China’s new anti-corruption regime is in place, and building a robust compliance programme in response to the nation’s increasingly low tolerance towards corruption is essential. Robert Clark and Zeng Jialin explain how this can be achieved

In enacting its new National Supervision Law, the central government has signalled the seriousness with which it intends to pursue allegations of corruption among state-affiliated domestic concerns. Foreign companies doing business in China will also likely be affected, while remaining under sustained pressure from their home jurisdictions to avoid involvement in corrupt activities.

In light of the recently heightened sensitivity to the risk of censure or prosecution for corruption, it is necessary to explore the nature of compliance, with particular focus on anti-bribery compliance, and the important functions it can serve for small and medium-sized enterprises (SMEs). Businesses may encounter challenges in their efforts to maintain compliance, and compliance programmes must aim to fulfil some essential goals. But if your compliance system fails to achieve its aim, or you are required to respond to an act of misfeasance committed on behalf of your company, just how should you respond?

What is compliance?

In the business context, the word “compliance” covers a wide range of substantive issues. At its core, however, the meaning is simple: Corporate management based on rules. Those rules come from a number of different sources, including national laws and regulatory requirements, policies established by international organizations, standards and practices within the industry, and a business’s own codes of conduct and ethics. They are put in place in order to further various important social aims, such as preventing bribery or money laundering, protecting the environment, fostering competitive markets, or securing intellectual property rights.

Businesses and their leaders have the responsibility of ensuring that these rules are followed. The day-to-day job of carrying out this responsibility is often delegated to a chief compliance officer or a compliance committee, tasked with overseeing all aspects of the company’s compliance efforts. Depending on the size and complexity of the organization, this may include work performed by employees within a specialized compliance department. For smaller companies, a less formally structured approach may be appropriate. In any event, the obligation is the same: to understand the applicable rules, communicate them effectively to company personnel and agents, and monitor corporate activity to minimize the risk of non-compliance.

Importance of compliance

Large companies typically already have well-established compliance functions and processes. But maintaining a systematic compliance programme is also essential for SMEs. The scope of such programmes will vary from one industry to another, depending on the particular laws and regulations applicable to each. But bribery and other forms of corruption are potential dangers for any business, and therefore need to be addressed within any compliance programme.

The depth of bribery risk faced by a company depends on many factors, including the industry and the country or countries in which it operates. Areas such as energy, oil and gas, healthcare, and technology have received notable attention from China’s anti-corruption authorities, particularly in connection with the local operations of foreign multinationals, although domestic corruption has been and remains a priority as well, both for the Central Commission for Discipline Inspection and for the new National Supervisory Commission.

Interactions between foreign companies and domestic concerns, particularly state-owned enterprises (SOEs) can also implicate a range of laws prohibiting transnational bribery, including the US Foreign Corrupt Practices Act, the UK’s Bribery Act, and other laws enacted pursuant to conventions of the UN and the Organization for Economic Co-operation and Development (OECD). Enforcement of the laws is aided by an increasing trend towards international co-operation and information sharing.

Running afoul of these laws can have disastrous consequences, both for the companies involved and for the individuals responsible for the misconduct. Not only is there the short-term prospect of large fines and other penalties for the company along with potential individual criminal prosecutions, but involvement in bribery schemes can negatively affect a company’s reputation, both locally and in the global market. For businesses that depend on government contracts or participation in development projects, there is also the possibility of debarment by domestic agencies and multilateral banks, eliminating an important source of revenue for an extended period of time.

But compliance should not be thought of solely in negative terms. Anti-corruption legislation aims to promote fair competition, market integrity and transactional reliability. When properly and adequately enforced, it can help ensure that products and services are provided based on merit and quality rather than payoffs or favouritism, thereby building an atmosphere of confidence among business partners and customers. Making the effort to comply with anti-bribery rules is not only a legal obligation, but also a long-term investment in a core business interest: Maintaining a transparent commercial environment in which no participant can obtain an unfair advantage.

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Robert Clark is the manager of legal research at TRACE International, overseeing a team of lawyers responsible for the production of analytical content

Zeng Jialin (Jackie) is an associate at TRACE International focusing on anti-corruption legal research and due diligence on third parties headquartered in Greater China