I. Corporate liability deriving from criminal activity
1. Nature of the liability (criminal, administrative) and basis (crimes committed by directors or representatives, in the interest of or for the advantage of the company)
Corporate criminal liability exists in China as a subset of what are called “unit crimes.” According to Article 30 of the PRC Criminal Law, any company, institution, state organ or organization shall bear criminal liability if it commits an act that endangers society and if such act is prescribed by laws as a crime committed by a unit.
A unit crime is committed as a result of a collective decision made by the unit or an individual decision made by a person in a position of responsibility. To be a unit crime, the individual decision that leads to the criminal act must reflect the will of the unit. A person in a position of responsibility is any individual who has the authority to act on behalf of a unit in accordance with the law or the unit’s constitution. This may include the director, chairman of the board, general manager or any person who is responsible for specific departments, institutions or matters.
2. Type of crimes/administrative offenses from which, according to the legislature, corporate liability may arise
Under the PRC Criminal Law, corporate or unit liability may arise for the following offenses:
- Endangering public security or safety — Offering assistance to terrorist activities (Article 120); illegally manufacturing, trading, transporting, mailing or stockpiling guns, ammunition or explosives (Article 125(1)); illegally manufacturing, trading, transporting or storing toxic substances, radioactive materials or infectious disease pathogens (Article 125(2)); illegally selling, manufacturing or distributing guns (the subject of this crime is a unit that is legally permitted to manufacture or sell guns) (Article 126); illegally leasing or lending guns (Article 128); and causing a major safety accident by lowering or failing to adhere to project quality standards (the subjects of this crime are construction, design, work and engineering supervision units) (Article 137)
- Undermining the order of the socialist market economy
- Producing or marketing fake or substandard goods — Producing or selling fake or shoddy products (Article 140); producing or selling fake drugs (Article 141); producing or selling inferior medicines (Article 142); producing or selling foods that do not meet the food safety standards (Article 143); producing or selling toxic or harmful foods (Article 144); producing or selling medical devices and instruments or medical hygiene materials that do not meet national and industry standards for safeguarding human health (Article 145); producing or selling products that do not meet safety standards (Article 146); producing or selling fake or substandard insecticides, animal-use medicines, chemical fertilizers or seeds (Article 147); and producing or selling cosmetics that do not meet hygiene standards (Article 148)
- Smuggling — Smuggling weapons, ammunition, nuclear materials, counterfeit currency, cultural relics, gold, silver or other precious metals, precious and rare plant species or products thereof (Article 151); smuggling pornographic materials into the territory of China (Article 152(1)); smuggling solid, liquid or gaseous waste into the territory of China (Article 152 (2)); and smuggling common goods or articles (Article 153)
- Disrupting the orderly administration of companies and enterprises — Falsely declaring capital to be registered (Article 158); falsely claiming a capital contribution payment or withdrawing contributed capital after the incorporation of a company (Article 159); issuing shares or company bonds while concealing important information or falsifying major information (Article 160); failing to disclose important information (Article 161); interfering with accounts settlement (Article 162); concealing or intentionally destroying accounting vouchers, account books or financial and accounting reports (Article 162 (1)); falsely declaring bankruptcy (Article 162(2)); offering bribes to non-state functionaries, foreign government functionaries or officials of international public organizations (Article 164); and breaching a fiduciary duty (Article 169(1))
- Disrupting the orderly administration of financial markets — Establishing a financial institution without approval (Article 174(1)); forging, altering or illegally transferring a commercial banking permit or any other banking permit (Article 174 (2)); relending at high interest rate (Article 175); obtaining loans, acceptance of bills, letters of credit or letters of guarantee by means of deception (Article 175(1)); illegally accepting deposits (Article 176); forging or altering financial instruments (Article 177); forging or altering national treasury bonds, share certificates or company and enterprise bonds (Article 178); issuing shares or bonds without permission (Article 179); insider dealing or disclosing internal information or trading on undisclosed information (Article 180); disrupting securities or futures trading markets by fabricating or disseminating false information (Article 181); tricking investors into buying or selling securities (Article 181); manipulating the securities or futures market (Article 182); violating a fiduciary duty by unlawfully utilizing client funds or entrusted property (the subjects of this crime are commercial banks, stock exchanges, futures exchanges, securities companies, futures brokerage companies, insurance