Government Investigations in China

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Enforcement agencies and corporate liability

Government agencies

What government agencies are principally responsible for the enforcement of civil and criminal laws and regulations applicable to businesses?

The Administration for Market Regulation (AMR) (previously the Administrations for Industry and Commerce (AIC)) at all levels, Public Security Bureaus at all levels (PSBs), the People’s Bank of China and the China Banking Regulatory Commission and their subsidiary bodies, tax bureaus at all levels, the National Development and Reform Commission (NDRC) and its subsidiary bodies, and the China Securities Regulatory Commission (CSRC) and its subsidiary bodies respectively exercise governmental supervision and regulation authority (including conducting government or criminal investigations, and imposing administrative penalties) against fraud, bribery and money laundering, and on tax, securities, banks, etc, with their authorities sometimes overlapping. Of the aforementioned government agencies, those principally responsible for supervision and regulation of companies’ daily operations are the AMR, the PSBs and the NDRC.

Futhermore, article 3 of the newly effective Supervision Law provides that:

Supervisory commissions at all levels are the specialised organs responsible for exercising state supervisory functions. They shall, in accordance with this Law, conduct supervision of public officials exercising public power (hereinafter referred to as ‘public officials’), investigate duty-related violations and crimes, build integrity and carry out the anti-corruption work, and maintain the dignity of the Constitution and the law.

Therefore, together with the above-mentioned government agencies, supervisory committees handle violations of duties of public functionaries and relevant personnel.

Scope of agency authority

What is the scope of each agency’s enforcement authority? Can the agencies pursue actions against corporate employees as well as the company itself? Do they typically do this?

The State Council and government agencies authorised by the State Council may decide the scope of authority that an administrative body is entitled to while conducting government investigations.

Government agencies may question the relevant employees to obtain evidence, but cannot take coercive measures against employees, such as searching their residences or restricting their personal freedom under general circumstances. However, in special situations - for example, when the AMR is conducting investigations of serious commercial bribery, upon the initiation of a collaborative investigation with a PSB and through legal procedures - the PSB may be authorised to take corresponding coercive measures against employees. In relation to the duty-related violations or crimes, the supervisory committees shall conduct the investigations. Supervisory committees are also entitled to detain certain people (including both public and non-public officials within their jurisdiction) at specific places designated by the committees.

The AMR may impose administrative penalties on business operators for violations of appropriate management and operation regulations (eg, unfair competition, monopoly, commercial bribery, acts against consumer interests, illegal advertisement, violations of price law, etc). PSBs are responsible for investigations of acts suspected to be bribery crimes or other acts that are criminally culpable. The NDRC, as the agency responsible for overall control of the national economy, is endowed with a wide scope of enforcement authority; yet in connection with companies’ daily operations, it conducts investigations into violations of price laws and acts of price monopoly or cartel behaviour.

Simultaneous investigations

Can multiple government entities simultaneously investigate the same target business? Must they coordinate their investigations? May they share information obtained from the target and on what terms?

Multiple administrative agencies may investigate the same corporation simultaneously according to their respective authority. It is permissible but not mandatory for these administrative agencies to coordinate their investigations. For example, if the AMR and NDRC are investigating the same company simultaneously, when the AMR discovers information about violations of price laws and regulations committed by the company in question, the AMR may make suggestions to and share relevant information with the NDRC; likewise, if the NDRC discovers unfair competition acts by the company in question that come under the AMR’s jurisdiction, the NDRC may make suggestions to and share relevant information with the AMR. Another example is where the CSRC cooperates with a PSB during its investigation of serious violations. In addition, since December 2014, the Supreme People’s Court of China and the CSRC have established a dedicated ‘head office to head office’ inquiry and control network to share information.

Civil fora

In what fora can civil charges be brought? In what fora can criminal charges be brought?

