Global Investigations Review - The law and practice of international investigations

The Practitioner’s Guide to Global Investigations, Third Edition

China

02 January 2019

Herbert Smith Freehills (Hong Kong)

General context and principles

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

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 the energy, infrastructure, telecoms, finance, insurance, metallurgy and automotive industries. However, these investigations have generally resulted in prosecutions and disciplinary actions against senior management personnel, not 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. China Mobile Group has also been the subject of high-profile investigations in recent years, with numerous former senior executives being investigated and prosecuted for bribery.

In relation to multinational corporations (MNCs), the highest-profile corporate investigation to date is that of British pharmaceutical giant 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.

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. The US authorities have taken a sectoral approach, focusing recently on the operations of global pharmaceutical companies’ operations in China. 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.

2 Outline 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 relevant 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 in order to seek transaction opportunities or a competitive edge. Vicarious liability is expressly presumed.

3 In your country, what law enforcement authorities regulate corporations? How is jurisdiction between the authorities allocated? Do the authorities have policies 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.

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 it initiates, particularly given the NSC’s 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 and Public Security Bureaus (PSBs), and the Supreme People’s Procuratorate and People’s Procuratorates. 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 bureaus, 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 Industry and Commerce (SAIC) investigates potential violations of the AUCL and sanctions civil bribery. It is not unusual for multiple agencies to be involved in a single matter.

4 What grounds must the authorities in your country 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 of the People’s Republic of China of 1979 (as amended) (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.

5 Does 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 country?

Chinese law does not expressly recognise the concept of double jeopardy or a similar concept, even for domestic criminal proceedings. In fact, under article 242 of 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 of the People’s Republic of China of 1979 (as amended) (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.

6 Does criminal law have general extraterritorial effect in your country? To the extent that extraterritorial effect is limited to specific offences, describe those which have extraterritorial effect, the statutory basis and any conditions that must be met for extraterritoriality to apply.

Generally speaking, the Criminal Law applies where either the act or the consequence of the crime occurs within China. Further, individuals located in China, regardless of nationality, are subject to the Criminal Law, 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 April 2018, China proposed an amendment to the Criminal Procedure Law to allow judgment to be delivered in corruption cases when the defendant is in absentia. The amendment is designed to tackle cases in which suspects escape justice by hiding overseas. If passed, the amendment will allow 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.

7 Describe the principal challenges in your country that arise in cross-border investigations, and explain whether and how such challenges are dependent on 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.

8 What 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.

9 Do your country’s law enforcement authorities have regard to corporate culture in assessing a company’s liability for misconduct?

Chinese law does not expressly identify corporate culture as a factor in assessing a company’s criminal liability. However, for certain criminal offences, corporate culture would be relevant in considering whether there is ‘corporate will’ in the misconduct, which is necessary to establish corporate liability. In addition, corporate culture could be one of the few discretionary factors that Chinese courts may take into account at sentencing.

In practice, any enforcement authority in China will take corporate culture into account when assessing whether to criminally charge an entity. A company that encourages compliance but is undermined by a couple of rogue employees is far less likely to be criminally charged than a company that has actively or passively permitted more systemic breaches. In addition, the SAIC has indicated that the presumption of vicarious liability in civil bribery cases under the AUCL could potentially be rebutted when companies demonstrate reasonable and effective compliance and supervisory procedures.

10 What 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.

11 How 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 41 and 42.

Before an internal investigation

12 How 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 SAIC or regulatory authorities may also flag issues.

13 Does your country have a data protection regime?

Yes. 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 Cybersecurity Law (CSL), which came into force in June 2017, attempts to harmonise China’s data privacy laws. Up to that point, data privacy rights had been arranged in a patchwork of legislation (including the Criminal Law, the Civil Law and the Tort Law), as well as in industry-specific regulations (e.g., in 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, which 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, is the first general good practice guide on data protection, which may serve as a reference for both users and the authorities.

14 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.

15 Are 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 50). 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 on 1 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.

16 Are 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 the 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 released 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., SAIC 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.

17 How 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 in China owe their clients a duty of confidentiality, this does not assist if documents are sought directly from a corporation as opposed to its lawyer. Moreover, 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.

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

There is no right to privilege over documents (see question 17). Article 50 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 50 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.

19 What legal protections are in place for whistleblowers in your country?

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 of witnesses confidential, and adopting protective measures so that the witnesses’ appearance or voices are not made public.

An employee who is dismissed for blowing the whistle 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 be 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.

