes the matter. The notion of self-reporting does not generally arise unless it is in the context of foreign enforcement bodies, and parallel reporting to Chinese law enforcement may then be considered. See questions 51 and 52.

Attorney–client privilege

37Can attorney–client privilege be claimed over any aspects of internal investigations in your country? What steps should a company take in your country to protect the privilege or confidentiality of an internal investigation?

No. However, if the conduct in question is, or is likely to be, investigated in a common law jurisdiction, the company and its lawyers should conduct themselves in such a way as to maximise privilege.

38Set out the key principles or elements of the attorney–client privilege in your country as it relates to corporations. Who is the holder of the privilege? Are there any differences when the client is an individual?

No concept of attorney–client privilege exists in China (see question 37). A lawyer owes a duty of confidentiality to his or her client, but this is not akin to legal privilege in the common law sense. In any event, this duty of confidentiality does not apply to communications aimed at or involving criminal acts causing harm to state security, public security or persons and property. This is widely interpreted, rendering the scope of confidentiality protection limited in practice.

39Does the attorney–client privilege apply equally to in-house and external counsel in your country?

No concept of attorney–client privilege exists in China.

40Does the attorney–client privilege apply equally to advice sought from foreign lawyers in relation to (internal or external) investigations in your country?

No concept of attorney–client privilege exists in China.

41To what extent is waiver of the attorney–client privilege regarded as a co-operative step in your country? Are there any contexts where privilege waiver is mandatory or required?

No concept of attorney–client privilege exists in China.

42Does the concept of limited waiver of privilege exist as a concept in your jurisdiction? What is its scope?

No concept of attorney–client privilege exists in China.

43If privilege has been waived on a limited basis in another country, can privilege be maintained in your own country?

No concept of attorney–client privilege exists in China.

44Do common interest privileges exist as concepts in your country? What are the requirements and scope?

No concept of attorney–client privilege exists in China.

45Can privilege be claimed over the assistance given by third parties to lawyers?

No concept of attorney–client privilege exists in China.

Witness interviews

46Does your country permit the interviewing of witnesses as part of an internal investigation?

Yes, this is common practice.

47Can a company claim attorney–client privilege over internal witness interviews or attorney reports?

No concept of attorney–client privilege exists in China.

48When conducting a witness interview of an employee in your country, what legal or ethical requirements or guidance must be adhered to? Are there different requirements when interviewing third parties?

There are no strict rules in China relating to the conduct of interviews (such as the requirement to give an Upjohn warning). However, the interviewer could be criticised for not explaining the situation and being transparent (e.g., if the investigation is likely to involve contentious labour law issues). Therefore, from a practical perspective, it is advisable to give something similar to an Upjohn warning.

49How is an internal interview typically conducted in your country? Are documents put to the witness? May or must employees in your country have their own legal representation at the interview?

Interviews will usually be conducted at the company’s offices, with in-house counsel and external lawyers present. The interview usually involves a chronology covering employment history, the alleged events and the employee’s recollections of the events. Assuming they are available, documents will be shown to the employee.

In general, the question of the employee’s legal representation will turn on whether the investigation relates to an MNC or a domestic company. An MNC is likely to allow employees to have their own representation, from cultural and risk perspectives (potential exposure in another jurisdiction would militate in favour of allowing separate legal representation for the employee).

Reporting to the authorities

50Are there circumstances under which reporting misconduct to law enforcement authorities is mandatory in your country?

Yes, see question 33. Under the Criminal Procedure Law, crimes should be reported, but this is not commonly observed in practice. Reporting of misconduct to regulators and to law enforcement authorities, as appropriate, will be mandatory in most regulated sectors in China.

51In what circumstances might you advise a company to self-report to law enforcement even if it has no legal obligation to do so? In what circumstances would that advice to self-report extend to countries beyond your country?

