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China Highlights Compliance Initiatives. Should You?
Momentum around President Xi Jinping’s anti-corruption campaign continues to grow. Last month, President Xi announced that China will expand anti-corruption efforts by evaluating its state-owned enterprises (“SOEs”) to ensure they are operating in compliance with China’s laws. President Xi’s announcement raises concerns not only for SOEs, whose transactions may face heightened scrutiny and periodic investigations, but also foreign companies conducting business with SOEs whose transactions will, consequently, be more closely reviewed. 
Through President Xi’s initiatives, China appears to be embracing the importance of corporate compliance that has generated considerable buzz in corporate and legal communities. Following the lead of companies in other countries, many businesses in China have recently decided to prioritize compliance efforts and have centralized responsibilities for such efforts in a corporate compliance officer position or with a compliance group. An internet search for “China corporate compliance” results in links to numerous materials offering various perspectives on the topic – including several compliance-related China Law Blog posts.
Many of you must admit that your eyes glaze over when you see an article on compliance efforts in China and that you are tempted to skip it. You shouldn’t.
Generally, “compliance” refers to a company’s efforts to understand the laws and regulations that apply to its operations and to operate in a manner that adheres with these laws. To date, China’s compliance efforts have principally focused on anti-corruption and anti-bribery issues. However, companies operating in China must also realize that China has been extending its compliance initiatives to embrace more uniform enforcement of its laws and regulations. We are seeing the greatest increase coming from companies penalized by the Chinese government for not operating under the entity structure appropriate for their operations and/or for not paying all of their taxes owed.
Taking a wait-and-see attitude in deciding whether to undertake compliance initiatives no longer works for China; if you have not already done so, now is the time to evaluate your China business practices, identify and prioritize your legal and business risks, and determine the most effective means to address such risks. Compliance efforts will necessarily differ among companies operating in China depending on several factors: a company’s size; the nature of the company’s business; the financial, employee, and time resources that can be invested in the company’s compliance reviews and new processes; and the other countries in which the company operates or to which it sells or purchases goods and services.
Companies doing business in China are often constrained by financial and time resources, and such constraints impact senior management decisions to undertake compliance efforts. Compliance efforts in China should not be undertaken if company leaders are not fully committed to seeing the efforts through to completion. Evaluating and prioritizing legal and business risks in China require ongoing efforts to work with employees and a company’s agents to understand the scope of their responsibilities and what laws may apply to such individuals’ roles. Meetings with company representatives to understand compliance considerations often result in follow-up questions that may need to be confirmed by reviewing corporate documents or financial records.
Leaders of foreign companies doing business in or with China generally recognize that compliance initiatives will result in less legal risk for the company. However, they must also weigh the benefits of risk reduction against the financial and resource costs of such compliance initiatives. Evaluating such benefits becomes increasingly trickier as companies in China carefully consider how new Chinese programs, such as the new evaluation of China’s SOEs and various other government crackdowns and initiatives, will affect their business operations.
Compliance reviews can result in significant benefits for companies that undertake the efforts associated with such reviews. Periodic compliance reviews can expose serious corporate wrongdoing and abuses. Compliance audits can, and often do, help companies identify violations of important legal requirements and provide opportunities to proactively remedy such violations and avoid regulatory fines and penalties. Compliance efforts also encourage better understanding and coordination between a company’s business departments that result in production and service efficiencies. Although not reflected on a company’s financial statements, compliance efforts generally reduce operating costs.
In addition to programs to address corruption and bribery concerns, one of the most fundamental compliance issues facing many foreign companies in China is effective document management. Because many companies do not have a document management system in place when they start their China commercial operations, initial employees usually assume responsibility for filing or saving company documents important or relevant to their positions. Implementing an effective document management system does not require a significant amount of effort but is not typically a priority when starting a company. However, not having such a system raises serious concerns about whether important documents can be found if needed and can result in committing unnecessary time and financial resources if documents must be re-filed with Chinese authorities.
The principal tools to address compliance risks are policies, procedures and training that should be customized to best fit a each company’s particular business operations and resources. Such tools should be carefully documented and preserved to ensure they can be referenced at a later time if necessary to demonstrate a company’s compliance or compliance efforts concerning Chinese regulations.
Foreign companies in China face a dynamic business culture that requires multi-tasking to address competing priorities. Time and energy constraints may leave little opportunity to focus energies on corporate compliance initiatives. Companies must decide whether to invest resources into compliance programs, policies, and training. Given the pace at which China’s regulations and enforcement mechanisms are changing, as demonstrated by recent anti-bribery prosecutions and the recently announced enhanced evaluation of SOEs, we think company-specific compliance evaluations and efforts are good investments.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/02/china-highlights-compliance-initiatives-should-you.html