companies or any other financial institution) (Article 185(1)); granting a loan in violation of laws or administrative rules and regulations (the subjects of this crime are banks or any other financial institution) (Article 186); accepting client money without entering it into the appropriate accounts (the subject of this crime are banks or any other financial institution) (Article 187); violating relevant provisions when issuing financial instruments (the subjects of this crime are banks or any other financial institution) (Article 188); accepting, paying or guaranteeing a negotiable instrument that does not comply with the provisions of the Law on Negotiable Instruments (the subjects of this crime are banks or any other financial institutions) (Article 189); evading foreign exchange restrictions(Article 190); and money laundering (Article 191)
- Financial fraud — Fraudulent fund raising (Article 192); fraudulent notes (Article 194); credit fraud (Article 195); and insurance fraud (Article 198)
- Jeopardizing administration of tax collection — Tax evasion (Article 201); avoiding payment of tax arrears (Article 203); using fraudulent means to defraud state export tax refunds (Article 204); falsely issuing exclusive value-added tax invoices or other invoices to fraudulently receive export tax refunds or to offset taxes (Article 205); falsely issuing exclusive value-added tax invoices or other invoices (Article 205(1)); forging or selling forged exclusive value-added tax invoices (Article 206); and illegally purchasing exclusive value-added tax invoices or forged exclusive value tax invoices (Article 208)
- Infringing on intellectual property rights — Counterfeiting registered trademarks (Article 213); selling merchandise under a faked trademark (Article 214); forging or selling registered trademarks without authority (Article 215); counterfeiting patents (Article 216); infringing copyright (Article 217); selling products that infringe copyright (Article 218); and infringing upon commercial secrets (Article 219)
- Disrupting market order — Impairing business credit or commodity reputation (Article 221); false advertising (Article 222); colluding during bidding (Article 223); committing contract fraud (Article 224); organizing or leading a pyramid sales scheme (Article 224(1)); conducting illegal business operations (Article 225); buying or selling commodities through violence or intimidation, or compelling others to provide or receive services (Article 226); counterfeiting or scalping tickets (Article 227); illegally transferring or reselling land-use rights (Article 228); providing false professional audits, opinions or assessments (the subjects of this crime are intermediary organizations whose duty is to provide capital assessment, verification or validation, or to provide accounting, auditing, or legal services, etc.) (Article 229); and evading a commodity inspection (Article 230)
- Infringing upon a citizen’s personal and democratic rights — Compelling others to work by violence, threats or restrictions on their personal freedom (Article 244); hiring children to conduct extremely dangerous or intensive work (Article 244(1)); infringing a citizen’s personal information (Article 253); retaliating against accountants or statisticians (Article 255); and maltreating a person under guardianship and care (Article 260(1))
- Infringing property rights — Converting the unit’s property (Article 271); misappropriating private or public funds (Article 272); and refusing to pay labor remuneration (Article 276)
- Obstructing the administration of public order
- Disturbing public order — Unlawfully manufacturing, purchasing or selling police insignia or equipment (Article 281); unlawfully manufacturing or selling specialized espionage equipment or devices (Article 283); hacking into computer information systems (Article 285); damaging computer information systems (Article 286); failing to manage security for information networks (Article 286(1)); unlawfully using information networks (Article 287(1)); offering assistance to those committing information network crimes (Article 287(2)); and disrupting radio communications (Article 288)
- Interfering with judicial activities — Tampering with testimony (Article 307); filing false litigation (Article 307(1)); divulging non-disclosable information (Article 308); disguising or concealing illegal income or proceeds (Article 312); and failing to execute a judicial judgment or ruling (Article 313)
- Fraudulently obtaining customs and immigration documents (Article 319)
- Violating regulations on cultural relics — Secretly selling or giving as a foreigner cultural relics (Article 325); and reselling cultural relics (Article 326)
- Endangering public health — Impairing infectious disease prevention (Article 330); violating the provisions on frontier health and quarantine (Article 332); and violating the provisions on animal and plant epidemic prevention and quarantine (Article 337)
- Undermining the protection of environmental resources — Causing major environmental pollution by discharging or dumping radioactive waste, infectious disease waste, toxic substances or other hazardous waste (Article 338); illegally disposing of or importing solid waste from abroad (Article 339); illegally harvesting aquatic species (Article 340); illegally catching or killing protected and endangered species (Article 341); illegally occupying land used for agriculture (Article 342); illegally mining (Article 343); illegally cutting down or destroying protected plants (Article 344); and illegally cutting down trees or illegally purchasing or transporting trees or lumber (Article 345)
