CHINA REGULATORY ENFORCEMENT QUARTERLY/media/Files/Insights/...December 5 – Ex-security chief Zhou...

CHINA REGULATORY ENFORCEMENT QUARTERLYNoteworthy developments and insights from the fourth quarter of 2014

Q4 – 2014 | www.dlapiper.com

WHAT’S INSIDE

Executive Summary

PRC Legal and Regulatory Updates

Major Enforcement News

The Pharmaceutical Blacklist: A Look Back After One Year

PRC Anti-Corruption 101

Frequently Asked Questions

ExECUTivE SUMMARY

During the fourth quarter of 2014, we saw a continued high level of regulatory enforcement by PRC authorities in the life sciences, automobile, media and advertising, and computer and information technology industries. President Xi Jinping’s anti-graft campaign resulted in the arrest of several high-profile officials, including the formal arrest of Zhou Yongkang, the former Domestic Security Chief of China and Politburo Standing Committee member, as well as an investigation against Ling Jihua, ex-President Hu Jintao’s top aide.

As a prelude, the Chinese government also introduced draft amendments to its anti-corruption laws, signed further information-sharing agreements with several other countries, and agreed to structurally enhance its investigative capacity to further combat corruption moving forward:

■ The Central Committee of the Communist Party agreed to establish a separate anti-corruption bureau to better streamline and organize anti-corruption crackdowns across the country.

■ First extensive draft amendments to the anti-corruption and anti-bribery provisions of the PRC Criminal Law were proposed to bring about broader coverage to punish corruption and bribery.

■ 21 APEC countries, including the United States and China, agreed to an information-sharing initiative called the Network of Anti-Corruption Authorities and Law Enforcement Agencies (“ACT-NET”), which strengthens enforcement and collaboration of cross-border anti-corruption enforcement actions.

PRC authorities’ active involvement in this space has precipitated further communications with overseas regulators, including those of the United States. We do not view this as temporary or an anomaly for Q4 2014.

WHAT TO ExpECT FOR 2015

We see a continued high level of regulatory enforcement by PRC authorities moving into 2015. Be on the lookout for new developments around the Chinese New Year holidays, which will take place in late February this year. Companies will continue to commit greater resources to their compliance capabilities, and there will be enhancements to compliance programs and controls as they look to reduce their exposure to risk. Greater due diligence and proactive reviews will increasingly become more relevant in these companies’ business cycle.

We hope you enjoy this inaugural edition of DLA Piper’s China Regulatory Enforcement Quarterly.

Welcome to the first edition of the China Regulatory Enforcement Quarterly.

Sammy Fang

PartnerHead of Compliance and investigations, Asia

02 | The China Regulatory Enforcement Quarterly

CONTENTS

04PRC LEGAL AND REGULATORY UPDATES

06MAJOR ENFORCEMENT NEWS

11PRC ANTi-CORRUPTiON 101

12FREQUENTLY ASKED QUESTiONS

09THE PHARMACEUTiCAL BLACKLiST: A LOOK BACK AFTER ONE YEAR

13KEY CONTACTS

This information is intended as a general overview and discussion of the subjects dealt with and is up-to-date as of 8 January 2015, however, laws and/or updates may have changed since this date. Some information contained in this report is based on media reports and public announcements, some of which may be considered secondary sources. This information is not legal advice, and should not be used as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this information.

www.dlapiper.com | 03

PRC LEGAL AND REGULATORY UpDATES

Draft amendments to the corruption provisions of the PRC Criminal Law are proposed to bring about broader coverage to punish bribery and corruption

October 27 – Draft amendments to the 9th Amendment of the Criminal Law are proposed by the Standing Committee of the National People’s Congress are proposed to increase the number of penalties for the crime of bribery and remove specific monetary criteria for deciding the level of punishment. The draft amendments also raise the exemption threshold for those who give bribes under the official bribery offense. Only those with relatively minor offenses and who voluntarily confess and assist with exposing the corrupt activities of others in successful subsequent investigations may be exempt from punishment. Other amendments further strengthen enforcement actions and lower thresholds for liability.