If the conduct of the investigated company is suspected to be a crime and meets the criteria for criminal prosecution, the Procuratorate will prosecute the company in question as well as the relevant responsible individuals. As mentioned above, though duty-related crimes are handled by supervisory committees according to the Supervisory Law, if, upon investigation, a supervisory committee finds that the criminal facts are clear and the evidence is credible and sufficient, it shall still transfer the case to the people’s Procuratorate for examination and initiation of a public prosecution in accordance with the law. The people’s courts have independent criminal, civil, and administrative trial courts. The cases are handled by different trial courts according to their specific types.

If the investigated company violates certain regulations but not criminal law, corresponding administrative penalties may be imposed upon it. However, victims of the investigated company’s illegal or criminal conduct cannot directly recover their losses through administrative penalties or criminal trial procedures; they must institute a civil action separately.

Corporate criminal liability

Is there a legal concept of corporate criminal liability? How does the government prove that a corporation is criminally liable for the acts of its officers, directors or employees?

If the decision is made by the management of the company or by the relevant responsible person on behalf of the company, wilful criminal conduct in the interests of the company and in the name of the company constitutes corporate crime. If the conduct of the employee is considered to have embodied the will of the corporation (for example, if the criminal intent is formed by the management of the corporation or the decision-making body of the corporation), or the decision-making body is aware of, yet acquiesces to, such wilful criminal conduct, and the proceeds go to the corporation in the end, then the judicial authorities may deem such criminal conduct to be corporate crime.

Bringing charges

Must the government evaluate any particular factors in deciding whether to bring criminal charges against a corporation?

If the conduct of the corporation meets the required criteria to be classed as a crime, and the judicial authority has thoroughly investigated the crime and obtained sufficient and concrete evidence, the judicial authority will bring a criminal action against the corporation in question.

The relevant details of the case, such as the timely disclosure of information by the investigated corporation, the scope of the criminal conduct and the credit record of the corporation, will, to some extent, influence the court’s final sentence in terms of the level of punishment. Moreover, if the corporation voluntarily surrenders itself, the judicial authority may impose a lighter or mitigated penalty in accordance with the law.

Initiation of an investigation

Investigation requirements

What requirements must be met before a government entity can commence a civil or criminal investigation?

If an administrative agency with competent jurisdiction discovers suspected facts or receives accusations or complaints, or a case is transferred to it from other agencies or from higher authorities, and the agency considers it a violation of law after preliminary investigations, the agency shall initiate an investigation upon an internal approval procedure.

The PSB and supervisory committee shall put the report on file and initiate investigations in accordance with their jurisdiction if they receive materials from public tip-offs, accusations, complaints or self-reporting and they consider the conduct involved to be criminally culpable after preliminary investigations.

Triggering events

What events commonly trigger a government investigation? Do different enforcement entities have different triggering events?

Government investigations may be initiated by public tip-offs, accusations, complaints, transfers of cases from other administrative agencies, orders from higher-level authorities, discovery during ordinary supervision and during the investigation of another case, and confessions of the offenders. In recent years, government investigations have also been initiated by reports from news media.

Whistleblowers

What protections are whistle-blowers entitled to?

Whistle-blowers can choose to remain anonymous. Even where whistle-blowers use their real names, the administrative agency will keep them confidential. In addition, the administrative agency may grant an award to a whistle-blower whose actions are considered meritorious.

Investigation publicity

At what stage will a government entity typically publicly acknowledge an investigation? How may a business under investigation seek anonymity or otherwise protect its reputation?

Administrative penalties are, in principle, made public. Generally, an administrative penalty will be announced publicly and notified to the person being punished. However, information related to state secrets, commercial secrets and personal privacy shall not be announced or disclosed. For example, since 1 March 2014 the AMR has published its administrative penalties via the National Enterprise Credit Information Publication System. If the NDRC considers that the investigated conduct constitutes a price monopoly, it will publish its decision via its official website. However, the corporation being investigated may apply for non-disclosure if it thinks the investigation is concerned with commercial secrets or individual privacy. Nevertheless, whether commercial secrets or individual privacy is involved or whether such information is against the public interest shall be determined by the administrative agency.

