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Despite a tumultuous 2020, China remains on track to complete an ambitious legislative plan, with clear acceleration of major white collar crime legislation and laws that will impact cross-border investigations. 2020 saw a new Securities Law issued, the long-awaited Provisions on the Unreliable Entity List adopted, a new Export Control Law enacted, a significant amendment to the criminal law passed, and the release of a new proposed Personal Information Protection Law that potentially impacts cross-border investigations.

We also observed increased enforcement activity against financial institutions as China’s economy recovered from the pandemic, exemplified by rigorous enforcement against intermediaries for due diligence failures in the capital markets, and against banks and third-party payment institutions for anti-money laundering (AML) violations. Following the rapid legislative progress this year, we expect a deluge of enforcement in the years to come.


Investigations trends/developments

Strengthened enforcement against financial institutions during the economic recovery from the pandemic

(i) Increasing focus on misrepresentation by issuers and due diligence failures by intermediaries

In 2020, PRC regulators cracked down dramatically on securities-related misconduct, in particular misrepresentation by issuers and due diligence failure by intermediaries. According to Securities Daily, by 2 November, the China Securities Regulatory Commission (the CSRC) and its local branches issued 219 administrative penalties in total, including: (i) 82 alleged misrepresentation cases by issuers, an increase from 29 in 2019; and (ii) 106 cases against intermediaries, most relating to due diligence failures by underwriters, a significant increase from 11 in 2019.

(ii) Reinforced AML enforcement, mainly targeting banks and payment institutions

China has been refining its AML regime over the years to catch up with international standards. The AML regime extended its reach from traditional banking institutions to insurance companies and securities firms in 2007 (when China joined the Financial Action Task Force), and to payment institutions in 2012.

This year, the People’s Bank of China, the main regulator responsible for AML enforcement, greatly stepped up its enforcement efforts. By July 2020, the number of penalties under the PRC Anti-Money Laundering Law already outnumbered the entirety of penalties in 2019. By 30 September 2020, 456 AML penalties had been published, with total fines of approximately RMB493 million. Banks and payment institutions remain the main targets of enforcement actions. The most commonly seen bases for punishment were failure to perform customer identification obligations and failure to submit large or suspicious transaction reports.

Significant drop in anti-bribery and anti-corruption (ABAC) cases

Compared to 2019, 2020 saw a drop in the number of published adjudications for criminal bribery cases under the Offence of Offering Bribes by an Entity and the Offence of Offering Bribes to a Non-state Functionary under the PRC Criminal Law (the Criminal Law). According to the Wolters Kluwer legal database, as at 11 November, 2020, there were: (i) 126 first-instance cases under Article 393, a significant decrease from 391 in 2019; and (ii) 84 first-instance cases under Article 164, a slightly smaller decrease from 140 in 2019.

Similarly, the number of published administrative penalty decisions under Article 7 of the PRC Anti-Unfair Competition Law (which provides the basis for administrative liability for “commercial bribery”) dropped from 42 in 2019 to 21 in the first 11 months of 2020. Nearly half of the 21 cases involved the life sciences industry.

Is the Chinese government loosening its grip on the anti-corruption campaign? We don’t think so. A number of cases still involved senior officials, including provincial party secretaries, a deputy provincial governor, and a vice-chief of a higher people’s court, each removed from their positions and sentenced for corruption. Much of the decline in ABAC cases has been attributed to the diversion of regulators’ attentions during the pandemic, and there has been little indication that the anti-corruption campaign has diminished as a policy initiative. Indeed, at the very tail-end of 2019, China armed its newly established watchdog, the National Supervisory Committee (the NSC), with greater powers designed to reduce its collaboration with the judicial system. On 30 December 2019, the Supreme People’s Procuratorate (the prosecutor) revised its Criminal Procedure Rules to make clear the process for transfer of cases from the NSC for criminal prosecution.

Significant law reforms impacting corporate criminal liability

Significant revisions to the Criminal Law

Adding or revising more than 40 provisions, the 11th Amendment of the Criminal Law is one of the most significant changes since the Criminal Law’s enactment in 1997. These amendments cover such areas as financial crime, corruption, workplace safety, food and drug safety, juvenile liability, infringement of corporate properties, and public health. There are key changes to money laundering, market manipulation, fraud and private sector embezzlement, and increased sentences and fines for securities fraud, bribery, and AML.

