The International Investigations Review: China
Government investigations in China can be generally divided into two major categories: criminal investigations and administrative investigations, with the investigative power being vested among multiple authorities. From a criminal perspective, authorities with criminal investigative power include:
- public security bureaus (PSBs), responsible for investigations, criminal detentions, the execution of arrests and preliminary inquiries in criminal cases;2
- the people's procuratorates (procuratorates), responsible for prosecutions, the approval of arrests and conducting investigations on criminal violations relating to a judicial functionary's infringement on citizens' rights or judicial justice;
- supervisory commissions, which supervise all public officials, investigate duty-related illegal activities and offences, and carry out anti-corruption work;
- national security authorities, which investigate and handle cases of crimes that compromise national security, performing the same functions and powers as PSBs;
- military security authorities, which may exercise the right to investigate criminal cases occurring in the military;
- the China Coast Guard, a law enforcement body that safeguards marine rights and exercises the right to investigate criminal cases occurring at sea; and
From an administrative perspective, authorities with investigative powers include:
- the State Administration for Market Regulation (SAMR), which oversees market regulation, food safety, healthcare compliance, advertisement violations, competition violations, commercial bribery, anti-monopoly, etc.; and its subsidiary bureaus, including the administrations for market regulations (AMRs) at the provincial, municipal and county levels;
- the National Development and Reform Commission and its subsidiary bureaus, responsible for overall planning and control of the national economy, and investigating price-related violations;
- the China Securities Regulatory Commission (CSRC) and its subsidiary bureaus, responsible for the administration of securities and investigating securities fraud;
- PSBs, which are also responsible for investigating administrative violations impacting public security; and
- the People's Bank of China (PBOC) and its subsidiaries, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, and regulating money laundering activities;
- other administrative authorities, such as the State Taxation Administration, the Customs, and the Environmental Protection Bureaus, etc.
For criminal investigations, the authorities are empowered to:
- interrogate the criminal suspect;
- interview with the witnesses;
- inspect or examine the sites, objects and persons relevant to a crime (including dawn raids);
- search the criminal suspect and his or her belongings and residence, and anyone who might be hiding a criminal or criminal evidence, as well as other relevant places;
- seal up or seize the property and documents; and
- access or freeze a criminal suspect's deposits, remittance, bonds, stocks, shares, funds or other property.
For administrative investigations, the authorities are generally empowered to:
- conduct on-site inspections (including dawn raids);
- interview the parties involved in the suspected violation;
- require the parties involved in the suspected violation to produce relevant supporting documents;
- review and reproduce documents and materials;
- seal up or seize property; and
- access bank accounts.
Government investigations may be triggered by routine inspections, whistle-blowing reports, accusations, complaints, self-disclosure, transfers of cases among authorities, or even media exposure related to certain misconducts. Once a government investigation has commenced, the responsible authorities will assert the discretion over the investigation methods depending on the nature of the alleged misconduct and the available resources for investigation.
Among the enumerated investigation methods, dawn raids are adopted quite frequently by government authorities. A dawn raid may be carried out if the authorities believe that prior notice or warning could possibly lead to the destruction or falsification of evidence. During a government dawn raid, the officers will show up without prior notice, usually in the morning at the start of the working day at the pre-determined sites. Several sites can be targeted simultaneously within or across provinces and a dawn raid can last for several days. Government authorities may have already collected evidence through peripheral investigations before initiating a dawn raid or sometimes a dawn raid could be triggered under exigent circumstances.
The time frames for government investigations are usually set in the respective laws and regulations, varying among the authorities. Companies under investigation are obliged to cooperate with the authorities and it is crucial to timely evaluate the potential legal implications and conduct necessary interactions with the authorities to contain the legal risk exposures and to achieve a favourable result.
