By Susan Ning King & Wood Mallesons’ Commercial & Regulatory group

ning_susanThe reform and opening up in China has been a process of establishing and improving a modern market system. As this process deepens, “building a unified, open, orderly and competitive market” has become the goal of the market economy reform. The year 2017 is the second year of China’s 13th Five-year Plan, in which “market” and “competition” are the key points that cannot be overlooked. According to the Plan, establishment of a modern market system requires accelerating the development of a unified, open, orderly and competitive market, establishing mechanisms for ensuring fair competition, overcoming regional segmentation, breaking up industry monopolies, and removing market barriers in order to promote the free and orderly flow and equitable exchange of goods and factors of production [1]

The Plan obviously lays an unprecedented emphasis on the market’s fundamental role in resource allocation. Meanwhile, the government is taking or strengthening regulatory measures to control market disrupting risks, resorting to the law to ensure orderly operation of the market economy and to resolve externality problems of the market. Compliance issues regarding anti-corruption, employment, tax, anti-monopoly, and environmental protection are now under strict government supervision. Reinforcing the compliance system, therefore, by incorporating it into the “Now Normal” management mechanism is a path enterprises must take in their development.

Compliance from A to Z in Business Management

“Compliance” means obedience or conformity. For enterprises, it means compliance firstly with the laws, regulations and regulatory requirements of the country in which they operate, and secondly with their own internal values, professional ethics and codes of conduct. In a sense, compliance itself embodies the influence of the law in economic activity.

In fact, compliance is involved in the whole lifespan of an enterprise:

When a business is founded, it needs to identify legal risks in the market it plans to enter. It is essential to undergo regulatory and approval procedures and  design and adjust reasonable project plans and transaction structures, e.g., tax structures in overseas investment by Chinese enterprises or FDI, HR management contracts, salary structures and equity incentive schemes, filings of concentration of undertakings for possible anti-trust issues in M&A or green field investment, due diligence for anti-commercial bribery, special due diligence for environmental protection, import and export permits and regulation, etc.

A business’s day-to-day operation is a process driven by its pursuit of growth and profit and its enforcement of compliance requirements, two indispensable and mutually complementary aspects. For instance, manufacturers may face issues of customs valuation, goods classification and IP protection; cooperation between competitors in the same industry may concern cartel issues; distribution models of upstream and downstream companies may concern the fixing or limiting minimum resale prices; dominant players’ market behaviour may be subject to regulations on abusing dominant market status, requiring redoubled emphasis on internal audit and compliance training. In addition, attention should be given to developing compliance manuals and guidelines on anti-commercial bribery or anti-trust, regular tax health checks and risk elimination, review of employee handbooks, employee compensation and benefits and performance assessment, management of supply chains, training of managers for environmental protection and energy preservation, etc.

Even when an enterprise exits the market, it still must pay attention to a series of compliance issues, e.g., tax plans, employee transfers and compensation, social risk assessment, customs and tax cancellation involved in restructuring, M&A and liquidation or winding up proceedings.

High Prices for Illegal Operation

Legal pursuit of profit is mother to a company’s development and accumulation of wealth. Some companies, however, choose illegal means out of sheer neglect of the consequences or a misconception that profits from their illegal operation may outstrip its costs. In fact, illegal operation will not only result in civil, administrative and criminal liabilities, but also harm a company’s goodwill, ruin its business opportunities and even force it out of business.

In recent years, compliance issues in which enterprises paid high prices have continued to come to light. In 2013, multinational pharmaceutical giant GSK was fined RMB 3 billion after it was found guilty of economic crimes including serious commercial bribery, and five executives were given jail sentences. In early 2015, telecommunication equipment giant Qualcomm was fined RMB 6 billion by the NDRC for breach of the Anti-Monopoly Law by abusing its dominant market status. In November 2016, internationally renowned food packing company Tetra Pak was fined RMB 667 million by the SAIC for abusing its dominant market status in packaging facilities, technologies and material. Months ago, JPMorgan Chase was reportedly fined USD 264 million by the US Department of Justice and Federal Reserve and China’s NDRC for bribery for hiring offspring of Chinese government officials. A Sichuan, China-based medical group was investigated by tax and police departments for falsifying more than 180 thousand invoices valued over RMB 200 million, and its responsible persons were arrested and prosecuted. Two executives at the China office of Schindler, the world’s second largest manufacturer of elevators, were subjected to criminal investigation for embezzlement and bribery.

For some international financial institutions, regulatory penalties for illegal operation may damage their goodwill or even lead to bankruptcies. In May 2016, a century-old Swiss private bank BSI was “sentenced to death” jointly by financial regulators of Switzerland and Singapore. It was ordered to be dissolved and its operation license be revoked for serious violations of anti-money laundering laws. Apart from high fines, some BSI executives faced criminal investigation. Similarly, in 2014, because of illegally processing up to USD 190 billion in violation of US economic sanction laws, BNP Paribas was fined USD 8.9 billion by the US government, marking the highest ever fine in a criminal case in US history.

A company must be aware that non-compliance has it high costs, such as heavy fines, criminal punishment, personal liability of executives and adverse publicity. Insufficient attention to compliance issues and wild, unprincipled business conduct may bring penalties on both the company and its executives. Therefore, companies should not perceive compliance as an obstacle to their growth but rather as an essential facilitator of their long-term, steady and sustainable development as well as a safeguard from legal risks.