Central Committee for Discipline inspection (“CCDI”) of the Communist Party establishes separate anti-corruption bureau to better streamline and organize anti-corruption crackdowns across the nation.

November 2 – Xinhua reported that the Fourth Plenary Session of the 18th CPC Central Committee further emphasized the full implementation of “Rule of Law”, and increased demands on the fight against corruption. The current bureau investigated eleven bureau-chief-level officials in 2014. The new anti-corruption bureau will be led by a Vice-Minister-level official so that the new bureau has the capacity to take on corruption cases relating to higher-ranking officials.

21 APEC countries agreed to share information via the Network of Anti-Corruption Authorities and Law Enforcement Agencies (“ACT-NET”)

November 8 – 21 APEC countries, including the United States and China, agreed to an information-sharing initiative called ACT-NET, which strengthens enforcement and collaboration of cross-border anti-corruption enforcement actions. ACT-NET is designed to open cross-border information flows between law-enforcement agencies in order to detect, investigate and prosecute crimes relating to corruption, bribery, money laundering, and illicit trade.

China calls on United States, Canada and Australia to jointly combat corruption

November 26 – China calls for increased cross-border information sharing and cooperation in judicial and law enforcement actions. China has signed extradition treaties with countries including France, Spain, Australia, Italy, and Portugal. The treaties signed with Spain and Portugal are already in effect. China approved a treaty with Australia, but the Australian Parliament has yet to ratify it. There is no extradition treaty between the United States and China, however, certain dialogues of communication are on-going.


IN NUMbERS

0

21

100

165

46,000,000

137,400,000

140,000,000

Wang Qishan, head of the CCDI, pledged zero tolerance for cliques within the party and vowed to ramp up inspections of the lower tiers of government and keep up the pressure to punish corruption.

Ministers from 21 APEC Nations met in Beijing and signed an agreement to share information via the Network of Anti-Corruption Authorities Law Enforcement Agencies.

China ranks 100th in this year’s Corruption Perception Index from Transparency International, down from 80th in 2013.

Number of government officials disciplined and/or investigated by the CCDI in Q4 2014.

China National Development and Reform Commission (“NDRC”) fined a sino-foreign automobile joint venture and the sales unit of a European automotive company a total of USD 46 million for price-fixing.

Total amount of fines in USD by the U.S. Department of Justice and U.S. Securities and Exchange Commission for FCPA enforcement actions related to conduct in China for Q4 2014.

A major U.S. software multinational is to pay Chinese tax authorities USD 140 million for “tax evasion”.


CHINESE REGULATORS AND OFFICIALS

One company blacklisted based on 2013 Recording Measures

October 22 – Chongqing Weixin Medical Supplies Co., Ltd. (“Weixin”) was put on the Chongqing provincial blacklist for a duration of two years. Weixin is a private company registered in Chongqing Municipality and specializes in selling medical equipment. It is alleged that the General Manager of Weixin provided the former head of the Equipment Division of Chongqing No. 13 Hospital with “favor fees” for an amount of CNY 135,000 (approximately USD 22,131) during the procurement stage. Once on the blacklist, all public hospitals and institutions within the Chongqing province cannot procure any products and/or services from Weixin. For further information on the Recording Measures, see the section below on The Pharmaceutical Blacklist: A Look Back after One Year.

National Health and Family planning Commission forbids Chinese Medical Association to provide contact information of meeting attendees/HCps to pharmaceutical companies

November 6 – According to the Jiangsu Provincial Committee of the Chinese Communist Party, an audit report of the Chinese Medical Association (“CMA”) indicated that the CMA received sponsorships from pharmaceutical companies amounting to CNY 820 million for 160 academic meetings in 2012 and 2013. In exchange for these payments, the CMA provided pharmaceutical companies with advertisement space and HCPs’ contact information. According to the CMA, in July, the organization

has suspended all commercial activities at the meetings. The CMA has also submitted relevant materials on sponsorships and proposed a reform plan to the supervising authority.

Ex-security chief of China Zhou Yongkang arrested

December 5 – Ex-security chief Zhou Yongkang, one of the most senior Chinese officials to be investigated for corruption, has been arrested and expelled from the Communist Party. The Supreme People’s Procuratorate, China’s top prosecuting body, said that it had opened a formal probe against him. According to reports, Mr. Zhou was accused of several crimes, including disclosing party and state secrets, accepting large sums of bribes either directly or through his family members, and committing adultery with several women.

