China: Statute Of Limitations In Administrative Investigations By Chinese Government Agencies Following Foreign Investigations

The current trend in Chinese administrative investigations and enforcement against multinational companies (MNCs) is for Chinese government agencies to launch investigations in response to settlements with government agencies outside China, or judgments in non-Chinese courts, when the conduct in question is related to the companies' activities in China.

FOLLOW-ON INVESTIGATIONS

Chinese government agencies have found that follow-on investigations avoid some of the challenges that agencies in China face when investigating MNCs doing business in China.

Follow-on investigations provide more security for Chinese agencies because they come with a roadmap:

  • There are often public descriptions of the foreign government's findings.
  • The company probably conducted an internal audit or review related to the foreign government investigation, to which the Chinese authorities can request access.
  • The company might have reviewed, organised and submitted evidence to the foreign government and, again, the Chinese authorities can request copies from the company.
  • The company might have paid a financial penalty, which will serve as an indicator of the severity of the conduct.

When a Chinese Government agency initiates a follow-on investigation, a variety of unique issues arise based on the specific case facts and evidence. The factor that would most complicate a case is the involvement of a State Owned Enterprise (SOE) as a partner or customer in the activities at issue, which would require delicate handling by both outside counsel and Chinese government agencies. The statute of limitations issue provides the best possible opportunity for a company to seek to limit potential liability from a China law perspective before a follow-on investigation is completed by the Chinese Government.

STATUTE OF LIMITATIONS

One major drawback, from the Chinese Government's perspective, of the follow-on investigation method is that it is common for foreign investigations to take years to complete before a judgment is finally rendered or a settlement is entered. The information in the judgment or settlement agreement could be related to conduct occurring outside the statute of limitations for civil administrative penalties in China. If Chinese authorities are investigating potential violations of criminal law rather than administrative law, different statute of limitations principles apply, requiring careful analysis not covered below.

With regard to administrative investigations, Article 29 of the Administrative Penalty Law of China provides a two-year statute of limitations for most administrative offenses, including violations of anti-bribery and competition laws. Article 29 states

Where an illegal act is not discovered within two years of its commission, an administrative penalty shall no longer be imposed, except as otherwise prescribed by law. The period of time prescribed [...] shall be counted from the date the illegal act is committed; if the act is of a continual or continuous nature, it shall be counted from the date the act is terminated.

In comparison, US laws establishing limitations periods for an enforcement action under the Foreign Corrupt Practices Act (FCPA) provide for a five year statute of limitations for both criminal and civil proceedings (see 18 US Code Section 3282; 28 US Code Section 2462). FCPA investigations can take years, and the limitations period can be extended, or "tolled," with the parties' consent. For example, it is possible that the Securities and Exchange Commission or Department of Justice could settle an investigation in 2017 that commenced in 2012, involving conduct that occurred in 2009, which appears on its face to be outside the statute of limitations for an administrative penalty in China.

In a typical case, where the foreign investigation took many years, the challenge for the Chinese government agencies to successfully find liability in follow-on investigations is to find conduct within the last two years (current activities) that can be used to consider the historical conduct as "continual or continuous" in nature. Certain tax and environmental laws have different statutes of limitations, and in financial misconduct cases authorities might try to identify tax violations that avoid the two-year statute of limitations. When such charges are not viable, Chinese government agencies often must find a link between current and historical activities to assert that the historical activities continued into the last two years.

CONTINUAL OR CONTINUOUS CONDUCT

Interestingly, it is not necessary for the current activities to be unlawful for them to be considered as a continuation of historical, unlawful activities. From a legal perspective, the link should be stronger than simply maintaining a business relationship, but it does not have to be substantially stronger.

The agencies have discretion over this determination and there are no statutory or regulatory factors for the government to consider in determining whether or not activities are continuous. If the link between current and historical activities is reasonable, the Chinese government agency could therefore legitimately assert that the conduct has been continuous.

Logically, there are many factors that would be relevant to whether or not activities can reasonably be considered as a continuation of unlawful historical conduct, including the effect of unlawful conduct on the creation or maintenance of the business relationship; the characteristics of the other party, i.e., a government official, SOE, or if it is in a sensitive industry; and whether or not

  • The unlawful conduct related to a specific contact person or people with decision making power.
  • That contact remains the primary contact and still has decisionmaking power.
  • The unlawful conduct assisted in creating a specific business deal or a long term business relationship.
  • The terms of that business relationship remain the same.

If a Chinese government agency determines that the current activities make the historical conduct continuous, the company may challenge this decision in Chinese courts. The courts are, however, likely to be highly deferential to agencies' decisions in such situations. To effectively limit liability from a China law perspective, a company should therefore proactively assess the situation before a follow-on investigation could even be launched.

PRACTICAL STEPS

Companies currently facing investigations in foreign jurisdictions for activities related to China should consider conducting an internal review from the perspective of Chinese law.

The company needs to make conscious efforts to visibly disconnect its historical and current activities in order to preserve the statute of limitations protections. It is common for companies to conduct an internal review and remediation during an international investigation, but they often fail to review and remediate from a China law perspective, leaving legal vulnerability in the jurisdiction where the conduct occurred. Companies should make such remediation a priority. When a company learns that it is the subject of a follow-on investigation and has a valid argument that the statute of limitations bars penalties, it should explore with counsel whether or not it could raise the statute of limitations with investigation agencies immediately, before investigations progress.

With proper remedial measures in both compliance and business activities, it is possible for a company to limit, or possibly eliminate, Chinese administrative liability in follow-on investigations.

Statute Of Limitations In Administrative Investigations By Chinese Government Agencies Following Foreign Investigations

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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