Monitorships in East Asia
Monitorships are common in some areas of the world but are only just emerging in East Asia. Generally, monitorships are imposed by the government (e.g., via a regulator, a prosecutor or an express court order) or can result from internal corporate compliance needs. Regardless of the basis, a growing global emphasis on legal and ethical compliance has led to their proliferation.
In the United States, monitorships are routinely imposed as a condition of certain orders or negotiated terms, such as deferred prosecution or non-prosecution agreements. The appointment of monitors has become increasingly popular in other jurisdictions, too, notably the United Kingdom. In East Asia, there is no tradition of monitorships. However, in an increasingly globalised market, East Asian businesses and organisations are increasingly likely to become the subject of a monitorship and to face the ensuing issues they raise.
This chapter considers the application of monitorships in an East Asian context and their effects on East Asian and international organisations. Specifically, we examine the history of monitorships in East Asia, evaluate the challenges and opportunities that monitorships have encountered in the covid-19 era, analyse the anticipated increase in monitorships imposed on East Asian companies by other jurisdictions, and review the role of multilateral development bank-imposed monitorships in the region. We also consider some recent examples of third-party monitorships imposed by East Asian government authorities, in what may be the start of an emerging trend.
The rise of government-imposed monitorships in East Asia
Although monitorships mandated by government authorities have not traditionally been a feature of legal and regulatory regimes in the region, there are some signs of East Asian authorities adopting the concept of monitorships. It is perhaps not unexpected that this trend has been seen in Singapore and Hong Kong, which are international financial centres with common law legal systems that maintain particularly close links with key Western economies, such as the United States. There is also an emerging trend of quasi-monitorships in South Korea.
Until recently, Singapore’s approach to corporate misconduct focused on individual liability. However, in 2018, the Singaporean Parliament adopted a framework for deferred prosecution agreements (DPAs) into its Criminal Procedure Code. These reforms, based largely on the example of the United Kingdom’s adoption of DPAs in 2014, now allow Singaporean prosecutors to appoint monitors to ensure compliance with DPA terms. Under the framework, monitors are responsible for assessing a company’s internal controls, advising the company and the prosecutors of improvements to the company’s compliance programme, and reporting misconduct uncovered in the implementation of the company’s compliance programme or internal controls. Although no major monitorships have been instituted under the Criminal Procedure Code, it will be an interesting area to watch in the coming years, particularly as Singapore continues to engage in cooperative anti-corruption enforcement actions with other governments, including the United Kingdom and the United States.
The appointment of independent monitors to oversee rectification efforts following a compliance breach or corporate crime is standard practice in many Western financial regulatory regimes. Now that the monitorship concept has been embraced in Singapore, the practice is likely to form part of the repertoire employed by Singapore regulatory authorities in future cases.
The independent monitor concept also has been adopted in the competition or antitrust context. The Competition and Consumer Commission of Singapore (CCCS) has the power to issue an interim measures direction, imposing conditions on the grant of approval for a transaction (such as a merger). As a condition of approving a recent acquisition of ride-hailing app Uber’s South East Asia business by competitor Grab, the CCCS imposed a requirement for an independent monitoring trustee to be appointed. The monitor’s role is to supervise the newly merged business’s compliance with several operational and legal restrictions imposed by the CCCS. In the Uber/Grab transaction, these conditions included maintaining certain pre-merger pricing, terminating some pre-existing exclusivity agreements, and restricting access to operational data held by Uber.
Monitorships in this context differ somewhat from the traditional format in that the monitorship here is forward-looking – the monitor’s role is to ensure compliance with transaction approval conditions pre-emptively, rather than following a breach.