Self-reporting in China is often regarded as a confession; indeed, the terms are regularly used interchangeably in a way they are not in the West. The assessment of whether to self-report is generally driven by the risk that a third party may disclose the matter to the authorities. Usually, the risk of an individual disclosing the matter to Chinese law enforcement authorities is lower than in the West.

In practice, and where the matter raises potential liability overseas, a report is usually made to the relevant law enforcement authority in that jurisdiction before anything similar is done in China (e.g., for the purposes of leniency or co-operation credit). Disclosure to foreign law enforcement authorities generally raises the concern that the matter will become public. This in turn may prompt disclosure by the company to the Chinese authorities. Self-reporting is viewed by the Chinese authorities as being highly unusual.

52What are the practical steps you need to take to self-report to law enforcement in your country?

Self-reporting can be challenging in practice. Finding the right person to report to and documenting the report (e.g., for mitigation purposes) is not straightforward. Law enforcement officials may approach the concept of self-reporting with some doubt (see question 51), and may in turn be reluctant to sign documents or officiate the process. Moreover, it is very unusual in China to involve external lawyers when dealing with regulatory or criminal authorities before charges are laid, partly for reasons of face.

Responding to the authorities

53In practice, how does a company in your country respond to a notice or subpoena from a law enforcement authority? Is it possible to enter into dialogue with the authorities to address their concerns before or even after charges are brought? How?

It is possible to enter into a dialogue with the investigating authority to clarify the scope of evidence sought, or even to further limit the evidence. This dialogue can be conducted through formal or informal channels, with or without lawyers. However, the investigating authority may choose not to accommodate any such request.

54Are ongoing authority investigations subject to challenge before the courts?

A person or company subject to investigation may bring administrative proceedings against an authority’s decision or actions. Pending litigation, the authority’s action (e.g., seizing or freezing property) is not usually suspended. In exceptional cases, where non-suspension would result in irretrievable damage or if the relevant administrative authority deems it necessary to suspend the action, the court may, upon request, order suspension of the alleged action. The amended Administrative Procedure Law lowered the threshold for bringing an administrative proceeding. However, from a practical perspective, the courts may lack sufficient muscle to deliver judgments without interference from government departments.

Aside from recourse before the courts, an individual may file a petition or complaint to PSBs and people’s procuratorates against the unlawful exercise of certain powers in an investigation. These do not tend to be rigorously reviewed. In addition, Article 60 of the Supervision Law provides for certain acts of the NSC to be forwarded to a supervisory body for review within a month. It is too early to say whether and how challenges to the NSC’s investigative powers will be addressed.

55In the event that authorities in your country and one or more other countries issue separate notices or subpoenas regarding the same facts or allegations, how should the company approach this?

The Chinese authorities are unlikely to limit the scope of their review in consideration of foreign laws. Indeed, since China does not recognise the concept of privilege, the potential scope of disclosure to the Chinese authorities is far broader than under a notice issued by the authorities of common law countries (see questions 26 and 27).

The company should seek to comply with each notice, ring-fencing and curtailing disclosure pursuant to applicable laws by asserting legal rights. Issues may arise in China in relation to the transfer of personal data, state secrets and trade secrets overseas. Any appraisal of notices received from another country should ensure that any data and documents are only transferred out of the country in accordance with the limited exceptions provided under Chinese law.

56If a notice or subpoena from the authorities in your country seeks production of material relating to a particular matter that crosses borders, must the company search for, and produce material, in other countries to satisfy the request? What are the difficulties in that regard?

In practice, when a search is conducted and the information sought is located overseas, Chinese authorities have not generally expected companies to search outside mainland China and its Hong Kong and Macao special administrative regions (SARs). The authors are aware of a limited number of circumstances in which material on servers in Singapore has been sought and provided, but this is rare.

Technically, while investigating authorities may seek to impose such a requirement, they may not generally directly search and seize data overseas. Treaties on mutual legal assistance in criminal matters have been signed by China with 61 jurisdictions but these are of limited practical assistance in requiring a company to produce documents located overseas. In practice, the investigating authority might use other means (e.g., an administrative penalty) to seek to force a company to comply if the data located overseas is regarded as highly important.

