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.
“Corporate counsel of multinational companies in China should therefore keep a closer watch on investigations relevant to their industry, or concerning their competitors in other relevant jurisdictions, particularly the EU and US, since domestic enforcement agencies may pick up on and launch a related investigation in China,” says Zhan.
He says there is also an increasing awareness and willingness on the part of Chinese companies to engage in private antitrust litigation in the Chinese courts, either in conjunction or as a result of an administrative investigation, or of their own accord.
“We will likely continue to see a continued increase in investigations and high-profile cases,” says Zhan. “Given the potential costs to becoming embroiled in such investigations/litigations, corporate counsel need to be proactive in mitigating potential antitrust risks by keeping abreast of relevant litigations and investigations, both overseas and domestically, and ensuring that proper staff training and antitrust controls are in place, and are being adhered to.”
The rapid growth in computing power and digital data, coupled with better algorithms, are further reinforcing the rise of AI (artificial intelligence) and Big Data. Consequently, countries all over the world are tackling two major challenges – cybersecurity and privacy. “Cybersecurity is an indispensable part of China’s overall national security,” says Shen.
China’s Cybersecurity Law, which took effect on 1 June 2017, is expected to have a significant impact on companies’ practices and operations. “The new Cybersecurity Law builds upon a series of laws and draft laws on internet controls and state access to private data, and is an important step in bringing cybersecurity norms and practices in line with global standards,” says Zhan.
According to the new law adopted by China’s top legislature in November 2016, internet service providers cannot collect user information that is irrelevant to the services, and they should handle such information in line with laws and agreements. And users now have rights to request service providers to delete their information if such information is abused.
The law also states that staffers of cybersecurity management have the obligation to protect information obtained, and are banned from leaking or selling the information, including privacy and commercial secrets. Violation of such provisions and infringement on personal information will lead to penalties.
“In a cyber era, cybersecurity-related regulations affect every single entity and individual,” says Cindy Yang, the Greater China general counsel at VMware in Hong Kong. “It comes to a time for every company to have its cyber strategy and cyber risk control system, in which legal/compliance will be a key player.”
According to a statement from the Cyberspace Administration of China (CAC), the law is designed to safeguard China’s cyberspace sovereignty, national security, public interest, as well as the rights and interests of citizens, legal persons and other organizations. “It does not restrict foreign companies or their technology and products from entering the Chinese market, nor does it limit the orderly, free flow of data,” the statement said.
Zhan adds: “Proactive steps to monitor and review exposure to the law in line with further clarifications and supporting measures that are released should remain a priority in 2018, particularly as the CAC has shown willingness to enforce the law, for instance by temporarily shutting down various Chinese internet platforms contravening its privacy provisions.”
However, Yang says that although the Cybersecurity Law came into force on 1 June, the interpretation and enforcement of it still depends on more detailed implementing rules, guidances, measurements or, even more importantly, various standards issued or yet to be issued. For companies with cross-border data flows, a further grace period until 31 December 2018 has been given to organize compliance with implementation of the cross-border data localization provisions of the Law.
The EU’s General Data Protection Regulation (GDPR) will also very likely be a key focus of 2018. “The data protection landscape will change with the EU GDPR come 25 May 2018,” says Wan Kwong Weng, group general counsel of Mapletree Investments in Singapore. “This means compliance training needs a refresher to keep up the pace of change.”
William Wu, a senior compliance manager at Danone in Shanghai, says the regulation is “the most important change in data privacy regulation in 20 years”. The areas that the legislation now covers and regulates are significantly broader and touch on a wide range of issues. “It has more requirements, but at the same time the change is a lot more advanced than before,” he says.
Yang says that privacy and cybersecurity legislation are the two areas that Chinese companies need to watch closely. “[The GDPR] expands the rights of EU individuals and the obligations placed on organizations,” she says. “Companies around the world have been making a lot of studies and preparation work, but how EU data protection authorities will interpret the new GDPR and use their new penalty regime is to be watched closely.”
US AND CHINA
In terms of relations between the US and China, the world has been eyeing the progress of the two ever since US president Donald Trump’s inauguration in 2017. Fan, from Gide, says that “Chinese companies should watch closely any active and strict enforcement of the US sanctions regime/FCPA [Foreign Corrupt Practices Act] as the Trump administration enters an assertive phase of its relationship with China”.
Trump’s tax reform bill, with the associated capital inflow to the US, may also push China’s pace of further opening to foreign investment, says Shen. Therefore, it is speculated that China’s foreign investment law draft may be fast tracked.
Adds Wan, from Mapletree Investments: “The recent US tax regime reforms will need to be mulled over on consequential impact. Closer to home, China will continue to be watched with eagerness in terms of underlying credit reform, and India with the new GST reform, which will be a logistics game changer,”
There is no doubt that regulatory changes are placing an increased focus on compliance, reporting and governance obligations of Chinese companies. Wu, from Danone, says that antitrust and anti-bribery compliance training are a top priority for all enterprises in China, as the government has increasingly focused on these areas in recent years.
“During antitrust training, we will provide our employees and staffers with case studies, in particular of those that took place in between 2016 and 2017,” he says. “We will analyze them and identify the issues to make our relative departments aware and understand what to avoid during their practice.”
Philipp Senff, a partner at CMS China in Shanghai, adds that compliance management is not limited to anti-bribery and the typical criminal and competition law-related matters any more. Ongoing signals from Chinese regulators show that additional matters will play an increasingly important role, particularly environmental and product compliance. “Corporate counsel need to add these topics more intensively to their agendas, and work out robust strategies for prevention and crisis management in conjunction with liability risks arising in these areas,” he says.
Corporate counsel also need to be aware of whether regulators aim at developing a personal risk prevention obligation for company management in certain industry sectors.
“A key duty of such personal risk prevention obligation would be the establishment of a compliance management system in the company, and non-compliance with this obligation would lead to personal liability risks,” says Senff. “A key question will be then to define the precise parameter for an appropriate and effective compliance management system in China in order to avoid personal liability risks.”