Article 110 of the Criminal Procedure Law imposes a general obligation on individuals and entities to report any suspected crimes or criminal activity, but from a literal interpretation, the requirement is construed from the general public perspective to report criminal activities of others, instead of self-reporting, and no legal consequences are clearly stipulated for failing to self-report. Article 67 of the Criminal Law to some extent encourages self-reporting of criminal activity by stipulating mitigation or even exemption from the criminal penalties under voluntary confession circumstances. Similar principles could also be reflected in some other provisions prescribed in the Criminal Law. For example, Article 164 of the Criminal Law provides that 'any briber who confesses the bribery voluntarily prior to prosecution may be given a mitigated punishment or be exempted from punishment'. Article 28 of the Counter-Espionage Law provides that:
whoever joins a hostile or espionage organisation abroad under duress or inducement to engage in activities compromising the national security of China, but that honestly states the fact to a mission of China abroad in a timely manner or, after his or her return from abroad, honestly states the fact directly, or through his or her employer to a national security authority or a public security authority in a timely manner and shows repentance, may be exempted from legal liability.
From the administrative law perspective, self-reporting obligations are scattered in various laws and regulations, mostly related to violations that might have impact on social security and public welfare, such as food and drug safety, environmental protection and cybersecurity. For example, Article 47 of the Food Safety Law requires food manufacturers or business operators to cease food manufacturing or food business operations, and report to the food safety supervision and administration departments in the event of a food safety incident with potential risks. For other administrative violations, self-reporting is now appearing more often as a prerequisite in certain leniency programmes for companies to receive self-disclosure or cooperation credit. A typical situation is a horizontal monopoly agreement case, where business operators could choose to self-disclose the violation and provide important evidence in exchange for lenient treatment.
ii Internal investigations
Conducting internal investigation in general is not a statutory obligation in China except otherwise prescribed in the legislation applicable for specific industry, mostly in response to safety incidents. For instance, the Administrative Measures for Medical Device-Related Adverse Event Monitoring and Re-evaluation provides that, after identifying a medical device-related adverse event, marketing authorisation holders must immediately cease sales and operations, notify the user, in parallel with conducting an investigation and self-inspection on manufacturing quality control systems, and report the findings to the supervision authorities.
In addition, Chinese authorities (often industry supervision authorities) may initiate enforcement actions and require companies to conduct self-inspections and report non-compliant activities. For instance, in an ad hoc enforcement against commercial bribery in the healthcare industry, initiated by the AMRs in Tianjin in 2017 and 2018, companies and medical institutions were required to conduct self-inspections on commercial bribery and take corresponding remedial actions in this regard.
In practice, internal investigations are incorporated into the internal control mechanism by companies for compliance purposes. The cause of the actions varies in each company but white-collar crime and fraud (e.g., commercial bribery, bid rigging and embezzlement) are usually among the focuses for the majority of companies in China.
Commonly, internal investigations are undertaken by in-house counsels in the company or external local counsels depending on the nature and severity of the issues under investigation. The methodology and process for these internal investigations usually include document review, financial review and interviews with employees and other personnel. The key issues during internal investigations involve the legal issue identification, design and implementation of the investigation process analysis based on the findings and determining the solutions. Notably, due process and evidence preservation are often overlooked by companies, as it is very likely that the facts and evidence gathered under internal investigation may end up in labour arbitration tribunals or court for litigation purposes or be submitted to the Chinese authorities. Therefore, how to preserve the integrity of the internal investigation and ensure the admissibility of the evidence should be carefully evaluated during the preparation and implementation of the internal investigation.
Companies in China also commonly conduct internal investigations for foreign law considerations, such as the Foreign Corrupt Practices Act (FCPA), but now this practice is substantially impacted by the newly enacted International Criminal Judicial Assistance Law (ICJAL) in October 2018, which expressly stipulates that institutions, organisations and individuals in China must not provide evidence materials and assistance provided in this law to foreign countries without the consent of the competent authority of China. The ICJAL applies to criminal proceedings with a wide coverage of activities potentially deemed as assisting said crimes. Analysis of different types of FCPA investigations in China indicates that, as long as the investigation could potentially lead to a criminal resolution with the US authorities, the investigation remains within the zone of danger; further, the likelihood of the applicability of the ICJAL on the current FCPA investigations is substantially high with legal implications to be ascertained. Therefore, it is suggested that companies consult with competent local counsel in advance to access the legitimacy of internal investigations and to properly interact with the relevant Chinese authorities.
