China has been exploring a mechanism similar to the NPA in the past two years, which is called the (“CNPS”). The system is similar to the NPA mechanism in the U.S. in that:
1) if a corporate implicated in a criminal case admits wrongdoing;
2) cooperates with the government investigation, and
3) is willing to develop and implement a compliance program under the supervision of third-party monitors within a prescribed time limit,
the procuratorate will consider making a decision of non-prosecution.
The first phase to adopt the CNPS started in March 2020, when the Supreme People’s Procuratorate (“SSP”) launched a pilot program among six procuratorates located in Shanghai, Jiangsu, Shandong, and Guangdong. In April 2021, the SPP launched the second phase of the pilot program by issuing the Work Plan on Launching the Pilot Program for Corporate Compliance Reform (the “Plan”), which expanded the adoption of the CNPS to ten provinces and municipalities such as Beijing, Shanghai, and Zhejiang. Our article examines the CNPS and urges companies to implement and/or tweak their compliance system. The excuses for failing to comply are running out.
The Two Approaches
In evaluating the adoption of the CNPS, there have been two approaches taken by the local procuratorates in pilot regions:
- The 1st approach is “conditional non-prosecution” (附条件不起诉), which has been the more widely adopted model by the local procuratorates in pilot regions. Under this approach, the procuratorate will request the corporate to develop and implement a compliance program overseen by third-party monitors within a prescribed inspection period. Upon the expiration of the inspection period, the procuratorate will consider whether to prosecute or not based on the performance of the corporate.
- The 2nd approach is “relative non-prosecution” (相对不起诉). Under this approach, the procuratorate will recommend the corporate to develop and implement a compliance program and make the decision of non-prosecution at the same time. It should be noted that third-party monitors will not be involved under this approach. This approach has been adopted by some procuratorates in Shanghai and Jiangsu Province.
Third-Party Mechanism
While the 1st approach is widely adopted by procuratorates, an important question relates to how the third-party monitoring mechanism (“Third-Party Mechanism”) will be implemented in practice. On June 3, 2021, the SPP and eight other top Chinese authorities jointly issued the Guiding Opinions on Establishing a Third-Party Monitoring and Evaluation Mechanism for the Compliance of Corporates Involved in Cases (for Trial Implementation) (the “Guiding Opinions”), which introduced the framework of the Third-Party Mechanism.
According to the Guiding Opinions, the Third-Party Mechanism means that when the procuratorate is handling certain corporate-related criminal cases, the procuratorate may decide to hand over the case to third-party monitors who are appointed by the Third Party Monitoring and Evaluation Mechanism Management Committee (the “Management Committee”). The third-party monitors will oversee the development and implementation of the compliance program during the monitoring period. Upon the expiration of the monitoring period, third-party monitors will draft a compliance inspection report which will serve as an important reference for the procuratorate in making a non-prosecution decision.
Conditions on Adopting the Third-Party Mechanism:
In order for the procuratorate to adopt the Third-Party Mechanism in a criminal case, the Guiding Opinions requires the following three conditions to be met:
- The corporate and persons involved in the case admit wrongdoing.
- The corporate is capable of normal production and operation, commits to develop and implement a compliance program, and has the basic conditions for initiating the Third-Party Mechanism. Please note that the Guiding Opinions does not clarify the what the “basic conditions” should be, with further clarification expected to be released in the near future.
- The corporate involved must adopt the Third-Party Mechanism voluntarily.
If the conditions are met, then the procuratorate may decide whether to adopt the Third-Party Mechanism on its own initiative. In addition, corporates, persons involved, and their lawyers may apply for the adoption of the Third-Party Mechanism, and the procuratorate shall review the application accordingly.
Third-Party Monitoring and Evaluation Mechanism Management Committee
According to the Guiding Opinions, the aforementioned Management Committee will be established at both central and local levels. Management Committee in the central level includes the SSP, the State-owned Assets Supervision and Administration Commission of the State Council, the Ministry of Finance, the Ministry of Justice, and the Ministry of Ecology and Environment, State Administration of Taxation, State Administration for Market Regulation, China Council for the Promotion of International Trade and other authorities. The local level Management Committees constituted by the pilot regions to date have consisted of the local-level procuratorates, finance departments and federations of industry and commerce, amongst others.
If a procuratorate decides to adopt the Third-Party Mechanism, it shall request the Management Committee to activate the third-party mechanism by appointing third-party monitors. The third-party monitors are composed of experts listed on a database of compliance professionals from various industries, including but not limited to lawyers, auditors, retired judges, and scholars from relevant fields.
Responsibilities of the Third-party Monitors
The Management Committee will select a group of third-party monitors to investigate, evaluate, supervise and inspect the fulfilment of the corporate’s compliance commitments. In particular, the Guiding Opinions provided that the monitors are responsible for:
- Reviewing and revising the feasibility, effectiveness, and comprehensiveness of the compliance remediation plans proposed by the corporate;
- Determining the duration of the compliance inspection period;
- Conducting inspections and assessments of the implementation of the compliance plan during the compliance inspection period;
- Drafting and preparing a compliance inspection report.
Based on the third-party monitors’ evaluation of the corporate’s remediation efforts, the procuratorate will decide whether to prosecute or not.
Enforcement Trends
The SSP has released two batches of typical cases regarding the adoption of the CNPS, on June 3, 2021 and December 8, 2021 respectively. So far, the adoption of the new system shows the following trends:
- Most of the cases are related to economic crimes. Among the typical cases released by the SPP and local procuratorate, the crimes are related to tax evasion, corruption, smuggling, illegal fund-raising, and intellectual property infringement.
- In China, the regulatory authorities generally consider a crime punishable with imprisonment for not more than three years to be a less serious crime. So far, most cases have involved offenses of less serious crimes.
- During the first phase of the pilot program (i.e., from March 2020 to April 2021), all cases related to small and medium sized companies. However, with the further reform of the pilot program, some regions have gradually begun to apply the system to large companies. In the most recent typical cases released by the SSP in December 2021, we have seen large companies and even industry leaders involved.
Next steps
The development of the CNPS in China is part of the increasing domestic and international pressure toward enhancing investigative and resolution tools to increase the effectiveness of enforcement activity to combat white-collar crimes. The Chinese system in particular improves law enforcement by encouraging companies to voluntarily disclose wrongdoing and cooperate with the procuratorate, in order to avoid the reputational and financial damage that would come with a criminal prosecution. In this regard, companies, especially foreign companies in China, need to carefully review their compliance program or put it in place if it does not exist, to ensure that the company has taken all reasonable steps to reduce the risk of legal violations and criminal convictions.
Authored by Calvin Ding, Yang Bai.