Ling Jihua investigated for serious disciplinary violations

December 22 – Ling Jihua, the one-time top aide to former President Hu Jintao, is accused of “disciplinary violations”, which often refers to corruption. Mr. Ling is the former head of the Party’s United Front Work Department and a deputy chairman of the Chinese People’s Political Consultation Conference. The Party’s United Front Work Department is mainly responsible for maintaining relations with the non-Communist Party elite, including individuals and organizations with societal influence. Mr. Ling had also worked as the personal secretary of former President Hu Jintao and chief of the Party’s General Office. Ling is the latest top official to come under a corruption cloud since President Xi Jinping launched a massive anti-corruption campaign more than two years ago.

MAJOR ENFORCEMENT NEWS


CHINESE OFFICIALS UNDER INvESTIGATION FOR Q4 2014

Based upon data published by the CCDI, DLA Piper generated a visual map of China to highlight the provinces which have been targeted the most during the fourth quarter of 2014. This information is relevant for multinational corporations, especially those with operations and/or partnerships in the targeted areas.

GUANGDONG广东

GUANGXI广西

HAINAN海南

GUIZHOU贵州

HUNAN湖南

JIANGXI江西

SHANXI山西

SHAANXI陕西

NINGXIA宁夏

QINGHAI青海

GANSU甘肃

XINJIANG新疆

XIZANG西藏

BEIJING北京

TIANJIN天津

NEIMENGGU内蒙古

LIAONING辽宁

JILIN吉林

HUBEI湖北

ANHUI安徽

JIANGSU江苏 SHANGHAI

上海

ZHEJIANG浙江

FUJIAN福建

SHANDONG山东

HEBEI河北

HENAN河南

HEILONGJIANG黑龙江

SICHUAN四川 CHONGQING

重庆

YUNAN云南

Over 10

6 – 10

2 – 5

1

0

Central Government: 10

Sun Hongzhi under investigation

December 26 – Sun Hongzhi, Vice Minister of the State Administration for Industry and Commerce, has been put under investigation. He was accused of “serious disciplinary violations,” a standard reference to corruption. No further details are available at this time. However, together with other similar investigations into Chinese officials, China is undergoing a tougher enforcement phase of anti-competition and anti-corruption laws.

CORpORATIONS AND OFFICERS

NDRC investigated automobile multinational corporations for anti-monopoly violations

September 11 – According to the media, Chinese authorities ruled that a German automobile manufacturer violated provisions of the country’s anti-monopoly law – adding another high-profile foreign investor to the growing list of casualties from China’s automobile industry probe. The NDRC has also claimed that two other automobile manufacturers engaged in monopolistic behavior, and indicated that as many as twelve Japanese companies would face penalties.


Major U.S. software company to pay a fine of USD 137 million for “tax evasion” in China

November 23 – Xinhua News reported that a major U.S. multinational software company was ordered to pay the Chinese government CNY 840 million (approximately USD 137 million) in back taxes and interest, as well as more than CNY 100 million in additional taxes per year in the future. The software company reported “losses” of more than CNY 2 billion for six years in a row. Media reports indicate that the company admitted to tax evasion and its PRC subsidiary agreed to pay the fine to the PRC government.

China authorities investigate an executive at an automobile joint venture company

December 19 – Chinese authorities began an investigation into an executive of an automobile joint venture for alleged disciplinary violations. The Vice President of the joint venture will be removed from administrative roles and duties pending the result of the probe into “suspected serious disciplinary violations.”

OvERSEAS REGULATORS RE: CHINA

A global scientific instruments manufacturer to pay USD 2.4 million to settle FCpA charges

December 15 – A U.S.-based global manufacturer of scientific instruments agreed to pay USD 2.4 million to settle U.S. SEC bribery charges. It was found that the company violated the U.S. Foreign Corrupt Practices Act by providing non-business related travel and improper payments to various Chinese government officials in an effort to win business. The investigation found that the company lacked sufficient internal controls to prevent and detect approximately USD 230,000 in improper payments out of its China-based offices which were falsely recorded as legitimate business and marketing expenses. The payments enabled the company to realize approximately USD 1.7 million in profits from sales contracts with state-owned entities in China whose officials received the improper payments.

