Anti-bribery and anti-corruption compliance issues in China continue to catch international
news headlines and are showing no signs of cooling down.
As the number of companies charged for corrupt activities in China continues to rise, and the
probe into corrupt activities continues to spread into various industries and sectors,
multinational corporations (MNCs) are sparing no efforts in establishing and implementing
an enhanced compliance system in China.
As a result of this, human resources (HR) professionals with responsibility over China are
often asked to (1) provide input on how to design a system that ensures compliance by the
employees and (2) to implement decisions against employees who are found to have
committed misconduct. So what are some of the common challenges for HR when grappling
with these tasks? This article will provide number of top tips for dealing with them.
The regulatory environment
We provide a brief recap of regulatory actions taken against corrupt business activities in
China during the past year.
Regulators in China kept the aggressive stance towards corrupt activities, which began since
President Xi came to power. Since the beginning of 2015, the Chinese Communist Party's
Central Commission for Discipline Inspection conducted two rounds of extensive inspections
focusing on large state owned enterprises, many of them are among the world's top 500
companies. Enforcement actions and investigations span across different industries,
including finance and banking, automobile, aviation, military, health, energy,
telecommunications, transportation, and construction.
Foreign regulators have also focused on investigation and enforcement actions against
MNCs with China operations. Based on recent filings to the U.S. Securities Exchange
Commission (SEC), at least 29 U.S. listed companies have been involved in on-going
federal investigations under the Foreign Corrupt Practices Act in connection with their
business activities in China. In 2015, Bristol-Myers Squibb and Mead Johnson agreed to pay
US$ 14.7 million and 12 million, respectively, to settle civil charges that its China business
made improper payments to public hospitals to promote sales. In May 2015, the SEC
subpoenaed JP Morgan with respect to its hiring of candidates referred by Chinese clients
and government officials.
Changes to code of conduct or employee handbook
Businesses increasingly need to seek China HR’s assistance in establishing an enhanced
compliance system to head off the above regulatory risks. This often involves updating the
company’s code of conduct or employee handbook in China.
Chinese law requires any introduction or amendment of major company policies to be
subject to an employee consultation process. A common misconception is that the company
must obtain each employee’s consent to be bound by the new policies. Employee consent,
though ideal, is not mandatory. In practice, most companies would present any major
updates through a meeting and seek questions or suggestions from the employees. The
company is not required to agree or accept the employees’ comments, though it should keep
record of how it considered and responded to the employees’ comments. The company
would then proceed to publish the final version of the new code of conduct, and request
employees to acknowledge receipt or keep a record of delivery.
In terms of the contents, companies are advised to include a comprehensive list of
misconduct and update it based on experience of past cases or cases that have been
published in the media to close any loopholes. A number of companies have, for example,
started to introduce policies requiring employees to disclose relationship with government
officials and stating that any violation of the disclosure obligation would be punishable by
Training and certification
Regular training on codes of ethics and anti-corruption policies, as well as annual
certification of employee’s compliance with them, continue to be a key element of any
effective compliance program. However, a common challenge in China is that employees
would attend trainings and certify that they have acted in a compliant manner, but continue
to act in a non-compliant manner in their daily activities.
To address this issue, more and more companies are strengthening the impact of noncompliance
on the employees. This includes making compliance an express and mandatory
condition for bonus payments and job promotions.
An effective compliance program requires the company’s leadership to set the tone at the
top and foster a culture of compliance. This, together with effective codes of conduct,
training program, incentives and disciplinary measures, are part of the elements that make
up an effective compliance program set forth in the well-known U.S. Sentencing Guidelines.
Holding managers accountable for compliance of their team members is difficult, especially
in China. Employees with managerial skills are harder to replace and has more impact on
the business. Further, it is often difficult to find evidence that they are directly involved.
Nevertheless, given the harsh regulatory environment, more and more companies in China
are prepared to hold managers accountable for violations of their team members. Company
policies, job descriptions and communications need to be strengthened to emphasize
Implementing disciplinary action
Labor law restrictions
Chinese labor laws heavily restrict companies’ ability to impose disciplinary action against its
employees. Reduction in salary or demotion is not permitted without employee’s consent.
Moreover, except in cases of very serious violations, the company will likely need to issue a
warning letter to an employee who has committed misconduct first, instead of dismissing the
employee immediately. Dismissing an employee immediately carries significant risks in
China. The employee may challenge the dismissal before a labor arbitration commission or
court, which will hold the company to a very high standard of proof and require the company
to provide a lot of evidence to justify the dismissal. Failing to justify a dismissal could result
in the employee being reinstated to his/her original position.
Direct documented evidence from sources outside the company, such as signed admissions
by the employee or statements by external parties, is often expected by the courts but
lacking in cases involving alleged fraud or corrupt activities by an employee. Instead,
companies often have indirect evidence of circumstances suggesting fraud or corruption, or
statements from whistleblower or witnesses from within the company. Relying on such
evidence alone to dismiss an employee would be risky, as labor arbitration commissions or
courts tend to consider such evidence unreliable and reluctant to accept them.
HR professionals need to be aware of these requirements under Chinese labor laws, so as
to advise businesses appropriately when disciplinary action is being contemplated. In light of
the regulatory enforcement trends, companies are increasingly prepared to punish or
dismiss employees for violations of code of ethics or anti-corruption policies, but the relevant
risks need to be identified and assessed, so that companies would be prepared to defend
any potential employee claims.
- Ensure appropriate employee consultation procedures have been carried out before
implementing changes to code of ethics or anti-corruption policies.
- Include a comprehensive list of misconduct and update it based on experience of
past cases or cases that have been published in the media.
- Make compliance with code of ethics and anti-corruption policies a key element of
bonus and promotion policies.
- Strengthen company policies, job descriptions and communications to emphasize
manger responsibility over his/her team’s compliance situation.
- Be mindful of labour law restrictions on disciplinary action imposed on employees,
particularly with respect to summary dismissal, and advise business of relevant risks
This article was published in the January 2016 edition of HKIHRM.