China: Keeping An Effective Compliance Program For Your China Operations

Last Updated: 23 May 2014
Article by Tao Xiong

Law enforcement authorities in China have stepped up their overall efforts in recent months to combat what some of its leaders have referred to as China's problem of "rampant" corruption. The span of China's tightened anti-corruption enforcement has been wide, involving investigations into and penalization of not only certain high-level government officials, but also activities and/or employees of many companies, particularly multinational companies (MNCs). Among the recently disclosed investigations into potential commercial corrupt practices, the GSK investigation has garnered the most press attention. In the wake of the wide media coverage of the GSK investigation, MNCs start to take a closer look at China's anti-corruption laws and regulations, and evaluate whether their existing internal compliance programs are sufficient to keep up with the changing climate of tightened-up anti-corruption enforcement in China.

Most MNCs with operations in China have long established internal compliance programs to meet the requirements of anti-corruption laws of their respective home countries (for example, the U.S. Foreign Corrupt Practice Act and the UK Bribery Act). Those MNCs generally also have their China versions of internal compliance programs, put in place primarily to meet the compliance requirements of their home countries. The China versions of these compliance programs seemed self-sufficient when the anti-corruption enforcement by the Chinese authorities had been relatively sporadic and less aggressive. After the recent high-profile anti-corruption investigations by the Chinese enforcement authorities, nothing should be taken for granted and MNCs are reminded to reconsider and reassess their China component of their internal compliance programs.

So what messages and/or lessons can be learnt by the MNCs from the recent anti-corruption enforcement actions by the Chinese authorities? We believe there are at least three lessons.

The number one lesson that MNCs can learn from the recent anti-corruption investigations by the Chinese authorities is that China's anti-corruption laws and regulations do have teeth and can bite.

For many MNCs, existing compliance programs were originally designed to meet the compliance requirements of their home countries. Some companies extended the application of their home-country version of the compliance programs to its China operations with a simple Chinese translation thereof, while others incorporated certain China elements (to various degrees) to their home-country version of the compliance programs. Recent investigations against MNCs in China suggest that having an internal compliance program alone may not be enough to fend off enforcement actions by the Chinese authorities. It is worthwhile for the MNCs to review their China version of the compliance program within the framework of China's anti-corruption laws and regulations, also taking into account of the local culture, business practice, as well as enforcement focuses and mechanisms. While there is no one-size-fits-all program for each MNC with China operations, a tailor-made compliance program for its own China operations of each MNC would prove to be a more effective and efficient program.

The second lesson that MNCs can learn from the recent anti-corruption investigations by the Chinese authorities is the importance of having effective internal investigation or control mechanisms to detect and remediate potential wrongdoings before they turn into enforcement actions by the authorities.

Many people may be puzzled by one question about the GSK investigation - how could such alleged severe and widespread corrupt practices by the Chinese executives escape the internal scrutiny system of GSK which is supposed to be sophisticated and effective? One possible answer is that there might be certain deficiency in GSK's internal investigation mechanism which had caused the failure.

Like the general compliance program, again, there is no one-size-fits-all standard for an effective and adequate internal control and investigation mechanism to guard against potential wrongdoings at a company's gate. That being said, there are however a few pointers to effective internal investigations:

-Implementing a culture of zero-tolerance to corrupt practices. This message needs to be positively, explicitly and frequently transmitted to every employee of the company. Gaining support and commitment of local business leader is key to success.

-Empowering compliance personnel. The compliance team of a company should not only be involved in business decision-making process, but also be given a voice that will be heard and considered carefully and seriously by the top management. Moreover, the compliance team should also be given sufficient financial support in order for it to function effectively.

- Keeping a whistle-blower system in place. All employees should be encouraged and be given a channel to raise issues and report potential wrongdoings internally in strict confidence. Internal investigations should ensue immediately if the compliance team finds an employee's whistle-blowing is plausible.

- Keeping the process for internal investigations efficient, reliable, and properly documented. If circumstances warrant, involve outside counsels or investigation firms into the internal investigations. Upon completion of internal investigation, form an internal report with action plans for remedial measures and/or proactive measures to prevent future violation if necessary.

The third lesson from the recent anti-corruption investigations by the Chinese authorities is how to respond when a company becomes a target for anti-corruption investigation by Chinese enforcement authorities.

While there are several agencies in China having investigatory power over allegations of commercial bribery and corruption, the State Administration of Industry and Commerce and its local counterparts (AICs) are the key governmental agencies responsible for the administrative enforcement of China's anti-corruption laws and regulations. When a company becomes a target for anti-corruption investigation by the AICs, the first question to ask is what investigatory power the AICs have and what the scope of investigation is. Typically, the AICs have broad powers to conduct anti-corruption investigations, including making inquiries, inspection of objects, checking, copying and retaining documents, extracting electronic data from computers, interviewing employees and management personnel, investigating and freezing bank accounts etc. Given the wide investigatory powers conferred upon the AICs, a company is well advised to cooperate with AICs when it is targeted by a corruption investigation, as failure to cooperate with an investigation by AICs may give rise to criminal liability. However, a company subject to AIC anti-corruption investigation also has certain rights during investigation. Among other things, the company may request the relevant investigatory personnel to show their agency identification and warrants for investigation. The company should also be afforded the opportunity to be informed and make statements, to keep record of the evidence taken by the agency. In certain circumstances, it may be possible for the company to withhold disclosure of certain document or information on the grounds that it contains confidential information.

In practice, the AICs may adopt various approaches to investigations over corrupt practices in different circumstances. Therefore, a company may be caught by a surprise and eventually bring upon itself unwanted bad publicity if it is ill-prepared for anti-corruption investigations initiated by AICs. It is therefore always advisable for companies to put in place internal rules on how to respond to investigations by governmental agencies in China. And such internal rules can be made part of the overall compliance program, with all employees being informed and trained with such rules. Such rules will give a company some lead time to properly respond to AIC investigations.

In conclusion, the increased level of anti-corruption enforcement by the Chinese authorities calls for more robust and better tailored compliance programs for companies having operations in China. Companies are recommended to (i) reexamine or reassess their existing compliance programs to ensure that they are specifically designed to work within the Chinese legal framework and marketplace; (ii) to establish and/or strengthen an effective internal investigation system so that potential wrongdoings would be detected and remediated before they become target of enforcement actions by the authorities; and (iii) put in place well-designed internal procedures and protocols so that the company may act fast and respond efficiently when it becomes the target of anti-corruption investigations by the enforcement authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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