German authorities investigate an aircraft manufacturer’s subsidiary in China

December 17 – According to the media, the subsidiary of a leading aircraft manufacturer is suspected of bribing Chinese public servants when it sold satellite technologies to China. The investigation is being conducted by the Munich Procuratorate. The reports alleged that the aircraft manufacturer signed an agreement in 2004, giving Chinese public servants bribes in an amount totaling EUR 500,000 (approximately CNY 3.7 million). Investigation records also indicate that the business unit promised 1% of net order value of each deal as rebate/commission to managers of relevant Chinese companies. U.S. authorities, the Hong Kong Stock Exchange, and PRC regulators have not yet responded to the bribery investigation.

Leading global cosmetics company settles FCpA charges for USD 135 million

December 17 – One of the world’s largest sellers of cosmetic goods will pay USD 135 million to settle criminal and civil charges after its China unit pleaded guilty to conspiring to violate the U.S. Foreign Corrupt Practices Act by bribing Chinese officials. The China unit entered the plea and admitted that it disguised USD 8 million in gifts to Chinese government officials from 2004 through 2008 in order to gain access to officials who oversaw direct selling regulations. The China unit also admitted concealing and disguising cash, non-business meals, travel and entertainment it provided to obtain business benefits.


In 2007, the Ministry of Health (now merged within the National Health and Family Planning Commission or “NHFpC”) began documenting pharmaceutical companies that have committed commercial bribery offenses and “blacklisting” them so that their products are barred from entering public medical and/or healthcare institutions. Based on the “Measures of Recording Commercial Bribery of Pharmaceutical Companies” promulgated in 2007 (“2007 Recording Measures”), a total of 58 companies had been blacklisted. At the end of 2013, the 2007 Recording Measures were updated.

2013 Recording Measures

On December 25, 2013, the NHFPC promulgated the “Measures of Recording Commercial Bribery of Pharmaceutical Companies” (“2013 Recording Measures”). After this national-level measure was released, provincial authorities and local governments issued implementation opinions to carry out the 2013 Recording Measures. Pursuant to the 2013 Recording Measures, any pharmaceutical enterprise and its agents who have committed commercial bribery may be put on a “blacklist” issued by the provincial authorities. There are five situations in which a company may be placed on the “blacklist”:

1. If the company is deemed as having committed commercial bribery by the People’s courts, even if no criminal penalty is actually imposed by the court.

2. If the procuratorate’s decision of non-prosecution is because of minor criminal violations.

3. If the company investigated by the disciplinary inspection department because of alleged commercial bribery.

4. If there are imposed administrative penalties by the Ministry of Finance, State Administration for Industry and Commerce, China Food and Drug Administration and local equivalents, etc.

5. Other situations regulated by laws, regulations, and measures.

“Blacklisted” companies may face numerous consequences. Their products (whether drugs and/or medical devices) could be barred from entering the relevant province’s public medical institutions or the province’s medical healthcare institutions receiving public funds for a period up to two years (essentially all public hospitals in that province.) They could face reductions in scores when submitting their bids for procurement. If the company commits commercial bribery a secondtime within five years, its products can be barred for a period of up to two years across the country from entering all public medical institutions or medical healthcare institutions receiving public funds.

Differences between 2007 and 2013 Recording Measures

The 2013 Recording Measures preserved a substantial part of the 2007 Recording Measures. We interpret the 2013 Recording Measures as amending and strengthening the 2007 Recording Measures. Specifically, the 2013 Recording Measures added the following:

■ National blacklist, in addition to provincial list.

■ If two violations occur within five years, increased penalties including eligibility to enter national blacklist.

THE pHARMACEUTICAL bLACKLIST: A LOOK BACK AFTER ONE YEAR


■ Procedural requirement for anti-corruption clauses in contracts.

■ Requirement for public medical and health institutions in other provinces to give less consideration for two years for bids tendered by provincial blacklisted companies.

