compliance agreements are a novel means to help SMEs facing criminal conviction survive with the jobs they support

Prompted by international probes into PRC firms, sweeping corporate compliance reforms are bringing struggling SMEs to heel at home. Since March 2020, the SPP (Supreme People’s Procuratorate) has launched two sets of pilots for grassroots ‘corporate compliance’. Setting time frames for firms to rectify issues aims to improve their compliance with international/foreign laws—while avoiding the heavy costs of a criminal trial and verdict. The system borrows heavily from the US Justice Department’s use of compliance agreements, such as

  • DPA (deferred prosecution agreements)
  • NPA (non-prosecution agreements)
  • PA (plea agreements)

Starting with six procuratorates in four provinces, the SPP expanded the pilots nationwide on 2 April 2022. Issues continue to plague the initiative. With local procuratorates given significant autonomy, inconsistencies in monitoring, enforcement and standards for agreements are widespread. Domestic legal scholars warn that rushing the system will increase costs for firms, most notably for those that already operate within the law.

context: from ZTE to COVID-19

US investigations into ZTE in 2017 alarmed Beijing. A hurried directive to cross-border businesses, among others, to bake ‘compliance’ into their operations ensued. But with little direction or incentive, SOEs simply made a show of developing compliance in the years following. More façade than substance, progress was negligible at best.

Erupting in early 2020, COVID-19 brought a tsunami of SME collapses. To stem job losses and damage to industrial chains, the SPP launched compliance pilots to ensure businesses were doing all they could to keep jobs and maintain supply chains. The pilots were expanded in April 2021 to cover ten provinces, and made nationwide in 2022. To now bring businesses into compliance, with epidemic stresses yet to abate, may make matters worse.

striking a balance

In two years, the pilot procuratorates filed nearly a thousand cases. The number of compliance agreements in the US, France, Brazil and the UK, jurisdictions steeped in the culture of plea bargaining, pale in comparison: the US saw only 28 DPAs and NPAs signed in 2021, with a mere 3 or 4 DPA-type settlements in each of France, Brazil and the UK.

With the PRC’s 3,180 county-level procuratorates now given permission to handle compliance cases, explosive—and worrying—growth is on the cards in 2022.

The soaring numbers, argues He Jing 何静 Nanjing University of Technology School of Law and Politics, stem from the SPP’s use of compliance agreements to ease costs on SMEs to support the economy; in other countries, such instruments are applied to mega corporations. In addition, Beijing’s lack of clarity on the remit of the agreements deters local prosecutors from offering them to big name firms. With corporate empires sprawling across jurisdictions and the possibility of bad press if big name firms are exempt from paying penalties, local prosecutors often fail to find ‘strong legal basis’ to offer agreements.

Legal divides between individuals and firms separate PRC law from international norms as well. The international norm is to hold individuals responsible while going easy on firms; however, the SPP pilots aim to exonerate PRC executives, as their fate and that of their firm are legally linked. But deeming crimes ‘corporate’ means individuals can evade consequences.

a quagmire of false compliance

Plea bargaining, a mechanism for self-reporting of wrongdoing by large corporations, fits uneasily with China’s legal tradition, notoriously inclined to punish first and ask questions later.

Enforcing compliance agreements would be a challenge for local prosecutors’ offices in the best of situations, but the focus on SMEs, typically lacking reliable data and reporting, adds an additional challenge. Power lies with the prosecutors, but their staff, stuck with tedious paperwork, lack expertise. To the risk of judicial corruption is added that of ‘formalism’, crossing t’s and dotting i’s while turning a blind eye to pressing issues. Third-party monitoring is optimistically awaited, but it will be subject to the consent of the companies rather than authoritative under its own mandate.

The short, six weeks or at most a year, monitoring period for compliance raises further doubt as to the depth of the change. The current period, notes Dong Kun 董坤 Chinese Academy of Social Sciences Institute of Law, depends on terms set for procuratorates to process official caseloads. These are inadequate for firms, least of all larger ones, to genuinely arrange compliance; extra-territorial monitoring may well take three years.

Bureaucratic challenges aside, SMEs are far less motivated to see rectification through, argues Liu Xiaoguang 刘晓光 Shanghai Procuratorate Third Branch. SMEs are almost too easy to set up; directly responsible SME personnel can run rings around supervision, winding up a criminally liable entity today only to register a new one tomorrow.

pilots deliver new challenges

Clearing up discrepancies between large and small firms’ access to compliance agreements, Zhang Jun 张军 SPP procurator general explains that both SMEs and listed companies are candidates for inclusion in the 2022 nationwide pilot. This was to the liking of the legal commentariat. Only by encompassing large firms, noted Professor Chen Ruihua 陈瑞华 (see profile), can the benefits of compliance agreements be maximised. Procuratorial organs also aim to impose compliance demands on companies affiliated with those named in cases, using the agreements to clear up backlogs of complicated, long-pending cases.