The concept of monitorships is also gaining ground in Hong Kong. Unlike Singapore, there is still no explicit legislative provision permitting Hong Kong regulators to enter into DPAs (which would commonly require the appointment of a monitor). Despite the lack of statutory footing, Hong Kong regulators regularly find ways to implement monitor-like supervision by requiring the appointment of independent consultants who act in roles akin to those of a monitor. For example, in December 2018, the Hong Kong Monetary Authority (HKMA) ordered JPMorgan Hong Kong to have an independent external adviser assess the bank’s implementation of remedial measures following violations of anti-money laundering and counter-terrorist financing rules and report on whether those measures sufficiently addressed the circumstances that led to the violations. The HKMA has imposed similar monitorship requirements on other financial institutions, such as the State Bank of India, Hong Kong Branch.
One of the more interesting developments in monitorships in East Asia is China’s experimentation with a system of third-party monitors in dealing with economic crimes. In March 2020, China’s Supreme People’s Procuratorate launched a pilot programme to address compliance issues in corporate cases. The first phase of the programme was carried out in six procuratorate offices in the Shanghai, Jiangsu, Shandong and Guangdong provinces. Then, on 3 June 2021, the Supreme People’s Procuratorate, the Ministry of Justice and other regulatory authorities jointly issued ‘Guidance on Establishing a Third-Party Monitoring and Evaluation Mechanism for the Compliance of Enterprises involved in Cases (Trial Implementation)’ to expand the programme and clarify the monitorship component of corporate compliance reform. Under this Guidance, monitorships should be used in cases involving economic and white-collar crime, including bribery, corruption, fraud, tax evasion, and collusion, as well as major cases of product liability, environmental pollution and intellectual property infringement.
Third-party monitors are appointed by the Third-Party Monitorship Mechanism Management Committee, which consists of representatives from various government bodies, including the relevant procuratorate office. Once selected, the monitor is responsible for reviewing the company’s compliance plan, making recommendations on how to improve the plan, and scheduling compliance inspection site visits. The regulations further require monitors to inspect and evaluate the implementation of the compliance plan and submit regular reports to the company and the relevant procuratorate office. Should the third-party monitor uncover new, potentially criminal activity or information, the monitor must pause his or her efforts and report the conduct to the procuratorate that is supervising the monitorship.
The scope of China’s monitorship programme has expanded quickly. Since being initiated, the programme has grown to cover 10 offices at provincial level, 61 offices at municipal level and 381 local procuratorate offices. As of November 2021, the pilot regions have handled 525 corporate compliance cases and implemented 254 third-party corporate compliance monitorships across the country. Many non-pilot regions have also begun to implement similar policies at the local level. Considering that just a few years ago China’s criminal compliance non-prosecution system was virtually non-existent, these reforms clearly demonstrate that corporate compliance is a top priority for Chinese government officials, that monitorships are becoming the rule rather than the exception in these cases, and that because of these developments, corporate compliance will be ever more important and highly valued in the coming years.
Finally, although DPAs and non-prosecution agreements are not statutorily available options in South Korea, there is some statutory footing and certain court practices to support the formation of quasi-monitorships. For example, the Korean Commercial Code requires that listed companies with total assets valued at more than 500 billion won designate one or more compliance officers. Similarly, in the antitrust context, compliance programmes are recognised and have been recommended by the Korean Fair Trade Commission (KFTC) since 2001. Companies that have adopted compliance programmes received incentives from the KFTC, including reduction of fines. However, to ensure that compliance programmes were being implemented effectively, the KFTC introduced a rating evaluation system to structure incentives based on the effectiveness of the compliance programme. Prior to the amendment of compliance programme operation rules in 2016, the KFTC reduced the administrative surcharge required of companies, provided that the company in question had adopted a compliance programme and received a qualifying rating in its evaluation by the KFTC. Although this incentive has since been discarded, similar ones still exist. Companies that receive a high rating can be exempted from ex officio investigations and can reduce or exempt themselves from requirements to publicly disclose violations. In October 2019, the KFTC again amended the guidelines to better accommodate the incentives for companies with the highest rating and even introduced a reward programme. These programmes also share forward-looking characteristics, and compliance programmes provide some incentives, such as mitigation of sanctions following a potential future breach.
