The establishment of a powerful new anti-corruption enforcement body in China makes it imperative that foreign multinational companies carefully review existing interactions with public officials in the country and enhance their due diligence and third-party risk management efforts.
On March 20, China’s legislature—the National People’s Congress (NPC)—passed the Supervision Law, granting broad and powerful investigative and enforcement powers to the newly created National Supervisory Commission (NSC), the highest ever anti-corruption agency in China. The NSC is the merging of the Ministry of Supervision under the State Council (China’s Cabinet) and the anti-corruption investigation department of the Supreme People’s Procuratorate (the agency at the national level responsible for both prosecution and investigation in the People’s Republic of China). The new NSC will also carry out the responsibilities of the Communist Party of China’s Central Commission for Discipline Inspection (CCDI).
“The creation of a national supervisory system reflects historic calls to institutionalize the country’s anti-corruption drive,” says Amie Chang, an associate managing director at consulting firm Nardello & Co. based in Hong Kong. “The new setup essentially streamlines a two-track anti-corruption regime into a single-track system and bestows new powers upon the anti-corruption authorities.”
The creation of the NSC signals that political momentum for anti-corruption enforcement in China will not ease. “This is more than just a rebranding of the CCDI,” says Andy Gilholm, principal and director of the analysis practice for Greater China and North Asia at consultancy firm Control Risks. “It’s turning more proactive enforcement into a permanent feature of the environment, rather than a temporary crackdown, and creating a better-resourced and significantly more powerful agency.”
Specifically, THE NSC now has the power to:
Require companies and individuals to provide evidence upon request;
Use various means to investigate and collect evidence, including wiretaps;
Detain suspects for up to six months to assist with an NSC investigation;
Seize or freeze a suspect’s assets; and
Refer the case to the People’s Procuratorate for prosecution.
Under the Supervision Law, the target of the NSC will be criminal, ethical, and professional violations committed by “state functionaries who exercise public powers.” The scope of the NSC broadly applies to government officials; executives of state-owned enterprises; administrators and managers in education, scientific research, medicine, and other fields; and other state personnel.
“This is more than just a re-branding of the CCDI. It’s turning more proactive enforcement into a permanent feature of the environment, rather than a temporary crackdown, and creating a better-resourced and significantly more powerful agency.”
Andy Gilholm, Director, Analysis Practice, Greater China and North Asia, Control
Human rights organizations expressed serious concerns with the law. “The Supervision Law is a systemic threat to human rights in China,” Amnesty International East Asia Regional Director Nicholas Bequelin said in a statement. “It places tens of millions of people at the mercy of a secretive and virtually unaccountable system that is above the law. It bypasses judicial institutions by establishing a parallel system solely run by the Chinese Communist Party with no outside checks and balances.”
“The law eviscerates China’s legal system,” Bequelin continued. “It allows for arbitrary and prolonged incommunicado detention without any meaningful oversight and increases the risks of torture and forced ‘confessions.’
“Under the new system, supervision bodies can detain and interrogate Communist Party members or public-sector personnel—virtually anyone working directly or indirectly for the government. Judges, academics, and personnel of state-owned enterprises could all face up to six months detention without charge or legal process and without guaranteed access to lawyers or their families being told.”
In addition to the individual risks that the new law creates, foreign multinational companies also face heightened risk, particularly from a third-party risk perspective. “If partners, other stakeholders, or invested companies meet corruption and disciplinary problems, it can cause financial losses and business disruption or even expose foreign companies to scrutiny themselves,” Gilholm says. Historically, state-owned enterprises have posed the highest risk for corruption, but China’s enhanced enforcement regime signals that public healthcare and educational institutions also pose a high corruption risk.
“We recommend that companies doing business in China take steps to proactively review their existing operations and assess the risks under the new law,” says Mini vandePol, chair of the global compliance and investigations group at Baker & McKenzie Hong Kong. Specifically, compliance and risk teams should first check to see whether their companies have any interaction with government bodies, public entities, and state-owned entities, especially when a third party is conducting these interactions on behalf of the company.
“Against this backdrop, companies need to establish a robust system of screening, assessing, and monitoring their third-party providers,” Chang says. Establishment of the NSC reinforces the need for foreign companies doing business in China to conduct an enhanced level of due diligence on their business partners, agents, and third parties, especially on newly targeted groups of individuals like officials in public healthcare and educational institutions. This involves doing a deep dive into whether they pose any sort of financial, legal, or reputational risk to the company.
Every sector in China faces the risk of an anti-corruption enforcement action, but the highest risk sectors are “those that rely on large, sprawling sales and distribution networks, or that have been a priority for regulators in recent years,” Gilholm says. This includes pharmaceutical and medical device; autos and auto parts; energy; real estate and land transactions; and infrastructure and transport that depend heavily on government contracts.
“We might also see increasing issues in the technology sector and other industries in the ‘Made in China’ policy, as regulatory scrutiny of foreign firms in these areas might be one side effect of current U.S.-China tensions,” Gilholm adds.
Furthermore, the Supervision Law encourages enhanced cooperation with foreign law enforcement bodies, including the U.S. Department of Justice and the U.K. Serious Fraud Office, concerning corruption investigations. In the near term, Chang says, that means companies face heightened risks of being implicated in an anti-corruption investigation.
Long-established cultural norms in China can make enforcing anti-corruption policies and procedures challenging, however. The old expression, “it’s not what you know, it’s who you know,” rings especially true in Chinese culture. Familism has great influence on business decisions. Most Chinese companies possess tightly knit networks of informal interpersonal ties and relationships, including those with the Chinese government.
Because many relationships in Chinese culture are built on familism and mutual trust and respect, known in Chinese culture as “guanxi,” compliance officers in overseas companies may find it difficult to penetrate these tight-knit circles and enforce anti-corruption compliance policies and procedures put in place by the head office. “Each company must think hard about how to navigate this fine line, taking into consideration the realities versus perceptions of conducting effective business in this cultural environment within the regulatory framework,” Chang says.
Generally, an act is more prone to be interpreted as corrupt if it seeks to influence the performance of official duties, Chang adds. “Companies need to examine carefully who they are dealing with, understanding whether anyone in their supply chain could be construed as state, state-owned, or even state-affiliated actors,” she says.
Compliance officers should be knowledgeable about how business is carried out in Chinese culture, where risks lie—especially concerning the unwritten rules associated with the business—or consult with local counsel who understand these cultural differences, vandePol advises. “Subsequently,” she says, “they can adapt their global compliance system into one suitable for local needs on a risk basis.”