By Wu Wei, Zhu Yuanyuan King & Wood Mallesons’ Dispute Resolution group
China is a founding member of the Belt and Road (“B&R”). It already has more than 80 SOEs setting up branches in countries along the B&R and 47 SOE’s participating in 1676 construction projects. The B&R presents both opportunities and challenges to Chinese enterprises. Chinese firms will need to meet high standards to avoid breaching compliance requirements.
Countries along the B&R are High-risk Zones for Compliance Issues
Most countries along the B&R are developing countries in economic transition. They are high-risk zones for compliance issues.
According to the 2016 Corruption Perceptions Index published by Transparency International, many countries along the B&R have low transparency in their government operations. South-East Asian countries, such as the Philippines, Vietnam, and Malaysia, have a transparency score below 40. Eastern European and Central Asian countries have an average score of 34. Middle Eastern and North African countries have an average score of 38. In comparison, developed countries such as Britain, the United States, and Japan score 81, 74 and 72 respectively.
Chinese enterprises participating in the B&R will not only need to submit themselves to external compliance checks, but will also need to be cautious about regulatory breaches by their overseas branches and employees. If an overseas branch of a Chinese enterprise is charged with corruption or bribery, it will affect the reputation of the enterprise in China. This could impact negatively on the progress of the project and on bilateral economic cooperation between nations.
Diverse and Complex Compliance Environment in the B&R Initiative
Chinese enterprises participating in the B&R Initiative will need to uphold the host countries’ legal regulations, the United Nations Convention against Corruption, and international organizations’ anti-corruption regulations. This makes the regulatory environment diverse and complex.
China joined the United Nations Convention against Corruption in 2005. Throughout its integration into the international community, China has amended the Criminal Law of PRC multiple times. In the Amendment (VIII) to the Criminal Law of the PRC (2011), a new crime “bribing functionary of a foreign country or an official of an international organization” was added. This was the beginning of China’s overseas anti-graft campaign. The Chinese government is intensifying its fight against corruption and developing the law in this area. The legal definition of corruption, its constitutive elements and penalties have changed significantly over time.
The B&R covers more than 70 countries, most of which have their own laws against corruption. Although their content varies, these laws serve the same purpose – to protect market order and fight against corruption. King & Wood Mallesons have offices in five countries on the B&R. Our team of compliance and regulation specialists has put together a brief on the key points of anti-corruption regulations in some of the B&R countries.
For many B&R projects, especially those relating to energy and infrastructure, financing from multilateral development banks such as the World Bank is essential. The importance of fighting corruption is well recognized .
In April 2010, the World Bank Group, Asia Development Bank, African Development Bank, European Bank for Reconstruction and Development, and Inter-American Development Bank collectively signed the Agreement for Mutual Enforcement of Debarment Decision (AMEDD), which stipulates that entities sanctioned by one of the member banks for conduct such as corruption and fraud will also be sanctioned by the other signatories. This means, if sanctioned, an entity will be unable to receive loans from any of the member banks or participate in projects they have financed for the duration of the sanction.
In December 2016, the Asian Infrastructure Investment Bank (AIIB) published the Policy on Prohibited Practices. This established a regime to combat corruption and fraud. Though AIIB is not a member of the AMEDD, it has announced that it will unilaterally sanction entities debarred under the AMEDD.
Establishing and Improving an Overseas Compliance Management System Is Imperative
In December 2015, the SASAC promulgated the Opinions on Comprehensively Promoting the Construction of Central Enterprises under the Rule of Law, stipulating that SOEs participating in the B&R shall uphold the rule of law.
In April 2016, five SOEs (China National Petroleum Corporation, China Mobile Communications Corporation, Dongfang Electric Corporation, China Merchants Group, and China Railway Engineering Corporation) were selected to pilot compliance management systems. Compliance by SOEs is specified as an important political goal in the 13th Five Year Plan.
Fifty-nine Chinese enterprises are currently black-listed by the World Bank, some of which are affiliates of large SOEs. Due to cross-debarment, these enterprises are not eligible to participate in any projects financed by the AIIB, making it difficult for them to be involved in B&R projects.
If the sanctioned entities take positive steps such as implementing an integrity compliance program, they may be eligible for a shorter sanction period or the sanction may be lifted altogether.
In summary, both domestic and international communities are calling for better compliance governance from Chinese enterprises.
For more information on how Chinese enterprises, especially SOEs, should set up overseas compliance management systems and how to handle investigations and sanctions by international financial organizations, please check out the upcoming serial articles on the topic of compliance in the B&R.
1 Transparency International, founded in 1993, is a non-governmental and non-profit international organization fighting for a corruption-free global society. Today, Transparency International is one of the most trustworthy international NGOs that research and publish on the topic of anti-corruption.