Furthermore, the Seoul High Court directed Samsung to adopt measures to ensure compliance following a high-profile criminal case involving a Samsung executive in December 2019. As a result, in January 2020, Samsung established a compliance monitoring committee comprised of five external members and one Samsung executive, and led by former Chief Justice of the Supreme Court of Korea, Kim Ji-hyung. The High Court indicated that it would consider newly implemented measures as a positive sentencing factor, but only if the committee could demonstrate its capability in effectively ensuring compliance. However, after reviewing the monitor’s report, the Court concluded that, although Samsung had made serious efforts to improve its compliance system, the system still failed to satisfy the level of effectiveness required. With this finding, the Court further decided that it would be inappropriate to consider it as a factor in deciding the executive’s sentence.
These recent cases demonstrate that future (quasi-)monitorships will continue to have significant implications for businesses and organisations in South Korea in the coming years.
‘Virtual’ monitorships: corporate compliance in the covid-19 era
The covid-19 pandemic precipitated an unprecedented shift in how professional service firms conduct business. Many had to adapt to the changing environment by embracing new technologies and shifting work to remote settings. Monitorships are no different.
Although many of the challenges posed by the pandemic apply across the world, some of them are particularly acute in East Asia. One evident aspect is travel. Site visits are an important part of any monitorship, giving a monitor an opportunity to see how a company implements its compliance programme on the ground and gather first-hand testimony from employees. However, because of covid-19, travel has been particularly difficult in East Asia. During the course of the pandemic, many East Asian governments have closed borders, implemented entry and exit bans, and imposed visa restrictions. With lengthy quarantines, unexpected flight cancellations and strict testing requirements, travel became more onerous and expensive.
Although many countries implemented these types of restrictions during the pandemic, East Asian countries have been particularly cautious; for example, Singapore prohibited the entry and transfer of all foreigners from March 2020 until October 2021 – more than a year and a half. Many East Asian jurisdictions have also adopted stricter quarantine requirements. At the time of writing, Hong Kong requires all international travellers from high-risk countries to quarantine for 21 days on arrival, regardless of vaccination status. Even domestic travel has posed difficulties in places such as China. Regional lockdowns are regularly imposed in response to new outbreaks of the virus, as seen in early 2022 in Tianjin and Xi’an.
Despite these challenges, monitors have been able to adapt. Instead of conducting in-person site visits, many monitors in East Asia shifted to ‘virtual’ monitorships, saving both time and costs. Indeed, this is a trend that is likely to outlive the pandemic and its restrictions, as governments, companies and monitors consider low-cost, low-hassle virtual monitorship options when reasonable. Indeed, the flexibility to rely on virtual interviews and site visits to supplement or replace in-person events may increase the use of monitorships in East Asia.
Foreign monitorships in an East Asian context
Monitorships imposed by East Asian governments may still be less common than in other parts of the world, but they appear to be on the rise, as are monitorships imposed by foreign governments that affect parties based in the region.
Monitorships in the United States tend to be driven by three key areas: financial sector compliance, public protection (e.g., consumer safety and environmental standards) and criminal law compliance (e.g., corruption, sanctions or money laundering). In East Asia, the majority of monitorships imposed by US authorities fall into the last category, where the impetus is a criminal enforcement action.
Indeed, the transition of US administration from President Trump to President Biden portends an increase in anti-corruption enforcement as a key component of US foreign policy. This new emphasis, which includes elevating anti-corruption to a US national security priority, is likely to bring an increase in the number of enforcement actions. Alongside this, the US Department of Justice (DOJ) has touted the value of monitorships and promised to rely more heavily on them in resolving enforcement actions globally. Together, these two trends will undoubtedly reach the Asia-Pacific region, where corporate enforcement by the DOJ and the US Securities and Exchange Commission (SEC) under the US Foreign Corrupt Practices Act (FCPA) had been prevalent until 2017. Already this trend has developed, with three of the four corporate enforcement actions brought by the DOJ and the SEC in 2021 addressing conduct in Asia, including China, India and Malaysia. Below we examine two high-profile cases that demonstrate the reach that foreign-imposed monitorships can have in East Asia. Monitorships will increasingly play a part in the growing number of these matters.
