Reading Compliance Guidelines for Companies Going Global

道可特法视界第1184篇原创文章

Abstract: 

Most recently on December 29, 2018, National Development and Reform Commission (NDRC) jointly with other six government authorities issued Compliance Management Guidelines for Chinese Companies Doing Business Overseas (hereinafter referred to as Guidelines for Overseas Business). Compliance is a call for Chinese businesses going global including along the One Belt& One Road, and to a large extent dictates whether the business can succeed or fail. Compliance failures have been found in many bankrupted or problematic outbound projects. 

1

Pains & Gains

According to Report on China Outbound Investment in 2018 of Ministry of Commerce of PRC(MOFCOM), statistics of the UN Conference on Trade and Development (UNCTAD) show that just in 2017, there were 18 pieces of new policies issued across the globe with the aim to exert more restrictions and step up monitoring, most of which are under the name of national security and protection of strategic assets, for example, a pilot program of the United States for Foreign Investment Risk Review Modern Act (FIRRMA) initiated in November 2018. With all these years’ experiences of and exposure to globalization, more tightened and complicated regulations and rules, increasingly fierce competition among companies, international norms and good practices are not only introduced by the market players, but also accepted by the government authorities who acknowledge that compliance helps build the companies’ healthy and sustainable development and competitiveness in the global market. It is just timing.

Earlier 2018 ZTE has been heavily fined and tightly supervised by the US government, and then Huawei’s Vice Chairman, Ms. Meng Wanzhou was detained in Canada, not released so far and it is reported that US will soon request Canada to transfer Ms. Meng to US for trial. These two cases surely have sent very serious warnings to Chinese government and companies to attach sufficient attention and importance to compliance.

So it is never an coincidence that the year 2018 saw the mushrooming issuance of compliance guidelines: Compliance Guidelines for State –owned Enterprises (SOEs) with State–owned Assets Supervision and Administration (SASAC) enjoying the rights and responsibilities as entrusted shareholder (hereinafter referred to as Guidelines for SOEs) issued on November 2nd by SASAC, and the Guidelines for Effective Compliance Programs issued by China Standardization Institute on July 1st, 2018. All these three pieces of Guidelines provide fundamental and systematic rulers and tools for compliance management in line with international norms and practices.

More specifically, these three Guidelines share fundamental principles and ideas of compliance which are also internationally accepted good practices. While the Guidelines for SOEs only applies to SOEs supervised by SASAC, it does help provide other companies with valuable reference to develop their effective compliance programs, and is also expected to be applied to all companies when timing is mature. To be noticeable, Guidelines for SOEs covers and places much emphasis on compliance in outbound investment. While Guidelines for Overseas Business lays out more detailed rules for all companies to do overseas business, the two Guidelines just are not contradictory at all, but rather complementary, with much harmony. 

2

Main Framework

From the three Guidelines here come the shared main framework and backbone for a compliance program.

i. To articulate and uphold the basic principles of a compliance program: independence, adaptation and all-roundness, which underline and go to the essence of all compliance programs.

ii. To define each level of management’s compliance functions and duties from top to down, which thus are empowered as well as obligated. This sends strong message that compliance is not just compliance professionals’ job, but rather it is more of management’s and all company staff’s responsibility, which is the very key for a sound and effective compliance program. The Guidelines for SOEs also touches upon compliance roles of internal auditors, internal controls, risk management, QHSE, etc., in terms of their work functions and collaboration /synergy, a hard nut to crack in practice.

iii. To develop compliance rules and incorporate them into the company’s business flows for implementation purpose. Whether compliance policies and procedures, or company business conducts and ethics, should be based upon what compliance requires and what compliance risks are identified.

iv. To improve the compliance operating systems, covering risk identification and precaution (warning), response, compliance review (consulting and investigations), disciplinary actions, compliance program evaluation and continuous improvement. It is also advisable to conduct compliance audit and evaluation on a regular basis, thus the compliance programs will be adjusted and improved accordingly based upon the outside and inside changing circumstances and dynamics. Following closely with the latest development of legal/compliance rules in the target jurisdiction is critical.

v. Other supporting measures, like informatization, building compliance talents pool, training, reporting, performance examination and evaluation, and the last, but not the least, to nurture the compliance culture to walk the talk. This is quite soft aspect, and it speaks to the overall compliance environment and health of the organization. 

