China Regulatory Enforcement Quarterly - Q2 2015

Regulatory Update

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The Chinese regulatory enforcement landscape is still very active for the second quarter of 2015. In the absence of high-profile enforcement actions against Communist Party officials, Chinese authorities appear to be operating along the lines of a 'new normal where police enforcement and deployment of inspection teams by the Central Commission for Discipline Inspection (CCDI) are routine, on-going, and appear to be part of a new standard government initiative. The CCDI’s Central Inspection Teams, for example, have been carrying out several rounds of inspections focusing on central state-owned enterprises (SOEs). Additionally, based on our research, the CCDI has announced that 192 Chinese government officials were disciplined and/or investigated in this financial quarter alone. Also of significance, Chinese authorities are collaborating with foreign authorities and organizations including the Hong Kong Police, U.S. Federal Bureau of Investigations, International Criminal Police Organization (INTERPOL), and many others with increased success at repatriating suspected Chinese targets.

We are now starting to see in the market how this 'new normal' is beginning to impact the business environment for companies operating in China both in terms of compliance and operations. Companies are increasingly taking more proactive positions when conducting reviews of business partners, key city or provincial-level contacts, as well as third-party relationships such as agents, suppliers and distributors. The increase in Chinese regulatory investigations is also resulting in increases in the number of whistleblower complaints including those from competitors and anonymous third-party tipsters.

The inspection of SOEs by the CCDI’s Central Inspection Teams is slated to continue as the government appears to be committed to take strengthened measures – whether through inspections, raids, audits, etc. – to protect the financial health of its state-owned assets and reel in waste due to misconduct and abuse of power across various levels of government and private-sectors. This is being seen as a necessity in numerous sectors within the market as many SOEs continued to be saddled with increasing debts and dwindling profits.

What to expect in Q3 and beyond

On July 1, 2015, the Standing Committee of the National People’s Congress, China’s top legislature, approved the new national security law. Reaction to the new law from the business community as well as international responses are likely to dominate the third quarter of 2015. The new law covers a wide range of areas including the military, environment, religion, internet, wider social and economic issues, space exploration and more. We will provide an update on the new law in our Q3 2015 edition of the China Regulatory Enforcement Quarterly.

Several other notable developments from Q2 may serve as a prelude for what will come for Q3 and beyond including the launching of a corruption fighting smartphone app, strengthened food safety laws, as well as a major Chinese internet company self-reporting corrupt behavior of its employees to the Chinese police. These and other developments are covered in this edition of the China Regulatory Enforcement Quarterly.