China recently enacted a law that could prevent China-based individuals and entities, including the China-based subsidiaries of non-Chinese companies, from providing certain assistance in criminal proceedings outside of China.
The law appears to block such companies, absent approval from the Chinese government, from disclosing evidence in China to criminal enforcement authorities outside of China in connection with a criminal matter.
On October 26, 2018, China’s legislature, the National People’s Congress, enacted the International Criminal Judicial Assistance Law (ICJA Law). As the name suggests, the law applies only to criminal matters, not to civil or administrative matters.
The ICJA Law describes the processes to obtain assistance and evidence in criminal matters outside of China, including service of documents; evidence collection; witness testimony; freezing, seizure, and confiscation of assets; and transfer of convicted persons. The ICJA Law applies to entities and individuals outside of China seeking assistance from China, and China-based entities and individuals seeking assistance from other countries. The ICJA Law requires all such assistance in criminal proceedings be routed through a “competent authority” (currently five agencies in China are so designated).
In some respects, the ICJA Law is a gap-filler for countries where China does not have a Mutual Legal Assistance Treaty or similar agreement. According to the Chinese equivalent of legislative history of the ICJA Law, the restrictions aim to restrict the extraterritorial application of other countries’ laws in China, including in situations where criminal enforcement authorities request information directly from China-based organizations and institutions. The press release announcing the measure further stated that the ICJA Law would help fight corruption by allowing the Chinese government to obtain evidence against corrupt Chinese officials who have fled outside of China.
Of particular note for multinational companies, Article 4 of the ICJA Law states:
Without the approval of the competent authority of the People’s Republic of China, foreign agencies, organizations, and individuals shall not initiate criminal proceedings hereunder within the territory of the People’s Republic of China, [and] agencies, organizations, and individuals within the territory of the People’s Republic of China shall not provide to a foreign country any evidentiary material [or] the assistance set forth hereunder.
The first part of Article 4 is not new or surprising: China has long asserted its “judicial sovereignty,” and has long prohibited obtaining evidence in China without approval, even voluntary depositions in civil cases, and approval is rarely granted. (As a result, depositions for civil cases and DOJ witness interviews typically occur in Hong Kong or elsewhere outside of mainland China.)
The second part of Article 4 is new, and will be of particular interest to multinationals with operations in China. On its face, the new law would seem to prevent such agencies, organizations, or individuals from providing evidence or testimony in criminal proceedings outside of China without approval. This suggests that a China-based subsidiary of a multinational company could not, absent approval from the Chinese government, provide evidence or testimony to criminal enforcement authorities such as the U.S. DOJ or UK Serious Fraud Office. The U.S. SEC, without criminal enforcement authority, would not appear to be covered.
The reading of Article 4 may even be broad enough to prohibit a China-based subsidiary of a multinational from providing such information to its parent outside of China, absent approval, as the prohibition applies to providing evidence or assistance to “a foreign country,” and is not limited to providing information the government of a foreign country.
A multinational company requested to provide evidence or testimony for a criminal investigation related to alleged wrongdoing by its affiliate in China may face the unenviable task of choosing among (1) seeking approval to transfer the evidence or provide witness testimony — which, if experience is a guide, is likely to be very slow or unobtainable — and, by alerting the authorities to the conduct, could result in criminal enforcement in China, (2) telling the criminal authorities in the other countries that the company cannot provide the information sought, or (3) providing the information in potential violation of PRC law.
U.S. officials have encouraged dialogue when there are conflicts of laws that restrict companies from disclosing information; however, U.S. officials have also signaled that companies may ultimately have to decide whether to violate a foreign law or be held in contempt by a U.S. court. The ICJA Law does not contain penalties for violations, although China could presumably choose to not recognize any judicial decision based on evidence obtained in violation of the ICJA Law.
Notably, the ICJA Law does not appear to apply to an internal investigation initiated by the company. However, it could apply if the evidence developed during the internal investigation is to be submitted to a criminal enforcement authority outside of China.
Some commentators have asserted that the ICJA Law is a Chinese response to the US Department of Justice’s November 1, 2018 China Initiative, which states that DOJ will prioritize identifying FCPA cases “involving Chinese companies that compete with American businesses.” But the ICJA Law was enacted on October 26 — a week before the DOJ announced the China Initiative — and has been under consideration since 2015. The ICJA Law does seem to be a reaction, though, to broader concerns about perceptions of overreach of the long-arm jurisdiction exercised by certain other countries, and presumably the United States is top of mind in that regard.
After China National People’s Congress enacts a law, it is very common for the government to issue implementing regulations providing more details and interpretation of the law.
Eric Carlson, pictured above, a contributing editor of the FCPA Blog, is a Shanghai-based partner at Covington & Burling LLP specializing in anti-corruption compliance and investigations, with a particular focus on China and other regions in Asia. He speaks fluent Mandarin and Cantonese and can be contacted here.
Nicole Ma, an associate in Covington’s Shanghai office specializing in anti-corruption compliance and investigations, provided research assistance for this post.
A bilingual version of this post is available from the authors upon request.