Companies in China are now being exposed to the risks arising from the high frequency of whistle-blower complaints. The right to report crimes and other legal violations by citizens is well established in principle in the laws and regulations, such as the Constitution, the Criminal Procedure Law and the Anti-Unfair Competition Law. Although there is currently no consolidated legal regime to regulate whistle-blowing reports, various authorities have respectively promulgated legislation to regulate whistle-blowing reports against certain misconducts in their domain. For instance, the former China Food and Drug Administration (now the SAMR) promulgated the Measures for Rewarding Whistle-Blowing Reports against Food and Drugs Violations in 2013, which was later revised in 2017 to increase the award amount and clarify the relevant procedures and scope.
In practice, to encourage reporting misconduct, multiple authorities have set up reporting hotlines and online gateways to receive whistle-blowing reports from the public. For instance, the State Supervisory Commission is now operating an ad hoc online channel and hotline (12388)3 for receiving whistle-blowing reports against government officials' duty-related crimes or misconducts either by real name or anonymity (real-name reporting is highly encouraged). The national security authorities also encourage whistle-blowing reports made to the designated online platform and hotline (12339).4 Similarly, the AMRs at all levels have provided online and offline channels to encourage the public to report leads regarding company misconduct, and the handling procedures and specific timelines are published and well implemented.
With respect to whistle-blowers' protection, some specific rules, such as the Rules of the Supreme People's Procuratorate on Protecting the Citizens' Tip-off Rights, were formulated to provide a comprehensive mechanism from both substantial and procedural levels, and the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Finance jointly issued the Several Provisions on Protecting and Rewarding Whistle-Blowers of Duty Crimes in 2016.
Strict confidentiality is the foundational requirement imposed on the authorities that receive any reporting throughout the handling process. Further, the authorities need to take measures (i.e., restraining the physical access of those being reported to the reporter) to ensure the safety of the reporters and their close relatives whenever necessary. Retaliation towards the whistle-blowers is forbidden, and legal liabilities such as administrative punishment, criminal detention or imprisonment can be imposed.
i Corporate liability
Administrative and criminal corporate liabilities are stipulated in the Criminal Law and relevant administrative laws and regulations. For criminal liabilities, among the 469 crimes prescribed by the Criminal Law, there are approximately 150 unit crimes for which a company could be qualified as the perpetrator, and for these unit crimes, a company will be held criminally liable if:
- a collective decision has been made by the management of the company, or an individual decision by the relevant responsible personnel on behalf of the company, such as the legal representative; and
- the crime is committed in the name of the company and the illegal proceeds go to the company.
The Criminal Law adopts a dual punishment system for unit crime, which means both the company and the responsible persons are subject to the criminal liabilities with only a few exceptions otherwise prescribed in the Criminal Law.
As for the administrative corporate liabilities, they are derived from the respective administrative laws and regulations, such as the Unfair Competition Law, the Anti-Monopoly Law and the Advertisement Law, covering violations such as commercial bribery, monopoly, company illegal operation and illegal advertising.
Notably, for the same misconduct committed by a company, the criminal and administrative regimes are mutually exclusive. The Regulations on the Transfer of Suspected Criminal Cases by Administrative Law Enforcement Agencies promulgated by the State Council in 2001 set the regulatory framework for the conversion between administrative and criminal cases. A series of other regulations have been promulgated in the following years to further address the procedure of conversion. According to these regulations, while investigating an administrative case, if the agency suspects that the case should be prosecuted as a criminal case based on elements such as the monetary amount involved, the specific fact patterns or the consequences, then the case must be transferred to a PSB and the PSB will examine the cases transferred. If criminal fact patterns are identified and the PSB decides to investigate the case for criminal liability, it shall notify the administrative agency that transferred the case in writing. If there is no criminal fact pattern or the facts are insignificant, and the agency decides not to prosecute the case, it will state the reasons, notify the administrative agency and return the case. On the other hand, if a PSB discovers that a case it is investigating should not be criminally prosecuted but there may be administrative liability, it shall transfer the case to the relevant administrative law enforcement agency.
