Overview
The recent Chinese criminal investigation into alleged stock manipulation by investment companies operating in China is yet another reminder of the importance of being prepared for investigative raids. In the past, the foreign investor community had limited interaction with China’s criminal law – as a victim of intellectual property theft or perhaps by having been caught up in a customs investigation. Now the situation has changed. Beginning with the 2013 probe into the life sciences sector, China’s criminal law regime has become of significant importance to commercial practice and foreign investor operations in China. We first highlight recent developments in China’s criminal law and then provide an overview of the PRC criminal authorities typically involved with criminal investigations. We conclude with practice points for investigative raid preparations in China and offer some suggestions for dealing with them.
Recent Developments in Chinese Criminal Law
The main substantive law concerning crimes and penalties in China remains the 1979 Criminal Law of the People's Republic of China, a law which has been revised nine times, most recently in 2015. PRC criminal law developments of particular importance to foreign investors in recent years have included anti-corruption and criminal data privacy. For an overview of the recently issued Ninth Amendment, please see our previous alert China Promulgates the Ninth Amendment to the PRC Criminal Law.
Bribery Crimes: Shifting Focus to Bribe Payers
In December of 2012, the Supreme People's Court and the Supreme People's Procuratorate issued Fa Shi [2012] No. 22, a judicial interpretation that has become very important for anti-corruption practice in China.[1]
The judicial interpretation signaled a shift to more of an emphasis being placed on criminal bribe payers than in the past – i.e., to those who pass bribes to officials or in connection with commercial activities in China.
Among other items, the interpretation brought clarity to the meaning of the Chinese expression “谋取不正当利益,” “seeking an improper benefit,” in English translation, one of the elements for PRC law bribery crimes.[2] A prior expression of the phrase “seeking an improper benefit” was set out in a guiding opinion from 2008.[3]
Under the 2012 Judicial Interpretation, there are now three scenarios in which a benefit sought may be found to be improper:
- Where the briber sought to obtain an unfair commercial advantage.[4]
- Where the benefit sought violated a law, regulation, rule, or government policy.[5]
- Where a briber had requested/demanded that a “member of the working personnel of the state” (sometimes also translated as a “state functionary”) violate a law, regulation, rule, government policy or a provision of an industry standard. Arguably, the request itself may be deemed to be the seeking of an improper benefit.[6]
The definition for seeking improper benefits, now codified in a judicial interpretation, helps unpack what is meant by the Chinese phrase “谋取不正当利益” but it complicates the analysis somewhat by requiring a more detailed reading of the various laws, regulations, policies, and industry standards that may be implicated in any factual analysis. China has a complex web of semi-official policies and industry standards that are now even more relevant to compliance practice.
PRC Criminal Data Privacy Crimes
PRC Criminal Data Privacy – Article 253A
Data privacy was first criminalized in 2009 with the passage of the Seventh Amendment to the PRC Criminal Law and subsequently expanded under the Ninth Amendment in 2015. Revised Article 253A provides, in relevant part, in translation:
“Whoever sells or provides a citizen's personal information in violation of relevant national provisions shall, if the circumstances are serious, be sentenced to imprisonment of up to three years or criminal detention in addition to a fine or be sentenced to a fine only; or be sentenced to imprisonment of no less than three years but no more than seven years in addition to a fine if the circumstances are especially serious.”
One of the original reasons for Article 253A was to criminalize trading in personal information by particular government workers for profit. However, in practice, Article 253A was used more broadly and the amended Article 253A now expressly expands the scope of applicability for selling or providing personal information from staff members affiliated with particular state bodies to any individual. Moreover, early commentary for revised Article 253A suggests the term “citizen” should be interpreted to include not only Chinese citizens, but also foreign citizens and stateless persons.[7] The original sub part of Article 253A prohibiting the “stealing or illegally obtaining by other means” personal information remains in the new version but with some adjusted language. In practice, this sub part has been used to prosecute private investigators operating in China.
Personal Information and Identity Protection
In April 2013, the Supreme People's Court, Supreme People's Procuratorate, and Ministry of Public Security jointly issued Gong Tong Zi [2013], No. 12 (Criminal Data Privacy Notice), a notice announcing the importance of criminal data privacy prosecutions and clarifying some aspects of the criminal data privacy provisions of Article 253A of the PRC Criminal Code. Pursuant to the Criminal Data Privacy Notice "personal information" of citizens was defined as including "information and data that could identify a citizens' personal identity or were related to the privacy of a citizen, such as their name, age, identification number, marital status, work unit, education background, curriculum vitae, home address, and telephone number."[8]
A new, somewhat related crime, enhanced by the Ninth Amendment criminalizes trading in identity documents. Articles 280 and 280A prohibit the buying and selling of identification cards, passports, social security cards and driver’s licenses as well as the unauthorized use of another person’s identification documents – working to defend against identity theft in China.[9]
New Tool in Criminal Prosecution
There have been several significant cases brought under Article 253A in recent years. For example, in 2012, a foreign-invested marketing company was prosecuted under Article 253A for criminal data privacy violations.[10] According to the media, the company was found to have purchased over 90 million pieces of personal information, and used the information for marketing purposes. The company was prosecuted, and ultimately fined 1 Million Chinese Yuan. Several former executives were convicted and also received jail time and criminal fines. The high-profile convictions of ex-pat private investigators in 2014 were also made under Article 253A. Criminal data privacy is now a reality in China for foreign investors. This, coupled with the PRC state secrecy and sovereign information regimes, has created a special need for heightened attention to information compliance in China.
