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Eric Carlson: Measuring President Xi’s ‘crushing tide’ against graft

Almost exactly five years ago, I wrote a post for the FCPA Blog analyzing the impact that China’s leadership transition to Xi Jinping would have on anti-corruption enforcement in China. This post assesses those predictions and makes new ones for the coming five years, in light of the recently concluded Party Congress.

“Tone from the Top.” In his 2012 speech assuming power, Xi noted “severe problems” facing the Party, among them “corruption and bribe-taking by some Party members.” In his 3.5-hour keynote speech in 2017, Xi reiterated and expanded upon the theme that corruption remains the greatest threat to the Party’s survival. Xi stated that the anti-corruption campaign had been “built into a crushing tide” and achieved “overwhelming momentum” and would not stop until a “complete victory” against corruption by “tigers” (high-ranking officials), “flies” (lower-level officials), and “foxes” (officials who have fled from China).  The numerous references to anti-corruption in Xi’s speech and policies suggest there are no plans to scale back the vigorous anti-corruption campaign over the past five years.

Personalities. My post in 2012 noted that the selection of Wang Qishan to lead the anti-corruption campaign was a surprise to some, given that his previous experience was handling economic matters and crises. Wang proved to be extremely effective as head of the Central Commission for Discipline Inspection (CCDI), the body that oversees discipline for Party members, which effectively includes all government officials. Wang’s successor as head of the CCDI, Zhao Leji, has now joined the seven-member Standing Committee of the Politburo after serving for five years as the head of the Party’s powerful Organization Department, which is responsible for assignments and promotions with the Party and government. Zhao is reportedly family friends with Xi, although they never worked together. Zhao is also reportedly supported by former President Hu Jintao and Party elder Zeng Qinghong, who are other key factional stakeholders in the Party.

Demand-side Enforcement. My post in 2012 predicted “more ‘big-name’ prosecutions of government officials.” This was proven out by prosecutions of Zhou Yongkang, Bo Xilai, Sun Zhengcai, and senior generals, in addition to numerous minister-level officials. (The CCDI even investigated its own investigators for taking bribes from government officials to avoid investigation.) I predict that we will not see a significant decrease in the rate of prosecutions of officials. The anti-corruption campaign continues to be popular among the general citizenry, and also serves as way for Xi to remove potential challenges to his power or roadblocks to implementing his 2035 agenda.

Enforcement Against Multinationals. My post in 2012 predicted that the trend of the Chinese government targeting multinationals would “continue and possibly increase as the new leadership searches for ways to show that they are cracking down on corruption.” Both public (e.g., pharmaceutical industry) and non-public investigations seem to have borne this out, although official statistics are not broken out by type of company. Based on the fact that the work report for the Party Congress expressed a commitment to investigate both bribe-givers and bribe-takers to root out corruption, I predict that enforcement against bribe-givers (i.e., “supply-side” corruption) will continue.

Commercial Bribery. My post in 2012 predicted that the increasing pace of commercial bribery enforcement would not be significantly affected by the leadership transition. While the official statistics do not break out cases by types, anecdotally, we have seen an increase in commercial bribery enforcement in recent years, and significant increases in the fines threatened or levied against multinational companies to resolve allegations of commercial bribery. I expect to see this increase continue.

As one indication, the law regulating commercial bribery was amended on Saturday to, among other things, increase penalties for commercial bribery. We prepared a bilingual comparison table here and analyzed key changes in a near-final draft here.

Enforcement of Overseas Bribery. My post in 2012 noted that China had not at that time brought a case under its overseas bribery statute, which was enacted in 2011. The post suggested that if the Chinese government wanted to send a strong message against corruption, it could bring a case against a Chinese company for bribes paid to non-Chinese government officials, although the companies with the largest overseas operations are state-owned enterprises with strong political connections that might protect them. To date, China has not publicly announced any cases under that statute — and from conversations with Chinese prosecutors, no non-public cases have been brought, either. I predict that this statute will remain largely dormant for the next five years.

Institutionalization of Anti-Corruption Enforcement Against Government Officials. Official media have reported that a National Supervision Law will be enacted in early 2018 that would effectively shift primary responsibility for enforcement against government officials from the Party (i.e., CCDI) to a newly formed government body. The full text of the legislation not yet been released, but from reports, it appears that the new enforcement body, called the National Supervision Commission (“Commission”), will attempt to consolidate into a single body the supervision and enforcement powers of the People’s Procuratorate, Ministry of Supervision, and National Bureau of Corruption Prevention. The establishment of a national-level commission follows pilots in three local areas.

The practical effect of this development on most multinational companies operating in China may not be significant. The Commission likely will have direct enforcement jurisdiction only over government officials and officials at state-owned enterprises (SOEs), not private companies. The Commission will likely have the ability to collect evidence from private companies and individuals either itself or in cooperation with other regulators, but other agencies already have such authority (and use it). For multinational companies involved in joint ventures with government agencies or state-owned entities, however, continued and better coordinated enforcement against government officials and officials of SOEs could have compliance (and commercial) implications.

The Commission itself will, like all things in China, be ultimately accountable to the Party, rather than function as an independent check on the Party. Some have predicted that the Criminal Law will be amended to give the Commission more enforcement tools. While this is certainly possible, the government (and Party) already has significant power and authority to investigate and prosecute corruption, and one assumes that some of the vagueness in the current Criminal Law that gives government agencies significant discretion to interpret and enforce is not accidental.

(Other forms of anti-corruption measures, such as requiring government officials above certain levels to publicly disclose their assets and financial interests, have been quietly shelved.)

International Cooperation.  Since 2014, China’s anti-corruption campaign has included pursuing “foxes” (corrupt government officials who have fled China). The CCDI and government agencies have worked with Interpol and prosecutors in other countries to track down and bring back these fugitives. The effort — initially dubbed Operation Fox Hunt and later Operation Skynet — has repatriated more than 2,500 fugitives from 90 countries, including 48 of the “top 100” fugitives. These efforts have opened wider channels with other prosecutors and resulted in additional information sharing, which historically was limited. While cooperation between Chinese prosecutors and other prosecutors still lags far behind cooperation between, for instance, the U.S. and certain prosecutors in western Europe and Latin America, that cooperation is increasing.

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Eric Carlson, a contributing editor of the FCPA Blog, is a Shanghai-based partner at Covington & Burling LLP specializing in anti-corruption compliance and internal investigations, with a particular focus on China and other regions in Asia. He speaks fluent Mandarin and Cantonese and can be contacted hereJames Yuan, an associate in Covington’s Shanghai office, contributed research for this post.

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