Under the Criminal Law, the only sanction applicable to a company is the monetary penalty, but an individual's liabilities for a unit crime include public surveillance, criminal detention, imprisonment, the monetary penalty, the deprivation of political rights, deportation (in the case of foreign nationals) and even the death penalty.5
Penalties for administrative corporate liabilities generally include disciplinary warnings, monetary fines, the confiscation of illegal gains or unlawful property, the suspension of production or business, and the temporary suspension or rescission of a permit or licence.6 The range of penalties varies. Taking commercial bribery as an example, a fine could range from 100,000 yuan to 3 million yuan, as well as the confiscation of illegal gains and the revocation of the business licence.7 The amount of illegal gains is calculated based on revenue with the corresponding cost being deducted, which could easily add up to 10 million yuan or more, and therefore, in practice, create a larger concern to companies. Other restrictions, such as being banned from participating in government procurement, might also be imposed depending on the nature and severity of the violations. For example, the National Health Commission has established a recording system, which functions as a blacklist, specifically to track commercial bribery activities committed by pharmaceutical companies during drug procurement. Companies committing commercial bribery will be disqualified or severely disadvantaged in public procurement.
Both criminal and administrative penalties are, in principle, made public through the internet with some exceptions, such as where these cases involve state secrets or trade secrets, the personal information of minors or infringe on an individual's privacy, subject to the discretion of the relevant authorities that issue the penalties. Additionally, companies will be included on the publicly available blacklist administrated by the AMRs under certain circumstances (i.e., if a company has been subject to administrative punishment on three or more occasions within three years for unfair competition or distribution of false advertisements) pursuant to the Interim Measures for the Administration of the List of Dishonest Enterprises Committing Serious Illegal Activities, and will therefore be subject to stringent supervision by the AMRs and restrictions such as being disqualified for certain commercial transactions or relevant honorary titles for five years.
iii Compliance programmes
Although there is no regulatory requirement for compliance programmes, many companies in China have already incorporated compliance efforts into their internal control mechanisms to ensure compliance with a variety of laws designed for commercial bribery prevention and detection, anti-monopoly, employment and personal information protection. Specific compliance roles and responsibilities within a company are becoming increasingly prominent.
A practical reason for implementing compliance programmes is mitigating and reducing liability for legal violations. For example, in criminal cases where employees are committing crimes in the name of the company, a well implemented compliance programme is likely to negate the company's involvement and knowledge of the criminal conduct to some extent, and be used to corroborate evidence in the company's favour. Likewise, for administrative violations such as commercial bribery, the AMRs will consider a compliance programme as an important factor in evaluating the company's legal liabilities.
On 2 November 2018, the State-owned Assets Supervision and Administration Commission of the State Council, which is the governing authority for all the state-owned enterprises in China, released compliance guidance for all state-owned enterprises. Although this compliance guidance is mainly applicable to state-owned enterprises, other companies could benefit from using it as a major reference for establishing a solid compliance system. A wider range of compliance issues are identified as the key focuses, including anti-corruption and bribery, and anti-unfair competition. Specific requirements include policymaking, establishing risk identification and response systems, compliance review, strengthening accountability, regular compliance trainings, compliance evaluation and continuous improvements.
iv Prosecution of individuals
Where there has been a unit crime, persons such as legal representatives, general managers or directors could be charged for the crime by the procuratorate depending on their involvement and substantial knowledge of the charged crime. Law enforcement authorities often pursue individuals for the misconducts committed by a company. For example, in January 2018, the Ministry of Public Security and former China Food and Drug Administration jointly issued the Provisions on Intensifying Law Enforcement Concerning Food and Drug Safety and Fully Implementing the Requirement of Imposing Punishment against All Individuals Held Liable for Food and Drug Violations to emphasise the enforcement on individual liabilities for related violations or crimes.