- Illegally trafficking, transporting or manufacturing narcotics — Smuggling, trafficking, transporting and manufacturing illegal narcotics (Article 347); illegally producing, selling, purchasing or transporting raw materials or compounds used in the manufacture of illegal narcotics (Article 350); and providing for consumption illegal narcotics and psychotropic substances(Article 355)
- Facilitating prostitution — Introducing a woman to or forcing or luring a woman into prostitution (Article 361); organizing or sheltering prostitutes (Article 361); and harboring those who facilitate prostitution (Article 362)
- Manufacturing, trafficking and disseminating pornographic articles — Producing, duplicating, publishing, selling or disseminating pornographic materials for profit (Article 363); disseminating pornographic materials (Article 364); arranging shows of pornographic audio-video products (Article 364); and arranging pornographic performances (Article 365)
- Impairing national defense — Knowingly providing substandard weapons or equipment or military installations (Article 370); forging, altering, purchasing, selling, stealing or forcibly seizing the official documents, certificates or seals of the armed forces (Article 375); illegally producing, purchasing or selling uniforms of the armed forces (Article 375); forging, stealing, purchasing, selling or illegally providing or using vehicle license plates or other special signs of the armed forces (Article 375); and failing to accept orders for military supplies or intentionally delaying the provision of military supplies during wartime (Article 380)
- Accepting or offering bribes — Accepting bribes by the unit (Article 387); offering bribes to a person in a position of influence (Article 390(1)); offering bribes to a unit (Article 391); and offering bribes by the unit (Article 393)
3. Identification of companies and entities to which liability may apply
As stated in question 1, Article 30 of the PRC Criminal Law holds any company or entity criminally liable for committing any act that endangers society and is prescribed by law as a unit crime. The “company or entity” provided here includes not only Chinese state-owned companies, collectively owned companies and public institutions, but also includes any entity that can qualify as an independent legal person in the PRC, such as legally established joint ventures, wholly owned foreign enterprises as well as foreign companies, enterprises and institutions.
4. Corporate liability for crimes committed abroad by its representatives or subsidiaries
Article 7 of the PRC Criminal Law provides that Chinese citizens are liable and may be prosecuted for crimes committed outside the territory of the PRC if the minimum fixed-term imprisonment for the crime is more than three years under the PRC Criminal Law. Therefore, a Chinese citizen who commits a crime abroad as defined under the PRC Criminal Law while acting as a company representative may be prosecuted in the PRC. The PRC law is silent on corporate liability for crimes committed abroad by a company or its subsidiaries.
5. Corporate liability in the case of transactions taking place after the commission of a crime (acquisitions, mergers, demergers, etc.)
- Acquisitions/mergers – According to the Reply of the Supreme People’s Court on Issues Concerning the Criminal Liability for a Company Being Acquired and Merged After Committing a Crime (关于企业犯罪后被合并应当如何追究刑事责任问题的答复), the original company and the persons directly in charge or directly responsible for the original company are liable for crimes committed by the original company before it undergoes an acquisition or merger. During the prosecution, the original company is listed as the defendant, but with indication that the defendant has been merged into a new company. The fine imposed on the defendant is limited to its merged property and income.
- Demergers – According to Article 286 of the Interpretations of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China (最高人民法院关于适用《中华人民共和国刑事诉讼法》的解释), in cases where the defendant unit undergoes a merger or split during the criminal trial, the original unit continues to be listed as the defendant unit, with the merger or split being stated. The fine imposed on the defendant unit is limited to the property and financial interests that the defendant unit contributed to the new unit.
II. Applicable sanctions
1. Type of sanctions applicable to the company
Under the PRC Criminal Law, the only sanction applicable to a company is monetary fines. However, under administrative regulations, the authorities can publicly disclose the company’s behavior, suspend the company from some business operations, ban the company from participating in public procurement or disqualify the company for government-funded incentive programs.
2. Interim measures, cease and desist orders, bans and confiscatory measures
According to Article 100 of the PRC Criminal Procedure Law, the courts may issue preservation measures to seal, seize or freeze the property of the defendant. The plaintiff to an incidental civil action or the People’s Procuratorate may petition the court for these preservation measures.
In addition, Article 284 of the Interpretations of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China states that the courts may recover, seal, seize or freeze the company’s illegal gains and the fruits of those illegal gains.