Non-Compliance Is Preventable

To establish a complete and effective compliance system, first and foremost, it is important to have a thorough understanding of the external legal environment and updated knowledge of legislation to promptly assess impacts of compliance matters on a company. For example, the revised draft of the Anti-unfair Competition Law sets out typical acts of commercial bribery to help distinguish between bribery and allowances offered between businesses. The draft also specifies unfair acts undertaken by a non-dominant operator with relative advantages: this relative advantage clause sets out a relatively low threshold, and if adopted, will entail a heavier compliance review burden on enterprises. As for taxes, the roll-out of the value-added tax in lieu of the business tax[2] poses new challenges of tax compliance, and companies in pilot industries need to reconsider and amend terms concerning taxation in commercial contracts, improve internal control and system settings, and tighten control over invoices. For online business operators, the newly issued Cyber Security Law[3] imposes more obligations for operation and information security, among which the “key information infrastructure” clause sets forth new regulatory requirements on the existing business model under which a company transmits personal and business data abroad to its overseas headquarters.

On top of understanding external regulatory requirements, an enterprise also should set up an internal mechanism, draft, improve or update code of conduct, compliance manual and guidelines, regularly hold compliance training for employees and when necessary, engage external lawyers in streamlining the conduct of its business departments. For example, a VAT taxpayer in a traditional industry should consider how to reasonably pass on the burden of VAT and evaluate the impact on its books; and IPR holders may seek to take advantage of the “safe harbour” system laid down in the IPR anti-monopoly guidelines.

Also a company should establish and implement an effective supervisory mechanism, and depending on industry and business department, adopt measures such as internal compliance audit, regular checks, and reporting and complaint to test whether its compliance system is working well to assess and eliminate compliance risks. In fact, many major domestic enterprises do have internal organs for supervision and self-inspection, and encourage employees to report internal illegal conduct, so as to help the company anticipate compliance risks, e.g., Alibaba’s “Department of Integrity”, JD’s “Department of Internal Control and Compliances” of JD, and Huawei’s “Statement of Self-discipline”. Through internal reporting, the JD Department of Internal Control and Compliances reportedly was able to deal with a bribery event recently. In the US, the Securities and Exchange Commission announced that since the launch of the “Whistleblower Programme”, total rewards for informants who reported the misconduct of their own employers have exceeded USD 100 million.

Once misconduct is discovered, an enterprise must find the root cause and deal with it immediately to prevent the situation from worsening; at the same time, it needs to take two more steps: first, find and repair the loopholes and deficiencies in internal regulation; second, hold the culprits accountable and decide whether to dismiss them in a legal manner.

A company must understand that improper handling of compliance issues is likely to lead to crisis, regulatory investigations, criminal liability, third party action, etc. The company should react promptly by engaging external lawyers to make its case to and communications with government authorities and participate in hearings and other law enforcement procedures, to sort out relevant conduct and evidence, and to formulate integrated crisis management strategies and remedies, for example, legitimate claim of how the transfer price is calculated in tax audits, reasonable defense in anti-monopoly investigations, seeking negotiation and alternative solutions in labour disputes, etc., so as to maximize legitimate interests and minimize actual and potential losses.

Overseas Jurisdiction

As China’s opening-up deepens and the “One Belt, One Road” strategy is implemented, the volume of overseas investment by Chinese enterprises is sky-rocketing and more and more Chinese enterprises are plagued with compliance problems. Many of them simply copied their established domestic business practices in foreign markets, and were subjected to investigation by governments of the host countries, and even suffered astronomical fines. Months ago, it is reported that Gree Electric agreed to pay a fine of USD15.45 million to the US Consumer Product Safety Commission. Gree admitted that due to an inadequate understanding of US laws, it had not timely reported to relevant authorities the defects and risks of causing material damage in its products. Research shows that the majority of the Chinese enterprises are ill-prepared when they “go global”, knowing little about compliance issues in tax, foreign exchange, employment, environmental protection and government approvals in host countries, with a compliance regime reduced to mere formalities and patchy safeguards from risks.

Currently, compliance governance is being strengthened globally. A “blacklist” system has been introduced by countries and multinationals as an important instrument of compliance management and credit rating. In the EU and America, various control mechanisms have been established to regulate multinationals’ misconduct. Against the background of heightened regulation of multinationals’ compliance, it is all the more important for Chinese enterprises to tighten their compliance management, learn from the success stories of multinationals, and establish efficient compliance management systems of their own in their “go global” processes.


Compliance is the boundary that an enterprise cannot afford to step over, and is the cornerstone for its sustainable development. Illegal operation will not only pose external risks to an enterprise, but also cause lasting internal disruptions that will eventually harm its health. It is advised that companies have their internal counsel and external lawyers work together to establish and improve internal compliance systems and models, so that they can thrive in an ever-changing market environment.



[2] In March 2016, the Ministry of Finance and the State Administration of Taxation jointly issued the “Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax” (Cai Shui [2016] No. 36), which expanded the change to construction, real estate, finance and life service industries as of 1 May.

[3] On 7 November 2016, the NPC Standing Committee adopted the Cyber Security Law.