PRC Criminal Authorities
There are various departments and agencies that may become involved in criminal investigations and prosecutions in China. Some of these authorities are formally within the Chinese criminal justice apparatus, such as the Ministry of Public Security (公安局), China's police,and the Supreme Procuratorate (最高人民检察院) – China's prosecutors, special investigators for official corruption cases, and supervisors of the criminal process. Others are from subject matter-specific organs of the government, such as the General Administration of Customs (海关总署) and the State Administration of Taxation (国家税务总局). There are also times where agencies affiliated with the national security apparatus of the government may become involved in criminal investigations of foreign invested enterprises.
In addition, given the fundamental importance of the Communist Party of China (CPC or Party) to the Chinese political system, criminal investigations, and, in particular, criminal corruption investigations of Party or government officials, may be led or assisted by investigators from the Central Commission for Discipline Inspection (中央纪律检查委员会) (CCDI), a powerful investigative organization within the PRC. Criminal investigations led by the CCDI may operate outside the criminal law and within the Party's disciplinary framework. While the targets of these investigations are typically high ranking CPC or government officials, as we have seen recently in our practice, they are sometimes involved in investigations of foreign investors, making for an especially challenging investigative environment.
Practice Points for Addressing Visits from the Chinese State Authorities
In closing, given recent developments in Chinese criminal law and investigative trends, we set out below practice points for approaching and addressing investigative raids in China:
Steps to Take Now
- Prepare a PRC Investigative Raid manual or handbook. This document would set out appropriate “dawn raid” protocols and the names of key internal contacts, advisors, PR firm, and criminal counsel. Contact lists should be updated and alternates identified in the event key contacts cannot be reached.
- Understand your computer and server systems and where information is stored – is the data stored in China or outside of China? If outside of China, review your systems in light of new developments in the PRC encryption regime and from the perspective of PRC information compliance (Chinese state secrets and other classified and sovereign information which may not be exported outside of China).
- Drill and conduct scenario training.
- Train the C-suite, China managers, and in-house legal on how to respond to PRC criminal investigations.
- Practice responding to a PRC investigation.
- We recommend identifying and vetting PRC defense counsel in advance – called “defenders” (辩护人) in PRC criminal practice. Defenders are tasked with protecting the procedural and other legal rights of criminal suspects and defendants in the criminal process.
- Chinese criminal counsel is a special type of law professional in China. Identifying the right Chinese criminal counsel can take some time.
- Have chosen international and PRC counsel on call, and have them conduct periodic corruption risk assessments.
- Monitor the media in Chinese, keep up to date on news developments through popular Chinese microblogs – e.g., Weixin (WeChat), Sina Weibo.
- Treat seriously whistleblower complaints. Conduct an internal review of complaints and engage outside counsel early in the internal investigations.
What to do When the Authorities Arrive?
- Establish a control group for responding to the authorities and for information requests. For example, set up local office tactical control and headquarter office strategic control.
- Assign a trusted member of your team (legal or compliance preferably) to act as the liaison with the PRC authorities.
- Have counsel out of sight, but nearby. Often times it is better to have at least initial interaction with the authorities conducted by trusted company personnel on the ground.
- Try to contain the investigation – offer to help the authorities. For example, offer to prepare summary reports of complex data. Offer to collect and compile information. Formal requests for information should come in the form of a “Notice of Inspection and Examination.” It is generally best to cooperate and produce the documents that are requested, but if the request is not clear, ask for clarification.
- Do not alter or destroy information.
- If employees are to be interviewed by authorities, brief each employee before their interview and encourage cooperation.
- Debrief any company employee that interacted with the authorities. Keep track of what the officials did while they were on-site. Employees must understand the investigation is confidential and should not be discussed with persons outside the company.
- Retain a copy, if possible, of anything produced to the authorities. Make two sets in case you are asked for a set by another organ of the Chinese state.
-
- If documents seized by the authorities are voluminous, note what was seized.
- Carefully read any official written recording of the raid before signing and, if possible, retain a copy of the recording.
- Properly scope the subsequent internal investigation. Unlike in other jurisdictions, historically there has not been an express attorney-client privilege in the PRC legal system, although at least in civil litigation, the system has arguably provided one in effect. However, Article 46 of the revised Criminal Procedure Law (2012) now appears to expressly recognize something like an attorney-client privilege for lawyers that have been appointed as “defenders” (referenced above) in the criminal process, but under this law, the right to keep “information and circumstances learned in the course of practice activities” confidential lies with the Chinese criminal defense lawyer who has been appointed as a defender. As such, from the perspective of the Chinese criminal investigation, an internal investigation into the same activities may end up being done in the “open”-- in other words, without the protections of an attorney-client privilege shielding the company’s internal investigation from the PRC authorities. In a serious PRC criminal investigation, let the PRC authorities lead the investigation, follow where they go. Collateral investigations should take a back seat during the active phase of the PRC criminal investigation; otherwise, the scope of the PRC’s investigation may end up becoming bigger than it may otherwise have become.
[1] Joint interpretation by the Supreme Court and the Supreme Procuratorate in December 2012 specifically concerned with passing bribes, Fashi [2012], No. 22.
[2] See, e.g., Articles 389 and 393, PRC Criminal Law.
[3] Opinions of the Supreme People's Court and the Supreme People's Procuratorate on Certain Issues Concerning the Application of Law in Handling Criminal Cases of Commercial Bribery, Fa Fa [2008], No. 33.
[4] Id. Article 12(2)
[5] Id. Article 12(1)
[6] Id.
[7] See p.171, Explanations and Application of the Ninth Amendment to the PRC Criminal Law, Court Press (September 2015).
[8] Notice of the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security on Punishing the Crime of Infringing the Person Information of Citizens, Gong Tong Zi [2013], No. 12 (April 23, 2013).
[9] See, Article 280, 280A, PRC Criminal Law.
[10] See Illegally Obtain Citizen Personal Information Case, (2012) Zha Xing Chu Zi No. 997.