Despite the frequency of criminal enforcement actions from the United States, there were few notable cases of monitorships in the region until 2017, when the United States imposed a monitorship on Chinese telecommunications giant ZTE Corporation (ZTE), one of the first examples of a high-profile monitorship imposed in East Asia.
ZTE relied on US-produced components for its smartphones and telecommunications networking equipment. By shipping US-origin goods to Iran without proper export licences, ZTE was found to be in violation of US sanctions against Iran. As a result, the United States forbade US companies from selling components to ZTE and its subsidiaries, cutting off the company’s supply of critical parts for its networking equipment and smartphones from US companies such as San Diego-based chipmaker Qualcomm.
ZTE entered into a plea agreement with the United States in March 2017, agreeing to pay fines of US$890 million and accepting a monitor appointed by the District Court. Restrictions on US companies’ exports to ZTE were suspended based on ZTE’s promise to implement the plea agreement. However, in April 2018, the United States alleged that ZTE was failing to comply with the agreement and reimposed the export restrictions. ZTE’s ability to secure key products from US companies was shut off for three months, putting the company at risk of bankruptcy. In June 2018, ZTE agreed to pay additional fines totalling US$1 billion and retained a compliance monitor to evaluate the company’s compliance with US export control laws pursuant to a US Department of Commerce order.
Subsequently, the end date of the monitorship was extended from 2020 to 2022 and the powers of the monitor were expanded to police ZTE to the same degree as that of a second monitor appointed by the US Department of Commerce. Other conditions of the monitorship included replacing ZTE’s entire board of directors and senior leadership team.
From China’s perspective, the appointment of a monitor and the imposition of the other strict measures in the ZTE case were a major intrusion on a key business. This reaction shows how countries should consider the symbolic significance of a foreign-appointed monitor when applied in a different cultural context. As an example, consider the reverse situation: if China were to appoint a Chinese citizen as a monitor to oversee all compliance activities of a major listed company in the United States, the decision would probably face stiff opposition from a number of different US stakeholders. Although there is no suggestion that China will introduce such a mechanism, this is the context in which the monitor’s role must be carried out when appointed to oversee an East Asian party.
Other issues in monitorships over Chinese companies could include Chinese state secrets. The current US–China trade war may result in an increased focus on the conduct of Chinese parties, with greater enforcement activity being conducted under US sanctions law, the FCPA, among others. ZTE may become a model for further monitorships to come.
Telefonaktiebolaget LM Ericsson
Another example of a monitorship imposed in the East Asian context resulted from an FCPA case brought against Ericsson, a Swedish multinational telecommunications company. The East Asian component of this case primarily concerned books and records, and internal controls violations in China, Vietnam and Indonesia.
From 2000 to 2016, Ericsson subsidiaries in China used agents, consultants and other service providers to fund a travel expense account and other leisure activities in China to win business with Chinese state-owned telecommunications companies. The Ericsson subsidiaries in China also made payments to third-party service providers through sham contracts for services that were never performed. These payments were then knowingly mischaracterised and reported in Ericsson’s books and records. Additionally, between 2012 and 2015, Ericsson subsidiaries in Vietnam and Indonesia also created off-the-books accounts that were used to make payments to third parties to contravene internal due diligence processes and to conceal illicit payments.
On 26 November 2019, Ericsson proceeded to resolve the case by entering into a DPA with the DOJ. The company paid more than US$1 billion to resolve the government’s global investigation into Ericsson’s FCPA violations and agreed to pay the SEC disgorgement and prejudgment interest, totalling roughly US$540 million. In addition to the monetary penalties, the DPA also required Ericsson to retain an independent compliance monitor for three years to ensure compliance with the terms of the settlement and to reduce the risk of any recurrence of misconduct.