3

Special Concerns

While compliance is integrated in all business flows and overall business operations, the Guidelines for Overseas Business is never scattershot.

i. Specific compliance risks may vary depending on the types of business the companies do. This is why the Guidelines points to the particular types of compliance risks separately for foreign trade, foreign investment, contracted projects and the daily business operations. And Merger & Acquisition as a frequent and big-deal business vehicle also requires special attention.

ii. The company’s compliance program shall also be tailored to the company itself in terms of its business scope, organization structure, and size, etc. with sufficient attention to the specific business process, like compliance review, due diligence, e.g. in some investment projects, and retaining third party vendors. We can not emphasize due diligence more, which affects whether to proceed or not, the deal structure, even success or failure of the project itself. It usually turns out that pitfalls are buried under those insufficient, unexhausted or unthorough due diligence.

iii. Following closely with the latest development of applicable legal and compliance rules in the local jurisdictions on a regular basis. It is basic task for the compliance watch so as to understand the compliance requirements, red flag, real time. It always pays off.

iv. While a compliance program is all-round and covering all business process, focus will need to be placed on key areas, key processes, and key people, which can be referred to in the Guidelines for SOEs while also applied in overseas business. In case of doing business overseas, focus shall be put on due diligence, compliance review of important decisions, major contracts and large sum of funds monitor, as well as on corporate governance of overseas subsidiaries. This is an economic approach to effectiveness and efficiency.

v. As the Guidelines applies to the companies which do business overseas, as well as their subsidiaries, branches, and representative offices set up overseas, it is a call to strengthen the parent companies’ oversight, with attention to information share, inspection and examination of their overseas entities, whose compliance programs are advisable to be integrated into those of their parent companies.

These guidelines are problem solving-oriented and practical, and do help the companies develop their customized compliance programs. However, they are basic guidelines, not mandatory in nature, with much room left for the companies to adopt the rules based upon their own situation and particular circumstances, which is thus a strong call and challenge for the government to follow up with effective supervision and tightened accountability. 

4

What Follows

Given that the governing authorities attach great importance to the compliance management and will improve compliance policies and rules, they will follow up with tightened supervision and issue corresponding disciplinary measures to enhance implementation, according to the Guidelines for Overseas Business and an NDRC official who responded to reporters regarding the release of the Guidelines. Therefore, it is a call for the companies to take actions under the Guidelines. Advisable are the following measures to be taken for the purpose of risk management:

i. To conduct a comprehensive compliance evaluation and risk identification;

ii. To review, develop and improve internal rules and build compliance requirements in the business flows, based upon and the company’s individual and particular situation.

iii. To develop compliance training programs to assist management and staff to learn compliance requirements and good practice, to raise compliance awareness and understand the business process in performing their duties and functions as well as coordinating with other functions.

If necessary, the companies are advisable to work with reliable professional firms to do compliance. Outside compliance professionals can add to their compliance capabilities, resources, expertise and experience, who also feature independence, detachment and thus the company staff are more ready to offer trust, assistance, and collaboration if is needed. They will tend to maintain a more objective position and perspective the company values, in developing internal rules, doing due diligence, conducting internal investigations, handling labor disputes, advising on local rules and policies, structuring business deals, and filing with local government authorities, etc. 

 陈 凤 霞  

Cathy Chen is a partner of Beijing DOCVIT Law Firm. She is admitted to practice law in China and New York State in the United States, with over 10 years of working experience in legal and compliance arena. Cathy focuses on corporate legal & compliance, inbound and outbound investment. Cathy’s working languages are Mandarin and English.

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