From another perspective, if an employee is being prosecuted for misconduct related to his or her duty, such as offering bribes to a state functionary in exchange for business opportunities without substantial evidence of the company's involvement, the situation will often get complicated owing to the stakeholders' conflicts of interest. It is likely that the employee will raise the defence that the misconduct was under the instruction, approval or with the knowledge of the company to be acquitted from the individual crime of offering bribes, because the individual criminal liabilities for the unit crime of offering bribes are much lighter compared with the individual crime of offering bribes. If the employee is convicted for the unit crime as the responsible person for the offence, he or she shall be sentenced to a fixed-term imprisonment of up to five years or criminal detention, and concurrently sentenced to a fine. In comparison, if the employee is convicted for the individual crime of offering bribes, the severest punishment could be life imprisonment with confiscation of property. Under such circumstances, the company has to provide evidence to prove its ignorance of the employee's conduct and such bribery is not related to efforts of seeking a transaction opportunity or competitive advantage for the company. Further, it is important for the company to demonstrate compliance efforts in preventing employees' misconduct, such as the internal control mechanisms in place, trainings regularly provided to the employees and disciplinary actions imposed on violations, to negate the wilful intent and mitigate the legal risk exposures for the company.
i Extraterritorial jurisdiction
The Criminal Law mainly adopts the principle of territorial jurisdiction over criminal offences, supplemented by the extraterritorial jurisdiction over the circumstances where the perpetrator is a Chinese citizen or a foreign national commits a crime against China or a Chinese citizen. Article 10 of the Criminal Law states that any Chinese citizen who commits a crime outside the territory of China may still be investigated for his or her criminal liabilities under Chinese law, even if he or she has already been tried in a foreign country. However, if he or she has already received criminal punishment in the foreign country, he or she may be exempted from punishment or given a mitigated punishment. Article 8 further states that the Criminal Law may be applicable to any foreigner who commits a crime outside the territory of China against China or against any Chinese citizens, if for that crime this Law prescribes a minimum punishment of fixed-term imprisonment of not less than three years; however, this does not apply to a crime that is not punishable according to the laws of the place where it is committed.
ii International cooperation
China has been actively promoting international and regional judicial cooperation in combating crimes relating to cybersecurity, corruption, money laundering, terrorism and drugs; joined international conventions; and signed bilateral judicial assistance and extradition treaties. In 2018 alone, China signed extradition treaties and mutual legal assistance treaties on criminal matters with 16 countries, and the enactment of the ICJAL in 2018 further established the fundamental framework of international cooperation on criminal justice, clarifying the required process for China to raise requests to, or accept requests from, foreign judicial authorities regarding criminal judicial assistance.
Anti-corruption is a priority for China in its international cooperation efforts, as evidenced by claims of a zero-tolerance approach to corruption, and its work on strengthening international cooperation with a focus on deterrence should help achieve this goal. On 30 November 2018, the State Supervisory Commission successfully extradited a suspect from Bulgaria accused of taking bribes, which was also the first time that China extradited a suspect from the European Union. On 13 November 2018, the State Supervisory Commission and the Australian Federal Police signed a cooperation memorandum regarding anti-corruption enforcement. All these efforts demonstrate China's commitments in international cooperation to combat corruption.
As was reiterated by China's President during the Fourth Plenary Session of the Central Commission for Discipline Inspection in January 2020, China needs to be clearly aware of the severity and complexity of combating bribery and corruption, which will be a long-term and arduous process. Because more and more cases are significantly implicated with foreign elements in recently years, China will carry the enforcement of 'Skynet 2020' and 2020 will be continuously labelled as the year for combating corruption under the international context.
iii Local law considerations
Under the circumstances where a government investigation involves multiple jurisdictions, conflicting law issues might arise. This is particularly true when a foreign government initiates investigation on conducts occurring in China and attempts to conduct an investigation and collect evidence without the proper approval from the Chinese authorities. The ICJAL clearly prohibits any unauthorised criminal investigation by any means, either directly conducted by the foreign authorities, or collaterally through instructing companies in China to collect evidence through internal investigation.
