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Manseau and Zeng: More enforcement risk for China joint ventures

Having recently toughened up its anti-bribery laws, China is now aiming to expand its oversight of corruption in the public sector, possibly leading to increased enforcement efforts against both domestic and foreign companies.

In the face of this increased scrutiny, companies doing business in China may wish to reassess the risks of partnering not only with state-owned enterprises, but with any individual or business authorized to exercise public duties.

In October, the Central Commission for Discipline Inspection (CCDI) — the powerful corruption oversight body of the Communist Party — announced a plan to escalate the Party’s fight against corruption in the public sphere by creating a new National Supervision Commission (NSC).

This follows an aggressive campaign of investigations and detentions carried out in a series of pilot projects in Beijing and the provinces of Shanxi and Zhejiang, covering a combined public-sector population of more than three million individuals.

The National People’s Congress has since issued a draft Supervision Law establishing supervision commissions across the country that will oversee all “public personnel exercising public power” at the provincial, regional, and municipal levels. The law may be adopted as early as March 2018.

The NSC will extend the Party’s anti-corruption investigation and enforcement powers to a huge swath of China’s population, reaching both Party members and non-Party individuals or entities carrying out public duties. These include officials of administrative departments, the people’s congresses, the judiciary, state-owned enterprises, personnel in public education, scientific research, health care and sports, and others who “perform public duties in accordance with law.”

While exercising this broadened coverage, the NSC will centralize enforcement mechanisms by consolidating several existing anti-corruption units, and will have at its disposal a range of investigative and supervisory methods. Among these is a new liuzhi detention mechanism for those under investigation, which Party officials are promoting as a codified and controlled replacement of the prior shuanggui system for disciplining Party officials — a system heavily criticized for its practices of arbitrary detention, solitary confinement, torture and forced disappearance. But human rights organizations maintain that the liuzhi system continues to withhold basic rights from detained persons—an especially concerning development due to the large number of individuals who will soon be subject to the new mechanisms.

While foreign companies are not subject to NSC oversight, the heightened and expanded attention to corruption among those who exercise public powers in China will likely lead to greater scrutiny of their foreign business partners. China’s laws barring corruption in the private sector remain in place, including the Criminal Law and Anti-Unfair Competition Law, and recent amendments to the latter (effective January 1, 2018) have strengthened law enforcement powers, increased penalties for commercial bribery, and broadened the definition of bribery to include bribery offers.

Meanwhile, the government’s intense focus on combating corruption has affected foreign companies in other ways: some ministries have resorted to issuing blacklists of companies, including foreign companies, involved in commercial bribery, and many suspect that Chinese government officials have slowed down their foreign investment approvals to avoid suspicion of corruption.

It remains uncertain how these developments will affect the country’s approach to corruption beyond its borders. Though China criminalized the bribery of foreign public officials in 2011, this provision of law has never been enforced in spite of extensive anecdotal evidence that foreign bribery is a frequent tool of Chinese companies operating abroad. The draft Supervision Law’s consolidation of anti-corruption units gives to the NSC the task of planning, coordinating, and implementing international anti-corruption treaties — functions previously carried out by the Ministry of Supervision — with particular directives to strengthen the Party’s asset recovery and extradition efforts.

But this focus on retrieving assets that have improperly left the country does not give assurance that China will increase its participation in the broader international effort to combat bribery of foreign public officials. At stake is whether the current reforms will serve to strengthen the norms of good governance worldwide, or merely to expand Party control at home.

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Gwen Manseau, currently Legal Research Associate at TRACE International, previously worked on Chinese anticorruption and administrative law issues for the U.S. Department of Commerce.

Jialin (Jackie) Zeng, Legal Research and Due Diligence Associate at TRACE International, focusing on anti-corruption legal research and due diligence on third parties headquartered in Greater China.

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