According to Article 1 of the Provisions of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of the Procedure for Confiscating Illegal Gains in a Case Where the Criminal Suspect or Defendant Goes into Hiding or Dies（最高人民法院、最高人民检察院关于适用犯罪嫌疑人、被告人逃匿、死亡案件违法所得没收程序若干问题的规定), the court may confiscate profits if the company earned any profits or revenues as a result of criminal corruption and bribery, terrorist activity, smuggling, money laundering, financial fraud and telecom or network fraud.
3. Liability of directors or managers for not having adopted (intentionally or negligently) measures for the prevention of the crime
The PRC Criminal Law does not specifically address the liability of directors and managers for intentionally or negligently failing to adopt measures to prevent a crime. However, a court could reasonably impose criminal liability for this intentional or negligent omission under the standard for general criminal liability. Thus, there is a possibility that a director or manager might be found criminally liable for intentionally or negligently failing to implement preventative measures.
III. Measures and “models” of prevention and effects of the same on corporate liability and applicable sanctions
1. Consequences of the adoption of a compliance “model” and effects on corporate liability for crimes committed by the company’s managers, directors or representatives (cases in which it is possible to obtain an exemption from liability or a mitigation of the sanction)
PRC laws and regulations do not discuss any consequences or effects on corporate criminal liability when a company has adopted a compliance model.
2. Modality according to which a compliance “model” must be adopted in order to benefit from exemption from responsibility or mitigated punishment (codes of ethics, procedures, etc.)
3. Monitoring: independent person or body to control/supervise, with the purpose of verifying the correct application of the “model”; mode of operation of such person or body
IV. Judicial proceedings to determine corporate liability
1. Court competent to decide the liability of and penalties applicable to the company
The PRC Criminal Law and the PRC Criminal Procedure Law do not name special courts competent in deciding the liability of and penalties for a company. Instead, the court with the competency to decide a company’s liability is the same court with the competency to decide the personal criminal liability of an individual charged with the crime. According to the PRC Criminal Procedure Law, the court will apply the same procedural rules to the company that are applicable to the individual.
2. Possibility of the application of interim measures
As stated in question 2 of Section II, Article 100 of the PRC Criminal Procedure Law states that upon the prosecutor’s request, the court can issue a preservation order to seal, seize or freeze the property of a company.
The same provision also states that the court must comply with the PRC Civil Procedure Law when issuing a preservation measure, specifically the following:
- Article 100 of the PRC Civil Procedure Law stipulates that the court may issue a preservation measure if the execution of a judgment may become impossible or difficult without it. In order to receive the preservation measure, the applicant may be ordered to provide security.
- Article 101 of the PRC Civil Procedure Law stipulates that a party may apply to the court for an emergency property preservation order before instituting a lawsuit or applying for arbitration if the applicant would suffer irreparable damage without it. In order to receive the emergency property preservation order, the applicant must provide security. If the applicant fails to provide security, the court will reject the application.
3. Plea bargains and related effects on the corporate liability
PRC laws and regulations do not provide specific provisions concerning plea bargains and their effects on corporate liability. However, PRC law does allow settlements in both private and public prosecutions.
In a criminal proceeding initiated by a private individual or entity instead of by the People’s Procuratorates, Article 272 of the PRC Criminal Procedure Law allows the plaintiff and defendant to settle the case by themselves before the announcement of judgment.
According to Article 204 of the PRC Criminal Procedure Law, private prosecutions include the following:
- Cases that can only be initiated by the applicant (eg, slander)
- Cases for which the applicant’s evidence shows the defendant’s underlying crime to be a minor criminal offense
- Cases for which the applicant has evidence to prove that the defendant should be investigated for criminal responsibility according to law, but the public security organs and the People’s Procuratorates decline to investigate
In a public prosecution, Article 277 of the PRC Criminal Procedure Law provides that the parties may reach a settlement if: (i) the criminal suspect or defendant sincerely feels remorse for the crime and obtains forgiveness from the victim by paying compensation and apologizing to the victim; and (ii) the victim is willing to settle.
According to Article 277 of the PRC Criminal Procedure Law, public prosecutions in which the victim and defendant can reach a settlement include the following:
- A civil dispute in which the defendant is suspected of violating PRC Criminal Law Chapters IV (Crimes infringing upon the rights of a person and the democratic rights of citizens) or V (Crimes infringing upon property), for which the defendant would be subject to a criminal punishment of less than three years fixed-term imprisonment
- A criminal negligence case subject to a criminal punishment of less than seven years of fixed-term imprisonment, excluding the crime of dereliction of duty
It should be noted that in cases where a criminal suspect or defendant is guilty of another intentional criminal offense in the past five years, this settlement mechanism is not available.