East Asian monitorships in a multilateral development bank context
Another channel through which monitorships have been imposed in East Asia is through sanctions by multilateral development banks (MDBs) such as the African Development Bank Group (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), and the World Bank Group (WBG). As MDBs step up the fight against fraud and corruption in development projects around the world, MDB sanctions and integrity compliance programmes have come to the fore. MDBs rely on various levels of sanctions to fulfil their fiduciary duties, ensure funding achieves its intended purpose, and punish those who engage in sanctionable conduct in the course of MDB-funded projects.
For most of these institutions, the baseline sanction is ‘debarment with conditional release’. Debarment prohibits sanctioned companies from engaging in MDB-financed projects while conditional release sets out certain requirements that the company must meet for the debarment period to end, such as implementing an integrity compliance programme and, more importantly, engaging an independent compliance monitor. This differs somewhat from a monitorship in a prosecution context, however, because in those situations the monitorship is imposed conditionally as part of a DPA.
Debarment most often arises when companies engage in one or more sanctionable practices, such as fraud, corruption, collusion, obstruction and coercion. To be clear, MDB monitorships are limited in scope and focus only on violations of specific guidelines in connection with MDB-financed projects.
Indeed, MDB enforcement efforts have increased in the past few years with a noticeable focus on companies based in East Asia. Nearly one-third of all World Bank sanctions cases targeted companies in East Asia and the Pacific, particularly China and Indonesia. Many of these companies have been further sanctioned through cross-debarment, a process by which one MDB will enforce debarment decisions issued by other MDBs. This framework is governed by the 2010 Agreement for Mutual Enforcement of Debarment Decisions, signed by the AfDB, the ADB, the EBRD, the IADB and the WBG. Whether through this mutual recognition procedure or under its own sanctions regime, some other MDBs impose a similar integrity compliance requirement, which may include the appointment of an independent monitor.
An area of continued policy development surrounds the creation of the Asian Infrastructure Investment Bank (AIIB), which began operations in 2016 and currently comprises 105 members around the globe. As China continues to implement its One Belt, One Road initiative to finance a network of infrastructure projects across numerous jurisdictions in the region, the AIIB will continue to grow in its levels of financing activity. As a result of the AIIB’s multilateral structure, it is perhaps not surprising that it has adopted a sanctions and debarment regime broadly based on the World Bank model, including maintaining an extensive list of entities debarred from accessing AIIB funding as a result of a compliance failing.
What we have not seen emerge yet in relation to the AIIB is a mechanism for debarred entities to be rehabilitated and subsequently regain their borrowing privileges. As the AIIB has only been in operation since 2016, it may be that the bank has not yet had an opportunity to develop an arrangement of this kind. As the AIIB continues to build its institutional structure in the coming years, it will be interesting to observe whether it continues to follow the World Bank model by imposing independent monitorships as a condition of a party being removed from the bank’s list of debarred entities. It also remains to be seen whether the AIIB will follow the World Bank and other MDBs in adopting a compliance guideline framework, including a provision for a compliance monitor when there are compliance concerns.
Whereas monitorships were previously quite rare in East Asia because of a lack of procedural mechanisms and a general reluctance to entrust a traditional government oversight role to a private party, they are increasingly being used as a tool by foreign governments, MDBs and East Asian governments themselves. As East Asia’s economic significance continues to rise and its firms take leading positions in the global economy, it is likely that there will be more scrutiny of business practices in the region. The end result is likely to be a greater reliance on third-party monitorships to ensure sound corporate governance, to promote compliance mechanisms and to remediate misconduct by corporate entities.
Although at a relatively nascent stage, monitorship regimes organically developed in the region are beginning to spread their wings, particularly in East Asian jurisdictions that maintain a common law legal system and strong links with jurisdictions where monitorships are more common, such as the United States. Overall, we are at an interesting point in time as the monitorship concept continues to develop in East Asia.
1 Jason J Kang, Wade Weems, Daniel S Lee and Scott Hulsey are lawyers at Kobre & Kim.
2 See. e.g., ‘Deferred Prosecution Agreements’, Serious Fraud Office, at https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/guidance-for-corporates/deferred-prosecution-agreements/ (last accessed 10 Mar. 2022).