How Chinese companies ensure compliance overseas

By Cui Haiyan, Zhejiang Brighteous Law Firm

Chinese companies are aggressively expanding into foreign markets, however, if there is no proper compliance culture in place, and if the companies fail to understand or respect the laws of the host countries, and international market rules, they will find themselves quickly crossing compliance red lines with their operations.

Not only will the companies incur major economic losses, but their international reputation will be at stake. In this macro international environment where compliance is being emphasized, compliance capacity building is imperative for Chinese companies.

Cui Haiyan
Managing Partner
Zhejiang Brighteous Law Firm

Compliance management systems should be supportive to the business management system to effectively prevent compliance risks. In general, the compliance management system of multinational companies should at least cover information disclosure, human rights, labour relations, environment protection, anti-corruption, anti-monopoly laws, consumers’ rights and interests, intellectual property (IP), antitrust and tax.

In response to an increasing demand for compliance legal services at home and abroad, this year Brighteous Law Firm assembled professional lawyers specialised in different areas to establish a cross-discipline compliance legal service centre. So, how can Chinese lawyers assist Chinese companies with their overseas investment?

Demonstrate the feasibility of the projects

To gauge the feasibility of investment projects, lawyers may refer to domestic laws and regulations governing outbound investment, and the rules and regulations of host countries, then make a list of the legal obligations and legal requirements that the companies should perform and satisfy based on these laws and rules. They should also analyze whether companies are able to satisfy the pre-conditions or cost-efficiency of efforts made to satisfy the conditions by combining the realities of the companies.

For example, in special sectors such as national defence, civil aviation, pharmaceuticals, electricity, communications, mineral exploitation and fishing, most countries have set limits to foreign investment (i.e., a negative list), or forbid foreign investment, or require the foreign companies to co-operate with local companies. Blind investment without prior knowledge of these access rules might result in the projects being aborted.

If the investment projects involve the acquisition of foreign companies or assets, the lawyers should also conduct due diligence on the targets of acquisition to identify legal risks that might jeopardize the acquisition or impact future operations. The due diligence should cover: basic information about the targets; movable properties and real estate; IP; financials; major contracts; employment; insurance; environment; litigation; and administrative proceedings.

The author once provided legal services to a company based in Zhejiang to support its acquisition of a Czech factory. In preliminary due diligence, the author found that, based on local laws and regulations, the acquirer bidding for the assets of the factory should also take over all the employees of the factory. But the local labour costs far exceeded the expectations of the acquirer, and the company would incur great losses, so the acquisition was called off.

Assist in the implementation of projects

The lawyers may sort out the requirements and relevant processes imposed by host countries on foreign companies that plan to establish or acquire companies in that country. They will help the companies go through these formalities and review the legal documents, providing legal opinions as to the communication between the companies and the relevant authorities of the host countries, with the aim of evading potential legal risks and facilitating the implementation of the project, and its sustained operation.

Guarantee the compliance of the operation

The lawyers can identify the compliance obligations and risks for the company by referring to applicable laws and regulations, and, by combining the operation scope and governance structure of the company, design a set of standardized and systematic internal management systems. Or they can optimize the current systems, which include the articles of association, compliance policy, administrative rules, financial system, manufacturing and operation system, and employee management rules.

The lawyers may also design standard contract templates for the company, such as an employment contract, sales contract, co-operation agreement, confidentiality agreement and other basic contracts, as well as contracts exclusive to certain sectors and industries.

Settle foreign compliance disputes

In the case where Chinese companies are investigated by the host country or third country (unions or regions) because of foreign compliance issues, the companies should actively respond and seek professional support from lawyers. If the companies are found to have not violated any laws and rules through the investigation and analysis of the lawyers, the companies should organize effective evidence in time and defend themselves in front of investigators in litigation or negotiations.

Where the companies are found to have committed violations, the companies should actively consult with the relevant authorities through lawyers, co-operate with the investigation, and seek the chances of a settlement so as to minimize the economic and reputational losses.

Do not passively wait for the investigation result or circumvent the investigation. Being unco-operative is least acceptable to foreign enforcement authorities and leads to the worst result. ZTE is an example. It was imposed with punitive measures when evidence regarding its circumvention of the investigation was established against it.

The author once successfully represented a Chinese company in an administrative litigation brought by the US Environmental Protection Agency (EPA). The EPA suspended the reconciliation process and brought the case to court because the Chinese company refused to co-operate, on the belief that the EPA had no jurisdiction over the company.

In co-operation with professional lawyers in the US, the author helped the company win back the trust of the EPA and successfully settled with the agency, thus avoiding a punishment running as high as tens of millions of US dollars.

Chinese companies must establish an effective compliance management system and embrace international compliance requirements if they seek sustainable development in the international market. Chinese lawyers specializing in foreign issues should intensify their study of foreign compliance cases, thus providing legal and compliance guarantees for the globalized operations of Chinese companies.

Cui Haiyan is managing partner at Zhejiang Brighteous Law Firm, the vice president of Zhejiang Lawyers Association and a director of the association’s foreign transactions and maritime and admiralty committee. She can be contacted on +86 136 0581 6499, or by email at