20 What rights do employees possess under local employment law that determine how they are treated within a company if their conduct is within the scope of an investigation? What employment rights would attach if they are deemed to have engaged in misconduct? Does it differ for officers and directors of the company?

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). 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 sentence date.

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.

21 Are there disciplinary or other steps that a company must take in your country when an employee is implicated or suspected of misconduct, such as suspension or in relation to compensation? Can an employee be dismissed for refusing to participate in an internal investigation?

Generally speaking, 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 where his or her misconduct has caused ‘material’ damage to the company. 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

22 Is 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. If it is a Chinese company, while investigations are not unusual, management 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, its 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).

23 If 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 unlikely 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.

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

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

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 cause great impact on the trading price of its securities.

25 When would management typically brief the board of a company in your country about an internal investigation or contact from law enforcement officials?

This will depend on the nature of the company and the circumstances. If it is a privately owned company, management should inform the board in a timely fashion, before any external intervention (e.g., from the local authorities or the press). This will hinge on the severity of the issue. If the company is regulated, listed or an SOE, it is likely that the board should be informed quickly in light of possible reporting requirements and interventions from regulators or state organs.

26 What 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 52 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 it will conduct its own review of the data collected.

27 How can the lawfulness or scope of a notice or subpoena from a law enforcement 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 the 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.

Attorney–client privilege

28 May 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.

29 Set 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 17). 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.

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

No concept of attorney–client privilege exists in China.

31 To 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.

32 Does 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.

33 If 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.

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

No concept of attorney–client privilege exists in China.

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

No concept of attorney–client privilege exists in China.

Witness interviews

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

Yes, this is common practice.

37 Can the attorney–client privilege be claimed over internal witness interviews or attorney reports in your country?

No concept of attorney–client privilege exists in China.

38 When 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.

39 How 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.

Generally speaking, 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

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

Yes, see question 23. Under the Criminal Law, crimes should be reported, but this is not really observed in practice. Reporting of misconduct to regulators and to law enforcement authorities, as appropriate, will be mandatory in most regulated sectors in China.

41 In 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. The Confucian ideology underpinning Chinese society means that 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 law enforcement in that jurisdiction before it is done in China (e.g., for the purposes of leniency or co-operation credit). Disclosure to foreign law enforcement 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 highly unusual.

42 What 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 41), 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

43 In 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.

44 Are 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 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 dealt with. Bearing in mind its omnipotent status, these may be few and far between.

45 In 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 17 and 18).

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 such data and documents are only transferred out of China in accordance with the limited exceptions provided under Chinese law.

46 If 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 41 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.

47 Does 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 the 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 and 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, 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.

48 Do 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.

49 How 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 46). 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.

50 Does your country have blocking statutes? What related issues are implicated by complying with a notice or subpoena?

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. 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.

51 What 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, documents containing state secrets should not be disclosed to a third party pursuant to Chinese law.

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.

Global settlements

52 Prior 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.

53 What 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).

As regards bribery offences, the April 2016 Judicial Interpretation to the Criminal Law introduced a new imprisonment regime linked to the severity of the offence. For those in the private sector, sentences generally range from one to 10 years. Corporates committing bribery offence 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.

54 What 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 related 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 impact 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 where a person voluntarily surrenders or 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.

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

No such settlement scheme exists in China.

56 Is there a regime for suspension and debarment from government contracts in your country? Where there is a risk of suspension or debarment or other restrictions on continuing business in your country, what are the options available to a corporate wanting to settle in another country?

There is no nationwide government contractor management system. Government procurement is conducted by local government under the general guidelines set out in the Government Procurement Law. Serious illegal conduct within the previous three years should disqualify an entity from participating in government procurement under article 22 of the Government Procurement Law. However, there is no national registry of ‘qualified’ government contractors.

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

We are not aware of any concluded global settlement that involved China.

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

Yes. However, this is rarely encountered given the domestic litigation environment, nor would the documents and files of the authorities be made available for a civil action. Procedurally, there are no class actions, derivative actions or analogous procedures to deal with broader issues of corporate fraud.

Publicity and reputational issues

59 Outline 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. Through 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 18 and 48.

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 not advised to make public statements during trials.

Chinese media outlets are, for the most part, controlled by the state. 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.

60 What 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, 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.

61 How 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

62 Is 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. Disclosure obligation to shareholders is governed by the relevant securities laws, and securities laws do not have a black-letter rule on this issue.


Footnotes

Kyle Wombolt is a partner and Anita Phillips is a professional support consultant at Herbert Smith Freehills.

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