4. Imposition of sanctions against the company
See Section II question 1 above.
5. Permanence of corporate liability if the crime is extinguished
No PRC law or regulation specifically addresses the permanence of corporate liability when the criminal conduct is voluntarily extinguished. According to the PRC Criminal Law, corporate liability arises when: (i) a unit crime has been committed; (ii) a unit is preparing for a crime; and (iii) a unit has already begun to carry out a crime but the crime is not consummated because of factors independent from the will of the unit. We believe that if the criminal conduct is voluntarily extinguished, the corporate criminal liability will also be extinguished.
V. Corporate liability in multinational groups
1. Liability of parent companies located abroad in the case of offenses committed by directors, managers or representatives of the local company
The PRC Criminal Law only provides that directors, managers or representatives of a local company are liable for a crime if they are directly in charge of or responsible for the commission of that crime. PRC laws and regulations are silent on whether a parent company located abroad will be criminally liable for offenses committed by its local company.
2. Basis of liability and applicable sanctions
According to Article 7 of the PRC Criminal Law, anyone who commits crimes within the territory of the PRC should be liable unless otherwise specially stipulated by law.
A foreign company, enterprise or institution that: (i) can qualify as a legal person in accordance with the PRC law; and (ii) commits within the territory of the PRC an offense endangering the society can be held liable for corporate criminal liability according to the Explanatory Document From the Research Institution of the Supreme Court on Issues Related to the Application of Law in Hearing Criminal Cases Involving Crimes Committed by Foreign Companies, Enterprises and Institutions Within the Territory of the People’s Republic of China (最高人民法院研究室关于外国公司、企业、事业单位在我国领域内犯罪如何适用法律问题的答复).
A local company and its directors, managers or representatives should bear liability for a crime committed within the territory of China. Foreign companies that can qualify as a legal person under PRC laws and their directors, managers or representatives who commit a crime within the territory of China should also bear criminal liability. However, PRC law does not explicitly provide that a parent company located abroad should be responsible for the crimes committed by the directors, managers or representatives of the local company.
As to the sanctions, please see Section II above.
VI. Significant case law concerning corporate liability arising from crimes and draft laws under discussion
1. Significant case law, if any
Although China does not formally follow the doctrine of precedent, courts still informally make reference to prior cases. As such, there are some significant cases concerning corporate criminal liability.
- On 15 March 2009, a Chinese court ruled that a leading infant formula manufacturer, which is a joint venture company, as well as its general manager and several senior managers, produced and sold fake or substandard products in violation of the PRC Criminal Law. The company produced a batch of infant formula containing melamine. This toxic industrial chemical was added to the formula to make the protein content appear higher. This caused the death of some infants as well as kidney stones in thousands of others. The court held that the company and its general manager, as well as several of its senior managers, were criminally liable. As a result, the court fined the company CNY 49 million (approximately USD 7.1 million), sentenced the general manager to life imprisonment with a personal fine of CNY 25 million (approximately USD 3.6 million) and sentenced the other managers to suspended sentences ranging from five to 15 years. The court found that a unit crime was committed as a result of a decision made by the unit collectively and by the person in a position of responsibility. A dual punishment was therefore imposed on both the unit and the persons directly in charge of and responsible for the crime.
- On 19 September 2014, a Chinese court ruled that a foreign-invested enterprise with headquarters in UK and several of its senior managers committed bribery under the PRC Criminal Law. Specifically, the court convicted the company and its five managers of the crime of “paying bribes to non-state working personnel” by using a network of Chinese travel agencies to disguise bribes paid to its customers and healthcare professionals. As a result, the court: (i) fined the company CNY 3 billion (approximately USD 489 million); (ii) sentenced its former general manager to three years of imprisonment with a four-year reprieve, which is essentially a suspended sentence, before ordering him deported from China; and (iii) sentenced the remaining four managers to suspended sentences from two to three years. The manager who actually took the bribes also received a suspended sentence of three years. This ruling was the first criminal verdict that a Chinese court has ever made against a multinational corporation that committed bribery.
2. Proposed or contemplated new legislation
At present, there is no newly proposed or contemplated legislation concerning corporate liability arising from corporate criminal conduct.