In the Year of the Dog, compliance will be an increasingly big challenge that companies have to face, writes Joanna Law
The year of 2017 was a robust and evolutional period for China. The 19th National Congress of the Communist Party of China, held in October, drew worldwide attention on the country’s future roadmap. Apart from showcasing a development plan for the period from 2020-2035, the meeting highlighted the central government’s commitment to developing a modernized economy, and turning Chinese enterprises into world-class, globally competitive firms. “China will not close its door to the world; it will only become more and more open … [and] will implement the system of pre-establishment national treatment plus a negative list across the board … China will significantly ease market access and protect the legitimate rights and interests of foreign investors,” President Xi Jinping said in a report to the congress in Beijing.
In terms of legal developments, China emphasized that it will strengthen oversight to ensure compliance with the constitution, advance constitutional review, and safeguard the authority of the constitution.
By the end of 2017, the Compliance Management System Guideline was approved and announced by China’s General Administration of Quality Supervision, Inspection and Quarantine and Standardization Administration. The guideline is to become effective on 1 August this year.
“This shows that the Chinese government is developing corporate compliance regulatory rules and aims to improve Chinese companies’ competitiveness in the global market,” says Ian Ivory, partner and head of corporate for Asia at Berwin Leighton Paisner in Hong Kong. “Maintaining a proper compliance management system is becoming increasingly important to Chinese companies’ success in doing business, both in mainland China and in the international market.”
Hot on the regulatory radar this year are an anti-unfair competition law, environmental law, cybersecurity law and antitrust law. Chinese companies and legal counsel are anticipating how the changes and implementation will affect and impact their practices.
During the 19th congress, President Xi emphasized that China will “clean up rules and practices that hinder a unified market and fair competition, support development of private firms and stimulate vitality of all types of market entities”.
ANTI-UNFAIR COMPETITION RULES
“The Amended Anti-unfair Competition Law [AUCL], which took effect from 1 January 2018, should be worth the most attention of corporate counsel at Chinese companies,” says George Wang, a partner at JunHe in Shanghai.
The Amended AUCL comprehensively updates the old law, which was adopted at the 3rd session of the Standing Committee of the 8th National People’s Congress 24 years ago. It had never been amended since it took effect on 1 December 1993. Victor Shen, Shanghai-based chief legal officer at Henkel Greater China and Korea, says China’s State Administration for Industry and Commerce (SAIC) is eager to implement the amended law as soon as possible.
Adopted on 4 November 2017, the amended legislation states that e-commerce operators should neither deceive nor mislead consumers by faking sales volume or user comments: “Operators must not fabricate transactions to help others in commercial promotions.”
The amendment redefines unfair competition as that which “violates this law, disturbs market order or infringes on the rights and interests of other operators or consumers during production and operations”. It also states that industrial associations must uphold market order through self-discipline and by guiding members to compete in accordance with law.
In addition, “the amended AUCL clearly stipulates that an employee’s bribery behaviour should be regarded as its employer’s behaviour, unless there is evidence to prove that the employee’s behaviour is not relevant to the employer for seeking business opportunity or gaining competitive advantages,” says Kate Peng, a partner at King & Wood Mallesons in Beijing. “Such clause further emphasizes the importance of establishing an effective compliance management to supervise and regulate employees’ behaviour, be zero tolerant and never connive at any bribery behaviour.”
Companies and investors should also note that the penalty under the amended AUCL is much heavier, with the range of fines increasing from “RMB10,000 to 200,000” to “RMB100,000 to 3 million”.
Fan Jiannian, a partner at Gide Loyrette Nouel in Shanghai, warns that clients should also be aware that cancelling the business licence of business operators who seriously violate the amended law is a new inclusion.
You Yong, general manager of the legal affairs division at China Minmetals Corporation in Beijing, adds: “With China’s anti-corruption requirements becoming more stringent, regulation on those Chinese enterprises that are looking to do outbound investments will get increasingly rigorous as a consequence.
“Combined with the relevant jurisdictions’ existing rules, such as anti-money laundering and anti-commercial bribery regulations, one can imagine the impact on Chinese corporations will just continue to enlarge.”
Although the US and the EU are relatively advanced in terms of regulatory developments and enforcement of these aspects, “as the amounts and volumes of Chinese outbound investments are increasing, whether or not there will be new rules or more stringent legalization targeting Chinese investors, this we will need to keep a close eye on”, says You.
Many legal practitioners see that the revision will better address new problems emerging in the market, and protect the rights and interests of both business operators and consumers.
At the end of 2017, China’s State Council detailed rules for enforcement of the Environment Protection Tax Law, which took effect on 1 January 2018, and aims to protect the environment and cut pollution.
“Environmental law enforcement is a crucial cornerstone for China’s sustainable growth,” says Shen from Henkel.
According to the State Council decree signed by Premier Li Keqiang, the regulations specified the tax targets, tax-setting basis, conditions for tax reduction and exemptions, and collection management for the law. The rules also offered a co-operation mechanism between tax and environmental protection authorities.
On a quarterly basis, tax and environmental protection authorities will keep track of the emissions of companies. Companies and public institutions that discharge listed pollutants directly into the environment will pay taxes for producing noise, air and water pollution as well as solid waste. Those whose emissions are down may apply for tax redemptions.
Local governments will keep the tax revenue and will have the right to set tax rates according to the legislation. Regions that are under heavy environmental pressure, such as Beijing, Hebei and Tianjin, have adopted higher rates than others.
In 2017, the National Development and Reform Commission (NDRC) issued the Guidelines on Industry Association’s Price Behaviour. “Anti-monopoly law will continue gaining momentum as a tool for implementing both competition policy and industry policy,” says Shen.
Accordingly, companies’ participation in anti-competitive behaviour, for example cartels organized by such industry associations, also bear the risks of violating the law. Peng, from King & Wood Mallesons, says law enforcement authorities recently investigated several cartels organized by their industry association and fined relevant participants. “Companies need to be aware that certain behaviours of industry associations may violate the legislation,” she says.
Zhan Hao, managing partner at AnJie Law Firm in Beijing, notes that the NDRC has been communicating with foreign antitrust enforcement agencies, including the US Department of Justice, on a regular basis. Although such communications are still mainly high-level, the NDRC may consider enlarging the scope of its supranational co-operation further this year.