The Chinese government recently released two new measures aimed
at tightening oversight of the lifestyles and finances of Chinese
government officials and their family members. The measures are
designed to expose evidence of misconduct within the bureaucracy by
expanding the scope of personal data that officials must report to
their superiors, extending the reporting obligations to a much
broader category of officials, and increasing the penalties for
non-compliance. The measures were jointly issued by the General
Office of the State Council, the top executive organ of the Chinese
state, and by the General Office of the Central Committee of the
ruling Communist Party of China ("CPC") as part of the
central government's continued efforts to rein in corruption
among bureaucrats and personnel of State-Owned Enterprises
(SOEs).
The Interim Rules on Strengthening Management of Officials
Whose Spouses and Children Have Migrated Overseas, issued on
May 19, 2010, address the growing phenomena of officials arranging
for the immigration of their family members to facilitate the
concealment of illegal wealth and to escape overseas to evade
punishment for graft and other misconduct. Promotions and
reassignments of so-called "naked officials" (Luo
Guan), whose family members have moved overseas, must be
reported to the CPC organizational departments at higher levels, as
must the whereabouts of their spouses and children. Such
"naked" officials must also disclose any travel to
foreign countries, Hong Kong, Macau or Taiwan prior to
departure.
The Regulation on Reporting Relevant Personal Matters by Cadres
and Officials (the "New Reporting Regulation"),
released on July 11, 2010, bolsters a reporting system first
established in 1995 and revised in 1997 and 2006.
The New Reporting Regulation significantly expands the scope of
officials subject to mandatory reporting requirements. Previously,
only officials at the "county chief" level (Xian Chu
Ji) and above were covered. The New Reporting Regulation
identifies three categories of "cadres and officials"
subject to mandatory reporting requirements, as follows:
- "officials at the deputy county chief level and above at departments and agencies of the CPC, people's congresses, administrative organs, committees of the Chinese People's Political Consultative Conference, judicial organs, people's procuratorates, and democratic parties" (referring to certain political parties permitted to exist within the CPC-dominated political system);
- "officials holding ranks equivalent to the deputy county chief level and above at civic organizations and public institutions," (such as museums); and
- certain managers in "wholly state-owned enterprises and state-controlled enterprises (including wholly state-owned financial enterprises and state-controlled financial enterprises)"
Previously, the reporting obligation only applied to CPC
members in the management of SOEs. Moreover, provincial level
CPC committees and governments now have authority to apply the
reporting regime to additional officials below the deputy county
chief level. A statement issued by the CPC explains that the
reporting obligations were extended to lower-level personnel
because lower level officials are often more susceptible to bribes
because they are dealing directly with practical issues involving
personnel, finance, and materials.
The New Reporting Regulation also expands the scope of reportable
information. Previously, covered cadres and officials were required
to report the following information to their CPC organization
departments: (1) changes in marital status; (2) ownership of
passports and other travel certificates for personal matters; (3)
travel outside China for personal matters; (4) the marriage of
cadres and officials' children to foreigners or residents of
Hong Kong, Macau and Taiwan; (5) situations where cadres and
officials' spouses and children are living outside China; (6)
personal investments in businesses and enterprises outside China by
cadres and officials' spouses and children living in the same
household (7) situations where cadres and officials' spouses
and children living in the same household serve as management
personnel in Chinese branches of foreign companies and Hong Kong,
Macau and Taiwan companies; (8) any criminal proceedings involving
cadres and officials' spouses and children and (9) any other
matters that cadres and officials think are reportable.
Beyond these existing reporting requirements, the New Reporting
Regulation now mandates that covered cadres and officials also
report: (1) the marriage of cadres and officials' children to
individuals "without nationality"; (2) the occupations of
cadres and officials' spouses and children (now including
children who do not live together with the officials and cadres),
both inside China and abroad; (3) salaries and all types of
allowances and subsidies of cadres and officials; (4) cadres and
officials' incomes from all sources, including lectures,
writing, consulting, editing, paintings and calligraphy, and other
services; (5) ownership of real estate by cadres and officials,
their spouses, or their children living in the same household; (6)
financial investments by cadres and officials, their spouses, or
their children living in the same household; (7) investments in
enterprises by cadres and officials, their spouses, or their
children living in the same household; and (8) any businesses in
which the cadres and officials, their spouses, or their children
living in the same household are owners or partners. The previous
catch-all item of "other matters that cadres and officials
think are reportable" in the 2006 regulation is omitted in the
New Reporting Regulation.
The new reporting items reflect the emergence of disproportionate
or sham compensation for officials' speeches and personal
services (such as calligraphy and paintings) as a means of
disguising incentives, as well as the prevalent practice of holding
proceeds of misconduct in family members' names.
Under the New Reporting Regulation, the penalties for failing to
report relevant personal matters timely or reporting false
information now include dismissal; previously, the harshest penalty
was a derogatory report or "criticism." Although the New
Reporting Regulation does not directly authorize civil or criminal
penalties, the reporting system may provide the basis for
prosecutions of cadres and officials for the crime of possessing
substantial wealth from unknown in violation of Article 395 of the
PRC Criminal Law.
The New Reporting Regulation does not, however, require any public
disclosure of reported data concerning the assets, income, and
lifestyles of the covered cadres and officials. Consequently, while
these new measures may equip investigators from CPC's
discipline inspection commissions and law enforcement authorities
with new means of unearthing evidence of corrupt conduct, the
measures do little to strengthen public oversight of the
bureaucracy.
For multinational enterprise active in China, these new measures
serve as a reminder of the Chinese central government's
continued efforts to tackle the country's endemic corruption.
Foreign companies should be mindful of the increasing risk of
scrutiny by enforcement authorities of any payments to officials
for speeches and other personal services and of favors to
officials' family members.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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