Nine companies currently blacklisted based on 2007 Recording Measures

Our research team has identified nine companies currently blacklisted in accordance to the 2007 Recording Measures. Their blacklist terms will expire on April 11, 2015 (Fujian) and April 6, 2015 (Inner Mongolia). A NHFPC announcement dated February 26, 2014 states that any company blacklisted from the 2007 Recording Measures that has not yet expired still remains valid and is not superseded by the 2013 Recording Measures. It is also likely that any company’s blacklist from the 2007 Recording Measures would count towards the two violations within five years rule under the 2013 Recording Measures and therefore qualify for the national blacklist. The nine companies are as follows:

blacklisted in Fujian province

1. Xiamen Zhengyuan Medical Instruments Co., Ltd. (厦门正源医疗器械有限公司)

2. Guangzhou Xindi Medical Instruments Co., Ltd. (广州鑫弟医疗器械有限公司)

3. Guangzhou Chennuo Medical Instruments Co., Ltd. (广州臣诺医疗器械有限公司)

4. Shanghai Zanwei Medical Instruments Co., Ltd. (上海赞未医疗器械有限公司)

5. Nanchang Rongguang Medical Instruments Co., Ltd. (南昌荣光医疗器械有限公司)

6. Fuzhou Baowen Medical Instruments Co., Ltd. (福州宝文医疗设备有限公司)

7. Fuzhou Mingkang Medical Instruments Co., Ltd. (福州明康医疗设备有限公司)

8. Guangzhou City Weisai Medical Instruments Co., Ltd. (广州市威赛医疗器械有限公司)

blacklisted in Inner Mongolia

9. Inner Mongolia Wuyuan Prefecture Chengxin Pharmaceutical Co., Ltd. (内蒙古五原县诚信药业有限责任公司)

Weixin medical supplies blacklisted based on 2013 Recording Measures

On October 16, 2014, Chongqing Weixin Medical Supplies Co., Ltd. (“Weixin”) was put on a provincial blacklist for a duration of two years. It is the first and currently the only company to be blacklisted based upon the 2013 Recording Measures. Weixin is a private company registered in Chongqing Municipality and specialized in selling medical equipment. It is alleged that its General Manager provided the former head of the Equipment Division of Chongqing No. 13 Hospital with “favor fees” amounting to CNY 135,000 (approximately USD 22,131) during a procurement project. According to Article 4.2 of the 2013 Recording Measures and Article 173 of PRC Criminal Procedure Law, Chongqing Health and Family Planning Commission decided to put Weixin on the provincial blacklist even though the bribery offense appeared to the authorities to be relatively minor and the People’s Procuratorate had decided not to prosecute Weixin nor its General Manager.


While most compliance officers are familiar with the U.S. Foreign Corrupt Practices Act and U.K. Bribery Act, the Chinese anti-bribery and anti-corruption (“AbAC”) regime has received less attention than its overseas counterparts. We briefly outline below China’s ABAC regime and some of its nuances.

The PRC ABAC regime is governed by a collection of laws and regulations, mainly the Criminal Law, Anti-Unfair Competition Law, the Interim Provisions on Prohibiting Commercial Bribery, as well as other rules and regulations issued by the State Council and other government authorities. Bribery offenses generally fall under two categories: “official bribery” and “commercial bribery.”

Criminal Law bribery to State Work personnel

The offender, either a corporation and/or an individual, commits an official bribery offense, if the offender offers property to a “State Work Personnel” (“SWp”) in return for an improper benefit. There are four elements that must be satisfied:

1. An offer of property to a SWP;

2. In return for a benefit, or for the assistance to obtain a benefit;

3. The amount involved meets the required threshold or certain requisite conditions if the amount involved is below such threshold; and

4. There is corrupt intent to bribe the SWP.

The current threshold for corporate offenders is CNY 200,000 (approximately USD 32,000) or CNY 10,000 (approximately USD 1,600) for individual offenders. Penalties range from temporary criminal detention up to life imprisonment as well as confiscation of illegal gains.