The PSB generally does not make public any information under investigation. However, if the case has a major impact on society, the PSB may disclose details of the case via news media.

Evidence gathering and investigative techniques

Covert phase

Is there a covert phase of the investigation, before the target business is approached by the government? Approximately how long does that phase last?

Generally, prior to commencing a formal investigation, all administrative agencies will conduct a preliminary investigation in order to determine whether to pursue a formal investigation. However, there is no uniform time limit for such preliminary investigations. For the PSBs, the duration of a preliminary investigation will be no more than 60 days. The supervisory committee may adopt technical investigation measures for up to six months. The AMR will normally decide whether to put the case on file within seven working days upon receipt of materials of complaint, report and accusation. Under special circumstances, this time limit may be extended to 15 working days. There is no prescribed time limit for the duration of a preliminary investigation by the NDRC.

What investigative techniques are used during the covert phase?

During the preliminary investigation, the PSB and supervisory committee are entitled to question relevant employees, inspect relevant objects and obtain evidence from the investigated company, but cannot take measures to constrain the respondent’s personal or property rights. The PSB may also seek assistance from relevant entities, including the investigated company. During their preliminary investigations, the AMR and the NDRC may verify the materials submitted via complaints, accusations, whistle-blowing or those transferred from other branches or higher authorities, but will not take any coercive administrative or criminal measures.

Investigation notification

After a target business becomes aware of the government’s investigation, what steps should it take to develop its own understanding of the facts?

Since the information about a PSB criminal investigation is confidential, the investigated corporation is likely to have difficulty obtaining information about the case, even though it can designate an attorney to ask the PSB about the progress of the investigation and relevant case information.

Before imposing any administrative penalty on a respondent, the administrative agency shall inform the respondent of the facts of its offence and the grounds for such penalty, etc. Therefore, during an investigation conducted by the AMR or the NRDC, the investigator may inform the investigated corporation of the situation and progress of the investigation. In addition, the target business can communicate with the administrative agency to learn about the progress of the investigation and the facts discovered by the administrative agency. The administrative agency shall disclose the facts at its own discretion. However, if a hearing procedure is applicable, the administrative agency must disclose the facts it is relying on to issue the administrative penalty.

Evidence and materials

Must the target business preserve documents, recorded communications and any other materials in connection with a government investigation? At what stage of the investigation does that duty arise?

The investigated corporation must keep all documents and materials related to the case under government investigation. This obligation arises when the investigator initiates the investigation. Moreover, according to the Company Law, the Securities Law, the Accounting Law, the Archives Law and the Corporation Archives Work Specification, the corporation is obligated to keep other documents (including finance materials, accounting materials and other materials related to its internal management and operation), and the obligation arises from the beginning of the corporation’s operations.

Providing evidence

During the course of an investigation, what materials - for example, documents, records, recorded communications - can the government entity require the target business to provide? What limitations do data protection and privacy laws impose and how are those limitations addressed?

The administrative agency should collect relevant evidence in accordance with the law. In practice, the administrative agency has the discretion to determine which materials are related to the case. Corporations are obligated to cooperate with the investigation and deliver all documents and materials requested by the investigator. Administrative agencies are obligated to keep confidential all materials concerned with national secrets, commercial secrets and individual privacy.

On what legal grounds can the target business oppose the government’s demand for materials? Can corporate documents be privileged? Can advice from an in-house attorney be privileged?

Chinese law does not recognise privileged information per se. Hence, all documents (including opinions issued by an in-house attorney) requested by the investigator must be submitted by the investigated company.

Employee testimony

May the government compel testimony of employees of the target business? What rights against incrimination, if any, do employees have? If testimony cannot be compelled, what other means does the government typically use to obtain information from corporate employees?