New export control regime

The PRC Export Control Law (the ECL), initially proposed in 2017, took effect on 1 December 2020. It replaces a set of non-systematic export control measures under the Foreign Trade Law and its administrative regulations, and sets up a new framework for China’s export control regime.

The ECL applies to export controls over dual-use items, military items, nuclear items, and other items relating to national security and interests. These items include products, technologies, and services.

Under the ECL, regulators are empowered to create export control lists, decide export control measures, issue export permits, conduct investigations, and punish violations. Detailed regulations for the implementation of the export control regime will be made at a later date.

Violation of the ECL can lead to serious consequences, including confiscation of illegal income, a fine as high as 20 times the amount of the illegal revenue, suspension of operations, and revocation of relevant export qualifications. There is also personal liability for individual violators, including the potential for a lifetime ban on export activities.

The ECL expressly provides for extraterritorial reach, stating that it applies to “any entity or individual” outside China that violates the ECL and endangers the national security and interests of the PRC, or hinders the fulfilment of such international obligations as non-proliferation.

The ECL also allows the state to employ reciprocal measures against a country or region that is abusing its own export control measures and in so doing is harming China’s national security and interests. This introduces the possibility that regulators may take actions beyond the general framework of the ECL.

The Unreliable Entity List Regime and transactions with foreign entities

The Provisions on the Unreliable Entity List (the UEL Provisions) were released on 19 September 2020. They target foreign enterprises, organisations, and individuals that: (1) endanger the sovereignty, security, and national interests of China; or (2) suspend normal business transactions with, or take discriminatory measures against, Chinese enterprises and organisations, or in violation of normal market transaction principles. The UEL Provisions are widely perceived as China’s response to the U.S. increasing its use of its sanction regime against Chinese citizens and enterprises, and is a tool to protect China’s national, economical, technological, informational, and supply-chain security.

The Provisions are implemented by a cross-departmental working mechanism under the State Council, which also determines the restrictions and punishments against listed entities (including restrictions or prohibitions on China-related export/import activities, investment in China, entry into the territory of China, residential permits/qualification to stay in China, and imposition of fines).

A foreign entity that is listed will need to consider the procedure for ‘delisting’, which states potential rectification steps.

The UEL Provisions add to China’s leverage over multinational companies, including those that choose to abide by U.S. sanction laws where China’s national interests are at stake. There is a risk that multinational companies may find themselves in a dilemma where compliance with the laws of both countries becomes challenging.

The ECL and the UEL Provisions are two pillars of China’s sanctions and embargo regime. The ECL concerns export activities of controlled items, while the UEL Provisions capture broader transactions with foreign entities that pose a more direct threat to China’s national interests. While the ECL is actually a law, the UEL Provisions are departmental regulations. While both rules were adopted as defensive tools, the Chinese government may increasingly use them for proactive engagement when projecting influence internationally.

New Securities Law – class actions and long-arm jurisdiction

The new PRC Securities Law, which took effect on 1 March 1 2020, provides more severe punishment for market manipulation and insider trading, enhances issuers’ responsibilities for information disclosure, and strengthens enforcement against due diligence failures and other misconduct by intermediaries. For instance, under the 2014 Securities Law, an institutional market manipulator could receive a fine of up to five times its illegal income, and an individual manipulator could receive a fine of up to RMB 600,000. Under the new Securities Law, fines have been increased to ten times the illegal income, and up to RMB 5 million, respectively. Two specific developments are worth noting:

  • New ‘opt-out’ class action system for securities-related cases: an investor protection organisation entrusted by more than 50 investors can represent all relevant securities holders in a civil litigation. All securities holders confirmed by the securities depository and clearing institution will become plaintiffs automatically, except for those who affirmatively express the intention to be excluded.
  • The long-arm jurisdiction clause: the new Securities Law provides: “Any offering or trading of securities outside of the territory of the People’s Republic of China, when disturbing the market order within the People’s Republic of China and harming the legitimate rights and interests of domestic investors, shall be dealt with and subject to liability according to the applicable provisions of this Law.” (Long-Arm Clause). CSRC’s reaction to the Luckin case suggests that the Long-Arm Clause is more likely to be applied to overseas activities that directly impact the Chinese domestic securities market, such as malicious manipulation or shorting of the Chinese market.