Commercial bribery

Similar PRC Criminal Law provisions exist for offenders who bribe non-SWPs in pure commercial bribery offenses, although the elements are slightly different and the monetary thresholds are higher. However, even the PRC Criminal Law thresholds are not met, there is also an administrative offense which targets commercial bribery at an administrative level. The Anti-Unfair Competition Law prohibits companies from offering cash and/or property through improper means for the purpose of selling and/or purchasing goods.

The Administration for Industry and Commence (“AIC”) is in charge of handling administrative commercial bribery matters and has broad discretionary powers to investigate and penalize in connection with such offenses. Penalties include fines, confiscation of any illegal gains, and revocation of the company’s business license.

pRC ANTI-CORRUpTION 101


FREQUENTLY ASKED QUESTIONS

What is State Work personnel according to pRC Criminal Law?

In the PRC, there is no specific definition of what a “government official” is. Instead, the PRC has a legal concept of State Work Personnel or “SWP” who consist of: (1) people who perform public services in the legislative, administrative, or judicial agencies or the military; (2) people who perform public services in state-owned enterprises (“SOEs”), institutions, or civil organizations; (3) people assigned by the government, SOEs or institutions to non-state-owned enterprises, institutions, or civil organizations to perform public services (such as a deputy general manager of a Sino-foreign joint venture company who has been sent to the joint venture by the Chinese party which is an SOE); and (4) people who perform public services according to law.

For example, positions such as “directors, managers, supervisors and cashiers” of state-owned companies who are in a position to manage or supervise the state’s assets would likely be considered as “performing a public service.” In contrast, employees whose functions do not reflect authorities’ duties and power and are related to labor and technical skills (such as salespersons and ticket office clerks) would likely not be considered “a person performing a public service.”

How do I prepare for unannounced visits by a local Chinese bureau?

In the past two years, we have seen an increase in unannounced visits by PRC government authorities. PRC law has no mandatory requirement that government officials must give notice prior to visiting a business premise. Aside from calling your lawyer immediately, you may consider adopting a “dawn raid protocol” to properly implement and train your employees to respond in an orderly and effective manner:

■ Train employees to remain calm and treat the officers with courtesy and respect.

■ Have a procedure in place to contact relevant individuals and develop a crisis management team.

■ Implement procedures to properly identify the government officer, search warrant and/or authorization documents to ensure the matter is handled properly.

■ Educate leadership on the basics of evidence preservation, proper documentation, confidentiality, making copies of seized materials, and how to communicate with the officers.

What is a current area of interest in China? What do I need to be particularly aware of?

In Q4 2014, we have seen a lot of issues with the Chinese media and journalists. The Chinese government has been cracking down on local television networks, magazines, newspapers, as well as online media. Certain journalists in state-owned media outlets have been alleged to have received bribes and/or for money in exchange to publish favorable news articles, quash stories, and/or otherwise obstruct the normal reporting of the news.

If you have significant marketing and public relations departments which require large budgets for hosting, entertaining, and/or giving gifts to local Chinese journalists, and/or third-party agencies who do the same, keep abreast of these latest developments and review your company’s current practices.


KEY CONTACTS

Sammy Fang Partner Hong Kong/Beijing T +852 2103 0649 +8610 5820 0988 [email protected]

Satpal Gobindpuri Partner Hong Kong T +852 2103 0836 [email protected]

Daniel Lee Country Managing Partner Seoul T +822 6270 8800 [email protected]

peter Shelford Country Managing Partner Bangkok T +662 6868 533 [email protected]

Julia Gorham Partner Hong Kong T +852 2103 0818 [email protected]

John Goulios Country Managing Partner Singapore T +65 6512 9517 [email protected]

Lance Miller Country Managing Partner Tokyo T +813 4550 2812 [email protected]

Gowri Kangeson Partner Melbourne T +61 3 9274 5428 [email protected]

ASIA pACIFIC

Jonathan King Partner Chicago T +1 312 368 7095 [email protected]

Laura L. Flippin Partner Washington DC T +1 202 799 4516 [email protected]

Karl buch Partner New York T +1 212 335 4943 [email protected]

US

Simon Airey Partner London T +44 (0)20 7153 7281 [email protected]

UK


mailto:[email protected]

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