The AMR and the NDRC during their investigations are entitled to request evidence from the relevant staff of the company under investigation. The investigated company has the right to make statements and argue in its defence, but it cannot avoid the investigation. However, administrative agencies such as the AMR and NDRC do not take coercive measures directly against employees of the investigated company, nor does the investigated company have the right to compel testimony from its employees.

During the criminal investigation, the PSB and supervisory committee are entitled to use coercive measures against the company or relevant responsible individuals under investigation, such as restricting the freedom of a responsible individual or supervising and monitoring the communication and correspondence of the same, and sealing up or freezing the property of the corporation under investigation.

Under what circumstances should employees obtain their own legal counsel? Under what circumstances can they be represented by counsel for the target business?

During the PSB’s investigation, the investigated company or relevant responsible individuals may engage attorneys to request case information from the PSB, file complaints or accusations on their behalf and challenge the coercive measures imposed on them.

No PRC law prohibits the company under investigation or the employees from hiring attorneys during the investigation procedures of the AMR and NDRC. Based on current practice, if both the investigated company and the employees believe that there is no conflict of interest, the employees can be represented by the same counsel as the target business. However, in practice, sometimes the AMR and NDRC do not permit any interference from outside attorneys engaged by the investigated company and its employees.

Sharing information

Where the government is investigating multiple target businesses, may the targets share information to assist in their defence? Can shared materials remain privileged? What are the potential negative consequences of sharing information?

According to PRC law, it is not prohibited for corporations under investigation to share information with each other. However, if the conduct under investigation is interrelated, and if it is the PSB conducting the investigation, information sharing may be held as false confession in collusion. So, with respect to criminal investigations and criminal liabilities, the sharing of information between targets under investigation may be held as a breach of the duty to cooperate with criminal investigations. For administrative investigations, sharing of information may be regarded as a failure to make a truthful statement or as withholding of facts, and may also constitute hindrance to the investigation.

Investor notification

At what stage must the target notify investors about the investigation? What should be considered in developing the content of those disclosures?

For listed companies, the law expressly prescribes that if a listed corporation is being formally investigated by the appropriate agency for its suspected violations of laws and regulations, or if its board director, supervisor or senior manager is under investigation or subject to restrictive measures imposed owing to violations of laws and regulations, the listed corporation should disclose this information to investors in a timely manner, and indicate the main reason, current status and possible implications of their actions. The reason for this duty to notify and disclose to investors resides in the possibility that the listed company’s qualification may be suspended or eventually cancelled after investigation by the CSRC together with the PSB - especially since 2014, when the CSRC issued an opinion to strictly enforce the listed companies’ market exit mechanism. For unlisted companies, the law does not expressly provide that the company under investigation is obligated to disclose information about the investigation to its investors. Hence, the disclosure issue for unlisted companies should follow the relevant agreement in the investment contract.

Pursuant to the Administrative Measures for the Disclosure of Information of Listed Companies, a listed company shall disclose its information truthfully, accurately and completely, in a timely manner, and the information disclosed shall not contain any false records, misleading statements or serious omissions.

Cooperation

Notification before investigation

Is there a mechanism by which a target business can cooperate with the investigation? Can a target notify the government of potential wrongdoing before a government investigation has started?

Chinese law provides that a corporation under investigation must cooperate with the administrative agency’s investigation. According to articles 67 and 68 of the PRC Criminal Law, the confession of one’s own crime and the reporting of another’s are both meritorious acts, which may result in a lighter or mitigated punishment or exemption from punishment. Article 108, paragraph 1 of the Criminal Procedure Law provides that ‘any entity or individual’ that discovers facts of a crime or a criminal suspect shall in general have a duty to report. But no legal liability will be imposed on a person or entity if a person or entity fails to report a crime. However, there are special subjects that are excluded from the scope of application of article 108, which include the offender of the crime. An offender does not have the obligation to turn himself or herself in. Apart from a lighter or mitigated punishment, the main reason for an entity to choose to voluntarily report a crime is to create an honest and responsible market presence.