57Does law enforcement in your country routinely share information or investigative materials with law enforcement in other countries? What framework is in place in your country for co-operation with foreign authorities?

The scope of assistance under bilateral legal assistance agreements includes mutual assistance in taking evidence, executing search and seizure warrants, and producing documents. In this regard, people’s procuratorates and PSBs do conduct inquiries into corruption-related matters in response to requests from overseas law enforcement organisations and judicial authorities, or vice versa. Most bilateral agreements on legal assistance contain provisions for tracing, restraining, confiscating, sharing or repatriating the proceeds of crime.

Currently, China’s authorities co-operate with SAR enforcement authorities (Hong Kong’s Independent Commission Against Corruption and the Macao Public Prosecution Office) in tackling cross-border corruption mainly through a mutual case assistance scheme and practice between the enforcement authorities on the mainland and in the Hong Kong and Macao SARs. In addition, the Supervision Law expressly encourages international co-operation and states that the NSC will coordinate anti-corruption co-operation with relevant countries, regions and international organisations and implement anti-corruption international treaties.

58Do law enforcement authorities in your country have any confidentiality obligations in relation to information received during an investigation or onward disclosure and use of that information by third parties?

People’s procuratorates or PSB investigators must keep the following information confidential: the identity of the person who makes the complaint; the identity of any suspects; the identity of any witnesses; and any state secrets, trade secrets and matters of personal privacy or personal information. These provisions are intended to contain dissemination of information to third parties. The Supervision Law expressly requires the NSC to keep state secrets, trade secrets and personal privacy confidential. Given the NSC’s power to involve other authorities in its investigations, sharing other information with third parties should be expected.

In general terms, an investigation should be kept confidential. By disclosing matters about an investigation to a third party, a person may fall foul of Article 50 of the Law on Penalties for Administration of Public Security. This Article punishes those who obstruct a functionary of a state organ (which includes the various investigating bodies) from performing their duties.

59How would you advise a company that has received a request from a law enforcement authority in your country seeking documents from another country, where production would violate the laws of that other country?

It is not typical for Chinese law enforcement authorities to request documents located overseas from a Chinese company (see question 56). If they do, and to comply would violate the laws of the other country, this should be explained. The Chinese authorities will generally respect this. Though this should not be necessary, the company could seek a legal opinion setting out how disclosure would violate such laws.

60Does your country have secrecy or blocking statutes? What related issues arise from compliance with a notice or subpoena?

At the end of 2018, China enacted a law governing how assistance is provided to foreign authorities and other bodies in criminal investigations. The International Criminal Judicial Assistance Law may serve as a blocking statute and restrict cross-border discovery of evidence. Institutions, organisations and individuals within China may not provide assistance to foreign countries without the consent of a competent authority, who may refuse on several grounds. In addition, the CSL attempts to harmonise rules on cross-border transfers of personal data. Draft regulations issued under the CSL indicate that personal and other important data can only be transferred offshore subject to a security assessment by the government authority. The government is currently drafting measures setting out the scope of security assessments. Since the CSL has significant implications for Chinese companies and MNCs operating in China, the new rules should be kept under review.

A related point concerns state secrets in the context of foreign notices or subpoenas. State secrets are defined very broadly. Therefore, the content of documents may be classified as a state secret under Chinese national security legislation. There is a risk that an investigation of Chinese documents may implicate state secret issues. This will also affect the ability to transfer such documents overseas in response to a notice or subpoena.

61What are the risks in voluntary production versus compelled production of material to authorities in your country? Is this material discoverable by third parties? Is there any confidentiality attached to productions to law enforcement in your country?

Disclosure to the Chinese authorities is generally compelled in an investigation. While a producing party can assert that confidentiality attaches to the investigation conducted by the Chinese authority, whether that assertion will create an effective shield from disclosure will depend on the relevant Chinese and foreign laws. For example, pursuant to Chinese law, documents containing state secrets should not be disclosed to a third party.

