With the belt and road initiative gaining momentum, a growing number of state-owned enterprises are expanding their overseas investments to align with the strategy. What are the risks and challenges, and how should an SOE manage overseas operations and ensure compliance? Pan Zhuqing, of CRRC Zhuzhou Locomotive, gives her insights on how to keep a tight rein

COMPLIANCE IS THE CORNERSTONE of the sustainable development of an organisation. That means when operating and managing businesses, companies and their employees should comply with applicable laws, rules, regulatory requirements, industry practices, corporate policies, international treaties and rules.

Essentially, compliance management is managing risks. Practically, building and implementing a compliance management system is a self-defence mechanism. It can help organisations to mitigate the risks of potential regulatory penalties or sanctions.

Compliance management of overseas operations refers to managing and controlling risks of business activities through system development, risk identification, compliance review, risk response, accountability, performance assessment, and compliance training.

According to the Guidelines on Compliance Management for Central State-Owned Enterprises by the State-Owned Assets Supervision and Administration Commission (SASAC) of the State Council, legal departments should take a lead to organise, co-ordinate and oversee compliance management, as well as provide compliance support to other departments.

In 2020, 63 Chinese companies participating in Belt and Road Initiative (BRI) construction jointly launched a business integrity and compliance initiative, including CRRC Zhuzhou Locomotive and centrally administered and local SOEs.

The governance structure of CRRC Zhuzhou Locomotive is shown opposite. According to the SASAC guidelines, companies have to follow three points to strengthen compliance management of overseas investment and operations:

(1) Study thoroughly the relevant laws and regulations in host jurisdictions. Companies should strengthen research on international rules and compliance risks, research and analyse the necessity, feasibility and legal compliance of its projects, and carry out forward-looking and multi-dimensional risk disclosure.

When conducting compliance investigations on key sectors like law, finance, business operation, and IT, enterprises should focus on high-risk areas involving investment protection, market access, environmental protection, product quality, labour unions, finance and taxation, intellectual property, and business partners. They should know Chinese law, and local laws and regulations, as well as prohibitive provisions under international rules.

Usually, before external agencies get involved, the first thing for in-house counsel to watch for is systemic legal risk. After evaluation, they would consider whether to adopt tools like insurances or double tax avoidance treaties to optimise investments. Businesses should scrutinise the limits for investment activities under Chinese law and offshore law.健稳驰行-BUCKLE-UP-clock

In terms of overseas law, investors should pay attention to the stability and adaptability of the political and legal environment in the target country, foreign exchange control regulations, risks of expropriation, and applicability of international arbitration. In-house counsel could utilise documents from local public business registration platforms, general interviews, initial visits, notarised documents, as well as third-party certification for their analysis.

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Pan Zhuqing is vice general counsel of CRRC Zhuzhou Locomotive, head of the legal and compliance department, and senior economist and senior management expert at CRRC. Pan leads five teams assisting the globalisation of China’s rail transit equipment and the company’s international development