President Xi Jinping initiated a wide-ranging anti-corruption campaign soon after he was appointed general secretary of China’s communist party in 2012. The main targets of this campaign have been government officials and state-owned enterprises (SOEs). The campaign’s focus has shifted over time, and at present the financial services sector is being targeted. Chinese media indicate that over a dozen industry executives have been investigated for alleged corruption since mid-2015.
China’s Central Commission for Discipline Inspection (CCDI) has been the lead agency in the anti-corruption campaign. The CCDI coordinates anti-corruption investigative work, dispatches inspection teams to government agencies and SOEs across the country, and reports some details on its findings to the public through its website. Reports of alleged wrongdoing at SOEs focus on their employees, rather than on the companies themselves.
The CCDI is ultimately responsible to the Communist Party. Like the Party itself, the CCDI is often content with merely naming and shaming wrongdoers, and imposing “administrative punishments”, or penalties, on company executives. It rarely seeks prosecutions, so many of the corruption charges it reports do not make their way to the courts. This poses a challenge for foreign companies seeking clarity on the track record of SOEs and their employees in the context of FCPA and Bribery Act-related concerns. A review of criminal litigation is often insufficient to determine potential exposure to compliance risks when partnering with SOEs.
Understanding how the CCDI reports wrongdoing is therefore key to grasping the full picture, and reviewing the CCDI’s website should be an essential part of the due diligence process for companies looking to partner with SOEs.
For SOE employees, the CCDI issues three kinds of light penalties, which it reports in notices posted to its website. These penalties can follow CCDI inspections of SOEs, or can be imposed on recommendation from the SOEs themselves following internal audits.
The lightest is a “warning” (????). SOE employees issued with warnings are not usually named by the CCDI in its website posts, although their employers are. Warnings are held in place for six months and if the individual in question does not commit further offences the warning is removed with no further repercussions. They are usually meted out for Communist Party regulation infractions. For example, following an inspection of China Aerospace Science and Technology Corp, the CCDI issued four employees with warnings for not declaring details of their bank accounts, dining on public funds and claiming bogus company allowances.
A step up in seriousness from a warning is a “demerit” (????), which is held in place for 12 months. Bribery or money laundering allegations can attract this type of penalty, although in practice such wrongdoings usually incur more serious penalties, as detailed below. While a demerit is in place, the individual is not eligible for any pay rise and he or she is usually, but not always, publicly named by the CCDI. In December 2015, for example, the Commission gave a demerit to an IT manager with a major Chinese bank, for using public funds to travel for leisure while he claimed he was attending a conference.
Third among the light penalties is a “gross demerit” (?????), which is valid for 18 months. This applies to the same class of misdemeanor as demerits, but the violations are usually more serious, involve larger sums of illicit financial flows, or have been allegedly committed over a sustained period of time. For example, in July 2015 Zhu Jianping, a warehouse manager for China Vanguard Group, received a gross demerit for allegedly submitting fraudulent travel expenses over a 13-month period.
The kinds of apparent wrongdoing that are met with warnings, demerits and gross demerits can certainly appear serious. The penalties may carry reputational or regulatory risk for foreign businesses that partner with the SOEs in question as they may indicate a tolerance for unethical dealings. In our experience, however, this tends to be case-specific.
The Risk Advisory Group has conducted numerous investigations into SOEs where employees have been cited for light penalties by the CCDI. In some cases, we found alleged wrongdoing to be isolated, whereas in others, the issues highlighted by the CCDI appeared indicative of a wider company culture of corruption. In a number of these instances, the CCDI launched wide-ranging investigations against SOEs following initial, light penalties imposed on some employees.
The CCDI issues three serious penalties on SOE employees. The first is “demotion” (????). The individual in question is demoted, and prohibited from gaining a pay rise for 24 months. As with gross demerits, demotions are issued for alleged wrongdoing that occurs over a sustained period of time, often pertaining to issues of corruption. An example is presented in a CCDI work report on Harbin Electric Corp from January 2016, where two mid-level managers were demoted for illegitimately awarding contracts to companies controlled by their relatives. The individuals were not recommended for prosecution, which is fairly typical in the case of demotions.
“Dismissal from post” (????) can follow a variety of alleged wrongdoings, including bribery, gambling using company money, and solicitation of prostitutes. It does not necessarily end the career of the alleged wrongdoer, as he or she can reapply for an SOE post after 24 months. Dismissals are often, but not always, accompanied by prosecution recommendations. For example, in December 2013 three senior employees of Fujian Guangze Grain Marketing were dismissed from their posts following allegations that they took bribes, embezzled public funds, falsified company revenues and receipts, and rigged public tenders. On the CCDI’s recommendation, the three were indicted in a Fujian district court and received jail terms.
The most serious CCDI penalty is “expulsion” (????). Expulsions often follow protracted investigations, which are usually announced publicly. A prominent expulsion in recent months was that of Si Xianmin, the former chairman and general manager of China Southern Airlines. Si was first announced as being under investigation by the CCDI in November 2015, following a probe that identified widespread corruption at the airline. In February 2016 he was expelled from his position for allegedly receiving bribes, authorising his company to pay bribes, and using his position to award business to companies controlled by his relatives. The CCDI recommended Si’s case for prosecution, which was widely reported. When the CCDI recommends prosecution, subsequent court cases almost always return guilty verdicts.
Under Chinese law, SOE employees recommended for prosecution by the CCDI may be charged with a “personal crime” or a “unit crime”. A personal crime carries no legal ramifications for the employer, whereas a unit crime implicates the employee‘s company in the alleged wrongdoing. A guilty verdict for a unit crime charge means that the company is fined and placed on a blacklist maintained by China’s Ministry of Finance, which debars it from participating in state sector procurement tenders for a period of between one and three years. A debarment does not, however, apply to other companies in a corporate group, which may continue to participate in such tenders.
With no end in sight to President Xi’s anti-corruption campaign, many more SOEs will likely be investigated by the CCDI, and many more SOE employees will likely be penalised. While the CCDI’s reporting on its investigations and penalties is far from transparent, it is worth being aware of the spectrum of its penalties. With many alleged instances of corruption not making their way to the Chinese courts system, understanding these penalties and their repercussions is vital to making sound compliance decisions about prospective SOE business partners.
This article was first published on The Anti-Fraud Network.