Internal investigations – key developments

Transmission of personal data abroad in the context of investigations

A draft Personal Information Protection Law was released in October 2020 (the draft PI Protection Law) and explicitly requires all “personal information processors” to submit applications with the relevant authorities where personal information is expected to be provided abroad for international judicial assistance or administrative enforcement assistance.

The blocking provision of the Law of the People’s Republic of China on International Criminal Justice Assistance (the ICJA Law), previously enacted in October 2018, provides that no authorities, organisations, or individuals in foreign countries may carry out criminal proceeding activities within China, and no authorities, organisations, or individuals within China may provide evidentiary materials or criminal judicial assistance to any foreign countries, without the consent of the competent authorities of China. After two years, there is no indication that Chinese authorities have enforced this provision. The PI Protection Law suggests, however, that the Chinese government is considering developing other, more direct measures to block the extraterritorial reach of foreign countries.

Sectors targeted by law reforms or enforcement action

As noted, in the ABAC area, the life science industry remains a primary focus of enforcement.

In capital markets, the due diligence failures of intermediaries have become a new focus of regulatory investigation and enforcement, especially for small and medium-size brokers and underwriters.

In the AML regime, the regulator has expanded enforcement against banks and third-party payment institutions.

Cross border coordinated enforcement activity

Enforcement collaboration between China and Western jurisdictions

The news in 2020 has largely focused on a deterioration of relationships between China and a number of Western jurisdictions, the United States in particular. Yet there are at least some indications that good-faith enforcement collaboration still takes place. In April 2020, when Luckin Coffee Inc., a China-based NASDAQ-listed company, announced findings of an estimated RMB2.2 billion (USD310 million) in false sales, the CSRC immediately expressed its disapproval of “all forms of fraud by listed companies”. The CSRC stated publicly that it had “proactively initiated communications with the SEC with regard to possible investigation into Luckin Coffee”, and expressed “readiness to cooperate fully with the SEC under the IOSCO Multilateral Memorandum of Understanding”.

Yi Huiman, the Chairman of CSRC, also stated that CSRC had provided the SEC and the Public Company Accounting Oversight Board (PCAOB) with audit working papers of 14 Chinese companies listed on the U.S. securities markets. According to Yi, since 2019, CSRC had made several proposals to PCAOB regarding a “joint inspection” approach for audit supervision, although U.S. authorities had not returned positive feedback.

However, as China continues to wrangle with Western jurisdictions over tariffs, sanctions, high‑profile cases such as the detention of Huawei’s Chief Financial Officer, and high-profile legislation such as the U.S. Holding Foreign Companies Accountable Act, the potential for further cross-border enforcement collaboration appears bleak, at least in the near future.

Enforcement collaboration between mainland China and Hong Kong

Given that many international financial institutions rely on their Hong Kong presence to access China’s securities markets, financial regulators such as the CSRC have expanded cooperation with their counterparts in the Hong Kong Securities and Futures Commission, and have asked the latter to pass along requests for document production and to conduct interviews for CSRC investigations. We expect that such cooperation will become more frequent as China exerts its sovereignty over the Special Administrative Region.

Financial crime issue predictions for 2021

In anticipation of the final enactment of the Personal Information Protection Law, coupled with the existing obstacles in the ICJA Law limiting cross-border information transfer for criminal judicial assistance purposes, we can expect cross-border data transfer for the purposes of investigations to be subject to stricter scrutiny, particularly when the data requests are responsive to requests from foreign regulators. In-house legal and investigation teams may face a dilemma where it becomes increasingly difficult to comply with both requests from foreign regulators and PRC blocking statutes at the same time.

The expedited roll-out of China’s sanctions regime also has the potential to substantially impact operations of multinational companies that do business in China, particularly before implementing regulations are made. It remains to be seen whether China’s flurry of legislation in this area is the beginning of a comprehensive, and well-thought-out legal regime, or a short-term response to the current political climate.

This article is part of the Allen & Overy Cross-border White collar Crime and Investigations Review. Please visit the review homepage for our overviews and insights in other jurisdictions. 


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