In 2021, the Chinese anti-corruption enforcement agencies issued regulations targeting bribe-givers. These regulations imposed penalties on bribe-givers that restrict their market access in China. Companies and individuals under investigation for corruption-related conduct can be placed under third-party monitorship. The Chinese anti-corruption enforcement agencies have indicated that they will focus on companies and individuals in key industries, such as life sciences, finance, education, and environmental protection.
A ‘blacklist’ system restricting bribe-givers’ market access in China
In late 2021, the Chinese enforcement agencies issued regulations implementing a blacklist system for companies and individuals that were found to have engaged in corruption-related conduct. Chinese state-owned enterprises have similarly implemented a blacklist system for suppliers that engaged in corruption-related conduct. Companies and individuals that are placed on the blacklist can be subject to a number of market access restrictions in China, as well as confiscation of illicit gains.
In September 2021, China’s Central Commission for Discipline Inspection (the CCDI), the Supreme People’s Court, and the Supreme People’s Procuratorate (the SPP) jointly issued the ‘Opinions on Further Promoting the Joint Investigation of Bribery and Acceptance of Bribes’ (the Opinion). The CCDI is the primary anti-corruption enforcement agency in China and is responsible for investigating corruption-related conduct by government officials. It refers criminal corruption-related conduct to the SPP, which in turn prosecutes cases before the Chinese courts.
The Opinion imposes penalties on bribe-givers, including adding bribe-givers to a blacklist that restricts their business operations in China, as well as confiscation of illicit gains obtained from bribes.
The Opinion indicates that the Chinese enforcement agencies will consider a number of factors when imposing penalties on bribe-givers, including whether the bribe-givers cooperated with investigations, their subjective intent (whether it was malicious), their remorsefulness, and forfeiture of proceeds from the bribe payments. The Opinion also indicates that the Chinese enforcement agencies will focus their investigations on bribe-givers who give “multiple bribes, large bribes, and bribes to multiple people”.
The CCDI has begun implementing the blacklist system in China. For example, in March 2022, 6 companies and 106 individuals in Hunan province were blacklisted as a result of their corruption-related conduct. They were mainly in the finance and construction industries. Their names and details of their corruption-related conduct were released to the public. In the Hunan province, the companies and individuals on the blacklist face up to 28 different types of penalties for up to one year, such as prohibition from bidding for government contracts, limited access to government subsidies, and increased inspections by Chinese government agencies. The companies and individuals will be automatically removed from the blacklist if they do not commit corruption-related conduct in the one-year time period. In the same month, two distributors of medical products were blacklisted for corruption-related conduct in Chongqing province. These distributors were banned from entering into sale and purchase agreements with medical institutions in Chongqing.
A number of major Chinese state-owned enterprises introduced their own blacklists in early 2022. For example, the China Southern Airlines Group blacklisted 26 suppliers for giving bribes to its employees during the procurement process. These suppliers were either permanently or temporarily banned from doing business with the airline depending on the severity of their corruption-related conduct and their level of cooperation with the investigations. The FAW Group, a state-owned car manufacturer, introduced a blacklist for suppliers that give bribes or gifts to its employees. Suppliers could be banned from doing business with the FAW Group ranging from one year to permanently depending on the severity of their corruption-related conduct.
Third-party monitorship of bribe-givers’ compliance programs
In 2021, the SPP issued regulations implementing a third-party monitorship of bribe-givers’ compliance programs for the first time in China. To qualify for this program, companies and individuals must first plead guilty to paying bribes to government officials. The consequence is that the SPP may impose lighter penalties on bribe-givers, if the monitor access that the bribe-givers’ compliance program can rectify the corruption-related compliance risks.
In June 2021, the SPP issued the ‘Guidance on Establishment of a Third-Party Monitoring and Evaluation Mechanism for the Compliance of Enterprises Involved in Cases (for Trial Implementation)’ (the Third-Party Mechanism). The SPP is responsible for investigating and prosecuting criminal corruption-related conduct by government officials and private citizens.
The Third-Party Mechanism applies to companies and individuals that are under investigation for corruption-related conduct. To qualify for third-party monitorship, the implicated party must first plead guilty to an economic or duty-based crime such as paying bribes to government officials. Implicated parties must also undertake to accept the penalties imposed by the SPP, and to establish a compliance program or improve their existing program. Companies and individuals under investigation, and their lawyers, can request the SPP for third-party monitorship to apply to them.
The Third-Party Mechanism requires companies and individuals to submit a compliance plan to the third-party monitor to rectify “internal compliance risks” that resulted in the corruption-related conduct. These internal compliance risks include “internal governance structure, rules and regulations, and personnel management”. The third-party monitor assesses the “feasibility, effectiveness, and comprehensiveness” of the compliance plan, and also provides suggestions for improvements to the compliance plan. The third-party monitor sets the timeframe for the implicated parties to implement their compliance plan and can require the implicated parties to periodically report on the implementation status.
At the conclusion of the monitorship, the third-party monitor evaluates the compliance plan implemented by the bribe-givers. The monitor then submits their ‘compliance inspection report’ to the SPP. The report serves “as an important reference” for the SPP when deciding how it will prosecute the case. A favorable report could result in a less severe penalty for the implicated company or individual.
The Third-Party Mechanism sets up a database of compliance professionals (such as lawyers and accountants) to monitor the companies and individuals under investigation for corruption-related conduct. The SPP is responsible for selecting, training, and supervising the compliance professionals.
The Third-Party Mechanism is currently being piloted in 10 major Chinese provinces, including Beijing, Guangdong, Shanghai, and Zhejiang. As of April 2022, the Third-Party Mechanism has been applied in 503 corruption-related cases across these provinces. The SPP indicated that the Third-Party Mechanism will be implemented throughout China by 2023.
What do these developments mean for you?
Companies operating in China should take note of these developments as the Chinese anti-corruption enforcement agencies and state-owned enterprises will likely increase the use of the blacklist system, which could significantly limit companies’ market access in China. Companies under investigation by the SPP should consult with their lawyers to assess the merits of applying for third-party monitorship. Companies should also take the opportunity to review the effectiveness of their compliance programs in China.
Asia-Pacific regulatory and investigations team
Our Chambers-recognized Asia-Pacific regulatory and investigations team is based in Singapore and the PRC and is led by Calvin Chan, the managing partner of our Singapore office. The Mandarin-fluent team has deep experience in handling large and complex investigations that implicate applicable anti-corruption laws and regulations (including the FCPA and the UK Bribery Act) and is highly familiar with anti-corruption developments in China and the wider Asia-Pacific region. If you have any questions, please don’t hesitate to reach out to Calvin.
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Client Alert 2022-135