What trends can be observed as China cracks down on corruption?

This year marks the fifth year of President Xi’s anti-corruption campaign, but China is moving only slowly up the ranks of the least corrupt jurisdictions globally. Transparency International had it at 79 on its corruption perception index in 2016, compared to 83 the year before. At the same time, proposals to amend the anti-unfair competition law, social credit system and a national supervisory commission that is expected be in place by March 2018 shows a clear message from the Chinese government: Big Brother is watching and investigations into suspected corruption will only intensify, so businesses operating in China should ready themselves for legal consequences if their anti-corruption policies are weak.

Carol Sun

“At the fifth session of the 12^th National People’s Congress in March, Chief Justice Zhou Qiang indicated that the court system concluded 45,000 graft cases in 2016, involving 63,000 people,” says Carol Sun, partner at Dentons. “The number of corruption cases heard by Chinese courts jumped by about one-third last year and 2,862 people were held accountable.”

Anti-corruption measures target not only domestic enterprises, but also foreign companies. In one of the biggest corruption cases involving multinational corporations, GlaxoSmithKline was found to have paid doctors and hospitals $487 million in bribes to use its products. It was slapped with a $492 million fine and the head of its China operations received a three year suspended prison sentence.

Stronger enforcement

China still lacks a comprehensive single anti-corruption regime such as America’s Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act (UKBA), but progress is being made. “The ongoing advancement of PRC anti-corruption statutes and stronger enforcement, combined with extra-territorial effects of FCPA and UKBA combine in a comprehensive patchwork of anti-corruption laws for foreign multinationals operating in the PRC,” says Alexander Shaik, partner at ADM Capital, who supervises the legal and regulatory aspects of the group’s investments in Asia.

Alexander Shaik

Shaik adds that China has had widespread success in its anti-graft campaign aimed at “tigers and flies”, which refers to high-level and local level government officials. PRC regulators have allocated more resources towards enforcement by anti-fraud and anti-corruption inspectors, and has embarked on a pilot programme, firstly in Beijing and the provincial, municipal and county levels of government in Shandong and Zhejiang, for a new supervisory commission. A national roll-out of the program is planned for March 2018. 

Regulations coming in

June 2014-National social credit system plan announced
November 2015-Bribery was made a criminal offence
February 2016-Draft changes to Anti-Unfair Competition Law
April 2016-Imprisonment regime for corruption introduced

In November 2015, bribery was made a criminal offence and a judicial interpretation in April 2016 introduced a new imprisonment regime for corruption ranging from a year to life imprisonment. Draft changes to the anti-unfair competition law were proposed in February 2016, with a focus on commercial bribery, including vicarious liability for employers on employees’ actions and liability for bribes paid through third parties. In June 2014, the State Council also announced a plan to build a national social credit system to assess individuals, enterprises and government authorities on areas ranging from tax payment to judicial credibility, and a related reward and punishment system by 2020.

Cross-border collaboration by regulatory authorities is also becoming very important and should be further enhanced, according to Tarek Ghalayini, managing director at AlixPartners. “China is a party to the UN Convention against Corruption, which has been signed by 140 countries and requires signatories to cooperate on extradition and enforcement,” he adds.

Anti-corruption trends

Tarek Ghalayini

As awareness about anti-corruption and a roll-out of policies to combat it has increased, the nature and patterns of corrupt activity have evolved as well. “Corruption and financial integrity issues are blending together. Where the field used to be dominated by high-volume and low-dollar value activity, such as meals, gift, and entertainment, which was fairly transparent in a company’s books and records, it is now characterised by low-volume and high-dollar activity involving classic embezzlement schemes to funnel money out of a company,” says Ghalayini. “This makes having a thorough, well-balanced, and effective anti-corruption compliance programme more important than ever before. With the increased awareness of anti-corruption efforts and enforcement around corruption and financial integrity issues, perpetrators tend to flee the jurisdiction more quickly and earlier than before.” 

Though the government’s attitude towards corruption has been rigorous and the framework against it is comprehensive, Sun believes enforcement falls short from time to time. “The reason is the inconsistent and selective application of the laws,” says Sun. “For instance, in the commercial bribery area, many enterprises value anti-bribery compliance as a key issue of operation, but they don't know how to process the measures. It is quite hard to distinguish a normal business activity from an unfair competition activity by giving bribery. The laws and regulations sometimes are not stipulated clearly and may lack practical standards. The administration also has their internal standards as guidelines to define the misconduct, which are not open to the public and raises a transparency issue.”

Tips for businesses

AlixPartners’s global anticorruption survey, conducted in November and December 2016, which polled corporate counsel, legal and compliance officers at international companies with global annual revenues of $150 million or more, based in Asia, found that the most effective measures to reduce corruption risk comprise internal audits, anti-corruption training given to employees and whistleblower programmes.

Corporates looking to clamp down on corruption need to start with the basics and focus first on instituting policies and procedures which employees can understand, and then make sure they are effectively implemented, notes Ghalayini. “The ongoing implementation continues to be where companies tend to fall down,” he adds. “While general awareness of anti-corruption efforts continues to improve, the key to effective compliance programmes lies in follow-on testing, but this part often gets left out, or is not done in a focused, constructive manner. Two primary goals should be to check the effectiveness of the programme, and to remind employees that the company takes the compliance programme seriously enough to conduct periodic testing. The fact that employees know that their activity could be scrutinised helps them self-regulate risky behaviour better and keep awareness of it front of mind.”

“The best approach to anti-corruption compliance is to build a firm-wide culture of zero tolerance through regular involvement of legal and compliance teams with front office staff from senior to junior levels,” says Shaik. “Changing internal structures to ensure teamwork approaches to business relationships, such as a “four eyes” policy whereby transactions are approved by at least two people, and compliance involvement in board or senior management meetings also assists in developing stronger anti-corruption structures. Businesses should have clear reporting channels and action plans developed for dealing with inspections that are prepared beforehand and known by all staff.”

From stronger enforcement to more comprehensive regulations, China is demonstrating that it is serious about targeting anti-corruption. Companies should have robust anti-corruption policies and programmes in place to ensure that they are prepared for more frequent investigations.