Corporate Risk Management
By Zhengyang Wang
Posted: 14th December 2017 08:31
How do companies deal with and control corporate risks? Based on our experience in providing legal service to foreign-owned enterprises in China, we think the following contents are worth paying attention to:
1. Managing risks prior to each transaction or deal
The most important part of corporate risk management prior to each transaction or deal is to perform due diligence on potential partners. It is always suggested to choose reliable business partners rather than dishonest ones. We advise companies to acquaint themselves with basic information on targeted companies including but not limited to: the date of their establishment, registered capital, number and backgrounds of shareholders, business scope, and governmental penalty history. The means and ways of doing this include conducting a thorough search on National Enterprise Credit Information Publicity System, China Judgments Online, China Enforcement Information Publicity Online or by appointing lawyers to acquire registration documents or even to do on-the-spot investigations.
2. Differentiating between business gifts and business bribes to prevent criminal risks
In business activities gifts may be exchanged for maintaining and enhancing friendly relationships. Commonly, this is regarded as normal business interaction, but some enterprises go to the extreme, transforming it into “bribery”.
In accordance with judicial interpretations issued by the Supreme Court of China, the factors determining whether it is a gift or a bribe are:
1) The backgrounds and circumstances under which the giving of gift takes place, e.g. whether the giver has a kinship with the receiver and their past interactions
2) The value of the gift
In fact, the interpretation of the value of a gift is the principle of dealing with gifts and bribery. In practice, we mainly analyse whether the value of the gift exceeds the intimacy of the relationship between the two parties. To be specific, the value of normal business gifts shall not be extremely high and it shall conform with the income standard of the giver, the intimacy of their relationship, and local customs and habits. Thus, it will not be deemed a business gift if the value of the present is inappropriately high, inconsistent with local customs and habits, and the intimacy of their relationship. Meanwhile, it also must be pointed out that since the essence of bribery is the exchange of interest and benefits, whether the giver has any “request” for the receiver and whether the receiver “provides convenience” to the giver through manipulation of power arising from work is crucial.
3. Paying attention to legal risks incurred from paying commissions and rebates
According to Chinese Law for Countering Unfair Competition, the operators shall not bribe in order to sell or purchase commodities by offering money, valuables or otherwise. When an operator secretly pays kickbacks to the counterparty, be it an entity or individual, off the books, the operator shall be punished for offering bribes. We could conclude from the regulation that giving commissions and rebates secretly and keeping it off the books is the boundary line to differentiate between normal practice and criminal activity. Therefore when foreign-owned enterprises in China pay commissions, rebates, consultation fees and intermediary service fees, it is necessary to request for invoices and to go through regular accounting procedures to pay taxes. Of course, “secretly” and “off the books” are not essential components of business bribes. As long as the behaviour of an operator is characteristic of a business bribe, even if it is recorded in accounting books, it will still be deemed as a business bribe.
4. Compliance study of new business model
It is indispensable to study the compliance of a new business model once it is put into practice and prepared to be included in a contract. Relevant evidence, such as agreements, summaries of conversations, and memos, shall be formed and preserved to suggest and prove the true meanings of both parties.
Take the following contract fraud case as an example: two enterprises entered into a sales contract with a bridge finance company in order to circumvent the ban on private loans and financing. Their true intention is not to sell and purchase products so that the “purchaser” does not require the “seller” to hand over the subject matter agreed in the contract but to replace it with low-value goods. When the deal doesn’t go through, the “purchaser” claims the contractual right of receiving the right subject matter. As the “seller” could not provide direct evidence to prove that the sales contract was a pretence of a private loan contract, a court could determine the dispute as contract fraud, turning a simple commercial case into a criminal one that could result in a penalty of imprisonment of more than ten years.
Corporate risk management is essential to the stable operation of enterprises and their sustainable development. Beijing JunZeJun Law Offices is devoted to the services of risk management of foreign-owned enterprises in China to help them achieve success.
Beijing JunZeJun (Shanghai) Law Offices
July 30, 2017
Mr. Zhengyang Wang: Attorney WANG Zhengyang has solid legal theory foundation and nearly 30 years of legal practice experience. He is highly recognised and praised by domestic and overseas clients for his professional services. He has been on the legal counsel for over 20 large state-owned corporations, private enterprises and financial institutions. In foreign legal services, he has successfully handled over 60 FDI, M&A, and many complex litigation and arbitration cases. Mr. Wang was elected as ALB 2014 Client Choice Top 20 lawyers in China of Asia Legal Business and has also won the “Commercial Arbitration – Lawyer of the Year – China” in the Lawyer Monthly Legal Awards 2016.