How a compliance non-prosecution system benefits IPO planners

By Wei Tianhui, Shu Jin Law Firm

Private companies are usually started from scratch and face challenges such as compliance costs and operating pressures. Many have undergone a development phase of “barbaric growth”, where compliance issues – even of a criminal nature – inevitably arise. For suspected criminal compliance issues, while strictly holding companies and personnel criminally liable can lead to a forceful crackdown on crime, it can also cause a series of social problems. One single case could effectively topple an enterprise and cause mass unemployment.

The corporate compliance non-prosecution system aims to pinpoint a balance between compliance and development so that with the help of procuratorates and third-party agencies, private companies with a determination for lawful and long-term development can grow in compliance and avoid criminal penalties. This prevents compliance issues becoming the “Waterloo” for their IPOs.


How a compliance non-prosecution system benefits IPO planners
Wei Tianhui
Senior Partner
Shu Jin Law Firm
Tel: +86 755 8826 5675

In March 2020, The Supreme People’s Procuratorate (SPP) launched the first phase of its corporate compliance reform pilot. In July 2020, the SPP issued the Opinions on Fully Exercising Procuratorial Functions to Serve and Ensure the Stability in Six Aspects and the Guarantee for Six Areas, emphasising the correction of improper filing of criminal cases involving private companies and requiring procuratorates at all levels to properly serve the society and ensure stability.

In April 2021, the SPP launched the second phase of its corporate criminal compliance non-prosecution reform pilot. This system applies to companies suspected of minor crimes and liable to be prosecuted. If the company is willing to correct its illegal activities and build a compliance system on such basis, the procurator may order it to, under the guiding hands of the procurator and other regulators, establish and carry out a compliance system within an observation period. If it passes the inspection, the procurator will not prosecute.

The corporate compliance non-prosecution system covers crimes including disturbing market order, taxation offences, environmental pollution and impairing natural resources. Conviction of these crimes will mean companies immediately fail to meet the substantive requirements for IPO.


Implementing the corporate compliance non-prosecution system is undoubtedly beneficial for prospective issuers suspected of corporate crimes. According to the Securities Law, the issuer and its controlling shareholders and actual controllers must not have committed any criminal offences of corruption, bribery, embezzlement of property, misappropriation of property or undermining the socialist market economic order in the past three years. Similar provisions are also found in various administrative measures promulgated by the China Securities Regulatory Commission (CSRC) regarding the registration of public offerings. Thanks to the corporate non-prosecution system, certain prospective issuers suspected of crimes during the reporting period may avoid being convicted and sentenced, therefore meeting the substantive requirements for IPO.

The following is a brief analysis of a tax-related criminal case that happened at a company that successfully completed its IPO.

During the reporting period, company A obtained several special VAT invoices from a third-party company that were confirmed to be falsely issued, with a total invoice value of about RMB31 million (USD4.6 million) and a total tax amount (input tax) of about RMB4.1 million. These special invoices were certified for VAT input tax (not actually used for deduction) and then fully transferred out as input tax at the following year’s VAT declaration. Company A paid about RMB36 million to the invoicing party after receiving the invoices.

According to article 205 of the Criminal Law, the action of company A fell within the circumstance of “making others falsely issue invoices for itself”. The amount of the false invoices exceeded RMB30 million, which also constituted a large amount as stipulated in the Notice of the Supreme People’s Court on Issues Concerning the Conviction and Sentencing Standards for the False Issuance of Special VAT Invoices. Company A was suspected of having committed the crime of falsely issuing VAT invoices with a substantial amount, which directly affected its listing plan at that time.

After these suspected criminal acts, company A made timely rectification. It not only recovered the payment of about RMB36 million with reasonable interest, but also established a series of sound internal control systems and complied with them. It strengthened legal compliance training for relevant personnel and clarified their respective responsibilities. Company A also presented evidence proving it had not started the sales of relevant commodities or made any profits in 2019. Therefore, it did not obtain the VAT invoices for the purpose of deducting or fraudulently obtaining taxes.

The local tax authority held that, in accordance with the Administrative Penalties Law, the illegal action of Company A was a minor violation that was corrected timely without causing harmful consequences, so no administrative penalty was imposed.

The SPP opinions stipulate that: “tax-related cases of companies shall be handled prudently according to law. It is necessary to correctly identify the boundary between general tax-related illegal acts and tax-related crimes for the purpose of fraudulently obtaining state taxes. Companies with actual production and business activities, if engaged in false issuance of special VAT invoices for non-tax fraud purposes such as inflated earnings, financing and loans without causing tax losses, shall not be qualitatively convicted of the crime. If a non-prosecution decision is made by law, it shall be transferred to the tax authority for administrative penalty.”

According to these provisions, the local people’s procuratorate held that company A did not intend to fraudulently obtain state VAT and its action did not result in state tax losses and other consequences, therefore it would not be further held criminally liable for the matter identified by the local tax authority. The procuratorate concluded the matter with a no-penalty decision.