The Administrative Penalty Law has similar provisions to the effect that those who cooperate with an investigation will receive lighter or mitigated administrative penalties. The corporation may notify government agencies of potential wrongdoing before a government investigation has started in order to seek a lighter or mitigated penalty.

Voluntary disclosure programmes

Do the principal government enforcement entities have formal voluntary disclosure programmes that can qualify a business for amnesty or reduced sanctions?

In criminal cases, a lighter or mitigated criminal penalty may be imposed on a criminal suspect that voluntarily surrenders. In the case of a price monopoly, the NDRC and the AMR have both provided that, if the operator voluntarily reports information about the price monopoly and supplies evidence, they may mitigate or cancel the penalty.

Timing of cooperation

Can a target business commence cooperation at any stage of the investigation?

The relevant Chinese laws provide that the person under investigation must cooperate with the investigation and make a true statement, and should not hinder the investigation of the administrative agency. The laws have not limited the duration of this obligation. Hence the target business should cooperate from the beginning to the end of the investigation.

Cooperation requirements

What is a target business generally required to do to fulfil its obligation to cooperate?

The target business is required to answer the questions of the investigators truthfully and to cooperate with them in their review or collection of evidence. They should not hinder the investigation, or conceal, change, destroy or transfer relevant evidence.

Employee requirements

When a target business is cooperating, what can it require of its employees? Can it pay attorneys’ fees for its employees? Can the government entity consider whether a business is paying employees’ (or former employees’) attorneys’ fees in evaluating a target’s cooperation?

The corporation will tell employees that cooperation with a government investigation is their duty and that they must make truthful and objective statements. The corporation may instruct employees that they must not state groundless hearsay and can only state or explain things involved in their own work and relevant to the investigated matters.

Chinese law does not prohibit the corporation from paying employees’ attorneys’ fees. Payment of the employees’ attorneys’ fees is not a major factor in considering whether the company under investigation is cooperative.

Why cooperate?

What considerations are relevant to an individual employee’s decision whether to cooperate with a government investigation in this context? What legal protections, if any, does an employee have?

Employees’ main concerns are whether they are personally liable, whether they will lose their job and whether the company will be penalised because of their cooperation with the investigation. While under investigation, employees have the right to make statements and argue in their defence. The corporation may not dismiss an employee, demote an employee or reduce an employee’s salary merely because he or she agrees or refuses to participate in an inquiry by the corporation’s counsel or the government. Non-cooperation is not one of the six legal situations listed in the Labour Contract Law for which an employee may be dismissed by the company. But if the employment contract or employee code of conduct stipulates an obligation to cooperate with an investigation by the corporation and the government, the corporation may dismiss the employee if the employee fails to cooperate.

Privileged communications

How does cooperation affect the target business’s ability to assert that certain documents and communications are privileged in other contexts, such as related civil litigation?

Chinese law currently does not provide for such privilege.

Resolution

Resolution mechanisms

What mechanisms are available to resolve a government investigation?

For unlawful conduct, such as entering into monopoly agreements, the NDRC and the AMR both provide that the investigation may be suspended according to the undertakings of the investigated business operator in the event that such operator has reached an agreement with the investigator, or terminated in the event that such operator has fulfilled its undertakings. For commercial bribery cases investigated by the AMR, the law does not provide that such investigations may be terminated as per agreements reached between the AMR and the investigated people, but similar practices are often seen in reality. In criminal cases investigated by a PSB, the law does not specify that criminal investigations can be terminated upon agreement between the investigator and the investigated person.

Admission of wrongdoing

Is an admission of wrongdoing by the target business required? Can that admission be used against the target in other contexts, such as related civil litigation?

