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2019 was an active year for white collar enforcement in China on all fronts. The consolidation of enforcement agencies into one “super regulator”, plus the addition of new agencies is likely to increase the scope and pace of enforcement action. The life sciences sector is a primary target, and regulatory enforcement against financial services has increased markedly. New laws provide for more significant fines for market manipulation and commercial bribery offences. Moreover, the International Criminal Justice Assistance Law, along with the Cybersecurity Law and State Secrets Law, pose challenges to how multinational companies conduct internal investigations, and potentially share information with foreign regulators in their home countries. 

Investigations trends/developments

Consolidation of enforcement authorities: For the past several years, China’s enforcement of criminal and administrative laws has been rigorous, and 2019 is no different. The reorganization of key regulators in China is likely to increase the pace and scope of enforcement actions. The creation of a “super-regulator”, the Administration for Market Regulation (SAMR), which now assumes the responsibilities of all antitrust enforcement, product quality supervision and food and drug administration in addition to the functions of the industrial and commercial administration,  is intended to bring greater cooperation among multiple enforcement agencies that previously operated independently, and greater consistency for those subject to enforcement actions. 

New regulator bares its teeth in life sciences and healthcare sector: The Supervision Law of the People’s Republic of China (Supervision Law), effective March 2018, creates a new regulator, the National Supervisory Committee, exercising power over a broadly defined group of “public officials.” The Supervisory Committee can investigate public officials’ conduct such as bribery, abuse of power, dereliction of duty, improper transfer of benefits, nepotism, and waste of state assets. It has wasted little time in initiating a broad range of investigations. In 2019, the Supervisory Committee launched a wave of investigations, focused on the life sciences industry, reviewing the conduct of hospitals, public medical associations, and healthcare providers. Although multinational companies are not the target of these investigations, they are often pulled into investigations related to their dealings with these public bodies. The findings of the Supervisory Committee can be referred to other regulators to take additional action.

Increased enforcement against financial institutions – market offences and AML: The continuing development and opening of China’s financial market has driven a move towards regulation that is more in line with international standards. Financial regulators in China have stepped up their enforcement action.  Two areas are of particular interest to international financial institutions. 

  • Securities market misconduct: More international financial institutions are participating in China’s capital markets either through their onshore presence or cross-border utilising regimes such as QFII/RQFII and Stock Connect. The securities regulator, the China Securities Regulatory Commission (CSRC), has continued its enforcement focus on market manipulation, one of its three key enforcement areas (the other two being misrepresentation of information and insider dealing). The number of market manipulation enforcement cases has increased significantly:
    • Between 2010 to 2014, there were on average four market manipulation enforcement cases per year.
    • Between 2015 and the third quarter of 2019, the average rose to 21.

Fines are also getting tougher. Before 1 March 2020, an institution could be fined up to five times its illegal income for market manipulation, and an individual could be fined up to RMB0.6m. The new Securities Law of the People’s Republic of China provides that an institution can be fined up to ten times its illegal income, and an individual can be fined up to RMB5 million. 

  • AML: The AML regime has been extended from its focus on traditional banking financial institutions in 2007 (when China joined the Financial Action Task Force), to insurance companies and securities firms after 2007, and with a stronger focus on payment institutions in 2012. The People’s Bank of China (PBOC), the main regulator for AML enforcement, has significantly stepped up enforcement efforts. In 2019, the majority of administrative penalty cases enforced by PBOC were AML related. There were 468 AML enforcement cases in 2019, an increase from 396 in 2018. The total fines increased from RMB13.1m to RMB17.3m. Of the AML enforcement cases against institutions, more than 80% also imposed liability on individuals. Six of the top ten highest penalties were issued against third party payment institutions. The highest penalty in 2019 was RMB6.3m. On 14 February 2020, PBOC issued three penalty decisions with penalties in each of the decisions exceeding RMB10m.

The “conversion rate” from administrative liability to criminal liability in these areas, however, remains fairly low.  From 2010 to the third quarter of 2019, CSRC issued 130 administrative penalty decisions on market manipulation, whereas there are only 13 criminal convictions for market manipulation in the same period.  For AML, PBOC issued 468 administrative penalty decisions in 2019, while there are only 53 criminal convictions for AML in the same year.

Internal investigations – significant developments 

As noted above, the ICJA Law could potentially have a substantial impact on how internal investigations are conducted in China.  

In addition, there are laws that influence how data can be handled, particularly with respect to the transfer of data outside the People’s Republic of China. For years, the State Secrets Law of the People’s Republic of China has posed concerns about how information that may fall within the definition of “state secrets” is transmitted outside of China.  

The 2016 Cyber Security Law of the People’s Republic of China (the Cyber Security Law) has also generated debate in light of the vagueness of the legislation coupled with the significant penalties associated with breach. New guidelines were issued in 2018 and 2019, although they still leave large grey areas. The potential impact of the Cyber Security Law on cross-border investigations is significant, particularly on the handling and cross-border transmission of “personal information”.  

The Cyber Security Law, coupled with the State Secrets Law, has the potential to act essentially as a blocking statute to prevent the transmission of data (including the results of investigations) outside the People’s Republic of China, with expanded penalties if provided to a foreign government authority.

Sectors targeted by law reforms or enforcement action

The life science industry has been a primary focus of enforcement activity in China, and 2019 is no exception.  In 2019, 48% of the published administrative penalties relating to bribery concerned the life sciences industry, followed by the technology, entertainment, and logistics sectors.

Cross border co-ordinated enforcement activity

A step towards collaboration: China has not traditionally co-operated well with other global enforcement agencies, although there are developments that suggest it is taking small steps towards greater international engagement in this area.

Given that many international financial institutions use their Hong Kong presence to gain access to China’s securities market, financial regulators such as the CSRC have increasingly co-operated with their counterparts in the Hong Kong Securities and Futures Commission (SFC), including asking the latter to pass on requests for the production of documents and conduct interviews for CSRC investigations.

But significant obstacles remain: In October 2018, a new law introduced rules and procedures on international criminal justice assistance between China and other countries (the Law of the People’s Republic of China on International Criminal Justice Assistance (ICJA Law)).  It covers service of documents, investigations and evidence collection, arrangements for witnesses to testify or assist in investigations, sealing, seizure, and freezing of property, confiscation and return of illegal gains and other relevant property, and transfer of sentenced persons.  The law provides that no foreign authority, organization, or individual may carry out activities in China, in relation to foreign criminal proceedings, nor provide a foreign country with evidentiary materials or the assistance prescribed in the ICJA Law without the approval of the competent Chinese authorities.

The ICJA Law has the potential to substantially change the process of conducting investigations in China.  While it is not entirely clear how the law will be interpreted and enforced, on its face, the law may well pose a challenge for a company wishing to conduct an internal investigation and self-report the results to a foreign authority.

Financial crime issue predictions for 2020

2020 is likely to present a host of challenges to multinational companies doing business in China.  We anticipate significant legislative developments and enforcement activities in relation to cyber security and data privacy offences, as well as continued enforcement of the country’s anti-bribery laws and financial market regulation laws. As the world becomes increasingly hostile to globalisation, and China comes under increasing scrutiny around the world, the potential of countervailing scrutiny over the operations of multinational companies in China is also likely to increase.  Clients would be well-advised to keep a close eye on legal developments, and prepare themselves for what could be a rocky ride.

This article is part of the Cross-border White Collar Crime and Investigations Review.  Read our overviews and insights in other jurisdictions here.

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