The SPP’s hopes of expanding the pilot to other areas arouses controversy. Subjecting possibly innocent firms to compliance reviews would put undue pressure on them, argues Professor Li Bencan 李本灿 (see profile). Law-abiding firms stand to be losers if they cannot trust they will be protected.

long road ahead

Some firms have nonetheless begun to make ex-ante preparations for compliance, at least in the pilot stage. Legal scholars remain cautiously optimistic

  • Li Fenfei 李奋飞 Renmin University of China School of Law argues that firms’ move to compliance will encourage amendment of the Criminal Procedure Law
  • Liu Yanhong 刘艳红 China University of Political Science and Law School of Criminal Justice sees an amendment as signalling improved official attitudes to, and penalties for, corporate crime
  • Lin Ziqi 林子淇 Guangdong Jinqiao Baixin Law Firm, forecasts modest progress over next five years, given the PRC’s legal environment, development level and social atmosphere

Although compliance reforms are tough in the PRC context, the Russia risk will now surely accelerate the process. While not officially aligning with US-led sanctions, Beijing is bound to dig deeper to stay on par with international business norms. Cai Kaiming 蔡开 China Going Global legal expert advises PRC companies to make compliance preparations in high-risk fields involving Russia.


what are the experts saying?

Li Bencan 李本灿 | Shandong University Law School professor

Institutional boundaries need setting for criminal compliance, suggests Li, and official supervision needs to be effective. Yet if compliance aims for absolute security, enterprises will face steeper costs, ultimately passed on to consumers. Thus, as attempted now, standardisation is a no-go. Low-level general and basic standards are no guarantee of a program’s effectiveness, while harsh criteria infringe on enterprises’ freedom of operation. External incentives have boundaries of their own, adds Li, and negative incentives should be prohibited: magistrates can’t exceed the statutory limits to penalise firms that avoid compliance.

Currently executive director of Shandong University’s Criminal Compliance Research Centre, Li hosted a National Social Science Fund youth project on criminal compliance in 2019. He was visiting scholar at Germany’s Max Planck Institute for Foreign and International Criminal Law in 2017.

Chen Ruihua 陈瑞华 | Peking University Law School professor

Large enterprises and SMEs, argues Chen, require different compliance criteria and models. Large firms should meet higher standards, not stopping at targeted error correction and management repair, but creating dedicated compliance frameworks. Typically lacking modern corporate governance, SMEs with a few score employees or less—not least township or family enterprises—can opt only for low-key, simplified compliance. If required, rectification should be targeted accordingly.

Teaching at Peking University Law School from 1997, Chen was ranked among the PRC’s ‘top ten young jurists’ in 2004. He was made an expert consultant to the Supreme People’s Procuratorate for a term of five years in 2020. A criminal procedure law specialist, Chen has published many score academic papers in leading journals.

Xie Pengcheng 谢鹏程 | Supreme People's Procuratorate, Procuratorial Theory Research Institute director

The current paradigm of ‘administrative supervision as the core and judicial supervision as a supplement’ is inadequate, argues Xie. For any enterprise, compliance is inseparable from the industry it is in. The focus of compliance supervision needs eventually to shift to industry autonomy. Industry discretion will determine supervisory regimes, mediating between industry and criminal justice while reiterating the dominance of the judiciary. Practical steps include improving judicial confirmation of compliance criteria and integrating the results of industry bodies’ certification and evaluation into cases.

Taking a JD from the Chinese Academy of Social Sciences Graduate School in 1996, Xie has since worked in the SPP’s Procuratorial Theory Research Institute. He was appointed leader of a Drafting Expert Group for evaluating effectiveness of compliance management for SMEs in December 2021.


context

14 Apr 2022: the judiciary urges companies involved in cases to strengthen data information compliance

2 Apr 2022: SPP and All-China Federation of Industry and Commerce jointly deploy the nationwide pilot of corporate criminal compliance reform

24 Dec 2021: draft amendment of Company Law emphasising refining corporate internal governance

24 Aug 2021: CASME (China Association of Small and Medium Enterprises) approves the project ‘Evaluation of the compliance management system’s effectiveness for SMEs’; the official edition is expected to be released in 2022

3 Jun 2021: SPP explores a third-party supervision and evaluation mechanism to standardise compliance monitoring and acceptance

8 Apr 2021: SPP decides to carry out second batch of pilots for corporate compliance reform with an extended scope

23 Jul 2020: in response to the economic impact brought by COVID-19, the procuratorial organs emphasise ‘six stabilities’, ‘six guarantees’, demanding a cautious attitude towards the arrest and prosecution of persons in charge of private enterprises involved in cases

March 2020: SPP launches first batch of corporate compliance reform pilots in six grassroots procuratorates

9 Nov 2018: ‘Guidelines for management compliance of central SOEs (trial)’ puts forward requirements for administrative compliance development

6 Mar 2017: ZTE signs a plea agreement with US DOJ, agreeing to implement an export control compliance programme and accept compliance monitoring


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