Restriction on cross-border data transfer is another pitfall of which companies need to be aware. The Cyber Security Law, which was promulgated in 2016 and took effect in 2017, establishes the basic framework of data localisation obligations in China. So far, China has promulgated a series of legislation prohibiting the cross-border transfer of certain categories of data in specific industries, such as healthcare and financial industries, and the general legislation and enforcement trend indicates a more restrictive approach by the Chinese authorities. An additional layer of risk in state secret protection is imposed on highly sensitive industries such as telecommunication and infrastructure, for which cross-border data transfer might constitute the crime of supplying state secrets or intelligence for an organ, organisation or individual outside the territory of China, as any information concerning political sensitivity or national security could be retrospectively labelled as a state secret by the Chinese authorities. An individual's criminal liabilities for violation are clearly stipulated in the Criminal Law.8
Year in review
The year 2019 is the first year after the restructuring of the AMRs at all levels, from multiple bureaucratic and administrative agencies into a fully functioning organisation. Though challenging, AMRs at all levels were still able to accomplish their duties. Published statistics shows that, in 2019, the AMRs have substantially strengthened the anti-monopoly enforcement and launched 103 government investigations, among which 28 cases are related to the monopoly agreements, 15 cases are related to abuse of market dominant position, 24 cases are administrative monopoly, and 36 cases are related to failure of declaring concentration of undertakings. In total, 44 monopoly cases were successfully closed in 2019 and the fines add up to 320 million yuan. The key industries for anti-monopoly enforcement include construction, automobile, public utility, healthcare and other industries related to livelihood economy. In April 2020, the SAMR issued the penalty decisions on abuse of market dominant position committed by three active pharmaceutical ingredients distribution companies, and the fines add up to 325 million yuan.
With respect to securities fraud, in 2019, the CSRC issued 136 administrative punishment decisions, which include 55 insider trading cases, 29 cases of illegal information disclosure, 14 cases of market manipulation, 11 cases of illegal activities of intermediaries, and nine cases of practitioners' violation of laws and regulations. Other violations involve gatekeepers' failures to exercise due diligence in asset valuation or audit process. Notably, in one on-site investigation against a publicly listed company in Shenzhen, the employees of the company committed violent conducts towards the investigation officers and received administrative penalties including warnings and administrative detention. The company was later punished by the CSRC for refusing to cooperate with the government investigation. Its actual controller and some other senior executives are now prohibited from access to securities market for 5–10 years.
With respect to anti-money laundering enforcement in 2019, the PBOC has published 468 administrative punishment decisions against 319 entities and the fines add up to 172 million yuan in total. The violations mostly involve failure to fulfil the obligations of identifying customer identity, keeping customer identity information and transaction records, or reporting suspicious transactions. The entities that were punished include banks, credit cooperative unions, securities institutions, insurance companies, payment institutions, and asset management companies, etc. Notably, in the first quarter of 2020, the PBOC has published a series of punishment decisions, and the total fines have already exceeded 160 million yuan, indicating a clear trend that more intensive enforcement actions are expected for the rest of 2020.
Conclusions and outlook
Although the covid-19 outbreak has been mostly controlled in China and the majority of public functions have been gradually restored, we would still anticipate correlated and substantial impacts on the government-initiated investigations, gradually emerging throughout the year 2020. Nevertheless, companies in China are still advised to pay close attention to updates and changes in regulatory enforcement trends, establish and operate a well-founded compliance mechanism, and continuously strengthen the compliance status, especially for those high-risk areas including anti-corruption, antimonopoly, anti-money laundering, securities fraud, and data protection, etc. As the regulatory compliance environment in China is generally expected to be more and more restrictive, it is always best practice to expend efforts both proactively in preventing non-compliance issues from happening and reactively in preparing and properly handling potential government investigations.
1 Alan Zhou and Jacky Li are partners at Global Law Office.
2 PSBs are empowered with dual investigative authorities at both criminal and administrative levels.
5 Articles 31, 33, and 34 of the Criminal Law.
6 Article 8 of the Administrative Punishment Law.
7 Article 19 of the Unfair Competition Law.
8 Article 111 of the Criminal Law: 'whoever steals, spies into, buys or unlawfully supplies State secrets or intelligence for an organ, organisation or individual outside the territory of China shall be sentenced to fixed-term imprisonment of not less than five years but not more than 10 years; if the circumstances are especially serious, he shall be sentenced to fixed-term imprisonment of not less than 10 years or life imprisonment; if the circumstances are minor, he shall be sentenced to fixed-term imprisonment of not more than five years, criminal detention, public surveillance or deprivation of political rights.'