Confidentiality requirements in China are very general and are unlikely to prevent the sharing of documents provided that disclosure is within the purview of Chinese law. Once documents have been shared with law enforcement authorities, a company cannot guarantee that they will not be shared with third parties. It is important for the company to assert its legal rights pursuant to the laws of the relevant jurisdictions so as to limit contagion issues.

Prosecution and penalties

62What types of penalties may companies or their directors, officers or employees face for misconduct in your country?

A corporate entity found guilty of misconduct will generally be sanctioned by a fine and confiscation of assets. The personnel in charge of the company and other personnel responsible for the crime may also face criminal liability (imprisonment, fines and confiscation of assets). In addition, individuals who have been convicted of corruption or bribery offences may also be disqualified from being directors or in senior management for five years.

As regards bribery offences, the April 2016 Judicial Interpretation to the Criminal Law introduced monetary thresholds for sentencing linked to the severity of the offence. For those in the private sector, individuals can be sentenced to up to 10 years for an offence of giving or offering a bribe and (technically) up to 15 years for receiving a bribe. Corporates committing bribery offences are liable on conviction to fines ranging from 100,000 yuan to twice the amount of the bribe.

For civil bribery offences under the AUCL, a corporate entity and its officers and employees may face administrative fines up to 3 million yuan, revocation of business licences and confiscation of illegal gains.

The Supervision Law expressly empowers the NSC to confiscate, recover or order restitution of ill-gotten gains. It should transfer such assets to the people’s procuratorate to then prosecute in the usual way.

63Where there is a risk of a corporate’s suspension, debarment or other restrictions on continuing business in your country, what options or restrictions apply to a corporate wanting to settle in another country?

Government procurement is conducted by local government under the general guidelines set out in the Government Procurement Law. Serious illegal conduct (i.e., any conduct that results in criminal liability, revocation of business licence or large civil fines) within the previous three years should disqualify an entity from participating in government procurement under Article 22 of the Government Procurement Law. In addition, misconduct during government procurement (e.g., corrupt acts that result in a fine ranging from 0.5 per cent to 1 per cent of the procurement value) will also disqualify an entity from participating in future government procurement for a period of one to three years under Article 77 of the Government Procurement Law. Although there is no national registry of qualified government contractors, the government has maintained a publicly available list of suppliers subject to the debarment under Article 77 of the Government Procurement Law, and information regarding serious illegal conduct under Article 22 is generally accessible via company searches on relevant Chinese authorities’ websites.

64What do the authorities in your country take into account when fixing penalties?

Under the Criminal Law, the Chinese courts should take into account factors including the nature of the crime, circumstances relating to the criminal conduct and the damage caused to society. Circumstances relating to the criminal conduct include aggregating or mitigating factors, such as whether it is a first or repeat offence, or self-reporting. Additionally, the courts may exercise discretion in considering other circumstances, such as motive, the surrounding circumstances and whether there was any confession.

Regarding criminal bribery offences, both the ninth amendment to the Criminal Law (November 2015) and the April 2016 Judicial Interpretation provide clarification on the effects of self-reporting and co-operation. Generally, if the crimes are relatively minor or the offender has ‘played a key role in investigating or solving a major case’, self-reporting may mitigate or even exempt the offender from liability. Otherwise, offenders who self-report should be entitled to lenient treatment, but cannot expect to be exempted from liability. The Supervision Law also proposes leniency when a person surrenders or voluntarily confesses, actively co-operates with the authorities, takes active measures to disgorge ill-gotten gains or otherwise renders significant assistance in cases involving major national interests.

Resolution and settlements short of trial

65Are non-prosecution agreements or deferred prosecution agreements available in your jurisdiction for corporations?

No such settlement scheme exists in China.

66Does your jurisdiction provide for reporting restrictions or anonymity for corporates that have entered into non-prosecution agreements or deferred prosecution agreements until the conclusion of criminal proceedings in relation to connected individuals to ensure fairness in those proceedings?