The relevant Chinese law stipulates that a person under investigation must cooperate and make a truthful statement. But the person under investigation has the right to appeal, object, apply for administrative reconsideration and bring about administrative action. Hence, the target under investigation is not required to admit wrongdoing. If there is an admission, it will generally be used as evidence against the target under investigation in a relevant civil lawsuit.

Civil penalties

What civil penalties can be imposed on businesses?

According to Chinese law, the administrative agency (government investigation agency) will not impose civil liabilities on a corporation, but may impose administrative penalties. According to the Law on Administrative Penalty, an administrative agency may:

• impose disciplinary warnings or fines;
• confiscate illegal earnings;
• confiscate unlawful property or items of value;
• order the suspension of production or business;
• order the temporary suspension or rescission of permits, or the temporary suspension or rescission of licences;
• impose administrative detention; and
• impose other penalties prescribed by law.

In addition to the above, the NDRC may limit, reduce or cease the allocation of national subsidies. The AMR may order the corporation to stop production until it has reordered itself, corrected the wrongdoing and offset the consequences, and my also restrict the registration of trademarks. According to different regulations in different industries, an administrative agency may also prohibit the corporation’s participation in certain activities for a certain period, or put the corporation on the blacklist of untrustworthy enterprises.

Criminal penalties

What criminal penalties can be imposed on businesses?

The PRC Criminal Law adopts a bipartite punishment system that imposes a fine on the corporation and criminal sanctions on principals who are directly responsible.

Sentencing regime

What is the applicable sentencing regime for businesses?

The Supreme People’s Court issued the Guiding Opinions on Sentencing for Common Crimes (the Opinions, effective as of 1 January 2014), which provide for the principal and the basic approach to sentencing, along with the application of common sentencing circumstances. The Opinions offer significant guidance as to the sentencing of various crimes. The fourth part of the Opinions covers the sentencing of 15 common crimes, including traffic offences, intentional assault, larceny, fraud and duty encroachment (taking intentional and unlawful possession of a corporation’s assets). However, the 15 crimes only account for a very small proportion of all crimes regulated by the Criminal Law. In addition, the various levels of the Chinese courts have internal sentencing rules for specific crimes, although some have not been released to the public. As important as these rules are in practice, they are not mandatory and judges may execute their discretionary power to the extent permitted by laws and these rules.

Future participation

What does an admission of wrongdoing mean for the business’s future participation in particular ventures or industries?

If the corporation admits wrongdoing and violation of law, but is not punished with penalties such as confiscation of its business qualification, prohibition from participating in the market or inclusion on the blacklist, there is generally no adverse impact on the company’s future operation and participation in a certain industry, other than damage to its reputation. However, if the corporation is penalised and blacklisted, such admission may severely harm the future operation of the company. For example, if the corporation under investigation is blacklisted as an untrustworthy company, it will be prohibited from issuing securities, bidding and other activities. Chinese law has similar blacklist systems in the areas of government procurement, non-financing security, retail, food and drugs, construction, security and others, such as bidding activities and government tax affairs. Moreover, if the corporation has been subject to an administrative penalty in the past 36 months because of a violation of laws and administrative regulations relating to industry and commerce, taxation, land, environmental protection and customs, and the circumstances are serious, the corporation may not conduct an initial public offering and listing of shares.

UPDATES & TRENDS

Updates & Trends

Updates and trends

The establishment of the National Supervisory Committee (and supervisory committees at all levels) is a significant measure to thoroughly implement the spirit of the 19th National Congress of the Communist Party of China (CPC). The 19th Congress made a strategic plan for deepening the reform of the national supervisory system and called for the ‘establishment of a national, provincial, municipal, and county supervisory committee to work together with CPC’s disciplinary inspection authority’. The purpose of the reform of the national supervisory system is to strengthen the CPC’s centralised and unified leadership on anti-corruption work, establish anti-corruption work organisations under the unified leadership of the CPC and implement full supervision of all public officials.

Jun He Law Offices - Weining Zou and Yufan Sun

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