No such settlement scheme exists in China.

67Prior to any settlement with a law enforcement authority in your country, what considerations should companies be aware of?

No settlement scheme exists under Chinese law.

68To what extent do law enforcement authorities in your country use external corporate compliance monitors as an enforcement tool?

It is not typical for Chinese law enforcement authorities to use external corporate compliance monitors as an enforcement tool.

69Are parallel private actions allowed? May private plaintiffs gain access to the authorities’ files?

Yes. However, this is rarely encountered given the domestic litigation environment, and the documents and files of the authorities would not be made available for a civil action. Also, authorities cannot share information classified as a state secret under the Chinese national security legislation. Procedurally, there are no class actions, derivative actions or analogous procedures to deal with broader issues of corporate fraud.

Publicity and reputational issues

70Outline the law in your country surrounding publicity of criminal cases at the investigatory stage and once a case is before a court.

At the investigatory stage, a confidentiality requirement is imposed through a general provision in the Criminal Procedure Law. By disclosing confidential matters about an investigation, a person may fall foul of Article 50 of the Law on Penalties for Administration of Public Security. See questions 27 and 58.

Once a case is before a court, the trial should technically be conducted with full public access unless state secrets, trade secrets or issues attracting privacy rights are implicated. Judges often take a very conservative approach, and access to the court by journalists and the general public is limited in practice. Although there is no general restriction on publicising a case during the trial process, this is rare in practice and parties to litigation are generally advised not to make public statements during trials.

Chinese media outlets are controlled by the state, for the most part. As such, investigations and trials involving SOEs, or broader public industry issues, are not fully reported in China (in contrast to overseas or Hong Kong media). On the other hand, the major private sector criminal investigation into GSK was reported in both China and overseas.

71What steps do you take to manage corporate communications in your country? Is it common for companies to use a public relations firm to manage a corporate crisis in your country?

The way in which corporate communications are managed will depend on the nature of the company (e.g., is it an SOE, a privately owned Chinese company, a listed company or an MNC with operations in China?). For the most part, it would be unusual for a public relations firm to be retained. However, this has occasionally been seen in high-profile matters involving MNCs or large multi-jurisdictional investigations involving the US authorities.

72How is publicity managed when there are ongoing related proceedings?

Related proceedings may be in the public domain and therefore could attract more publicity. Generally, statements to the press about ongoing litigation should be limited, and contagion issues should be managed carefully throughout. Leaks to the press are not advisable; the parties should focus on the issues within the public court arena.

Duty to the market

73Is disclosure to the market in circumstances where a settlement has been agreed but not yet made public mandatory?

There is generally no such mandatory disclosure requirement under corporate laws.

Under the PRC Security Law and related regulations, publicly listed companies are required to issue a market announcement of any major events that may materially affect the trading price of their shares. Although not specifically stated, settlement of criminal proceedings could constitute a major event, provided this materially affects the share price.

Anticipated developments

74Do you expect to see any key regulatory or legislative changes emerge in the next year or so designed to address corporate misconduct?

There have been a number of changes recently that are designed to address both corporate and public misconduct. These include amendments to the AUCL and the introduction of both the Supervision Law and the International Criminal Judicial Assistance Law. There have also been administrative and structural changes to the enforcement of key legislation in this area, including the introduction of the NSC and the SAMR. The SAMR administers the AUCL and other antitrust legislation.

We anticipate that the focus of regulators and authorities will now shift to enforcement under these new laws, rather than further amendments. In fact, we have already seen a significant number of investigations commenced by these bodies.

That said, the recent focus on investigations in specific sectors may result in changes to the regulations or the publication of additional guidance to allow authorities to more closely monitor and regulate the activities in the pharmaceutical or technology space.


Footnotes

1 Kyle Wombolt is a partner, Christine Cuthbert is a senior associate, and Mark Chu and Tracey Cui are associates at Herbert Smith Freehills.

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