Impact of new Criminal Law on private enterprise compliance

The Guidelines on Boosting Growth of the Private Sector from the Central Committee and State Council stress that the overarching requirement for boosting private-sector growth is “ensuring all economic sectors are equally protected by law and guiding private enterprises towards higher-quality development through their own reform and development, compliance management, transformation and upgrading”.

Amendment XII to the Criminal Law targets prominent issues facing private enterprises. It modifies and improves provisions concerning the protection of private enterprises, aiming to safeguard their legitimate rights and interests at the legislative level.

Amendment XII was passed on 29 December 2023 at the 14th National People’s Congress (NPC) and has been officially implemented since 1 March 2024.

New changes

The revisions in amendment XII focus on the breach of trust and bribery committed by employees of private firms. Articles 1 to 3 detail modifications related to breach of trust crimes within private enterprises.

Crime of illegally operating similar businesses. Offenders in state-owned companies or enterprises are expanded from “directors and managers” to “directors, supervisors and officers (DSOs)”. In addition, private enterprises are included in the scope of regulation, with the DSOs of private enterprises explicitly identified as potential offenders in this respect.

Crime of seeking illegal profits for relatives and friends. The original circumstances of seeking illegal profits are expanded from “purchasing or selling commodities” to “accepting or providing services”. Private enterprises are also included in the scope of regulation, with employees becoming potential offenders in this respect.

Crime of practising favouritism and converting state-owned assets into low-value stocks, or selling them at a low price. This offence title is modified to “practising favouritism and converting company or enterprise assets into low-value stocks, or selling them at a low price”, with potential offenders expanded to directly responsible persons in charge of a private enterprise.

Given the high level of autonomy and discretion of private enterprises in acting, these offences are triggered only when resulting in a “significant loss of the interests of the company or enterprise”.

Also, constitution of the offence of “illegally operating similar businesses or seeking illegal profits for relatives and friends” hinges upon “violation of laws or administrative regulations”.

Impact on private enterprises

Amendment XII has to some extent addressed unfairness in the current criminal law system. Before the revision, the above-mentioned three offences only encompassed the assets of state-owned companies or enterprises and public institutions, excluding those of private enterprises.

This amendment extends criminal law protection to rights and interests of private enterprises, providing legal grounds for cracking down on corruptions within them and legislatively clarifying the principle that public and non-public sectors of the economy should be equally protected by criminal law.

It fills the earlier gap in protecting assets and interests of private enterprises, further implementing the requirement of “improving the development environment of private enterprises, protecting the property rights of private enterprises, and the rights and interests of private business owners in accordance with the law and boosting the growth of the private sector”. The revision also urges private enterprises to establish a comprehensive compliance system. Incorporating internal corruption crimes within private enterprises into the criminal law system demonstrates the nation’s determination to protect development of private enterprises on an equal footing.

External interventions, however, cannot eradicate the root cause of internal corruption. In particular, private enterprises have developed unevenly in China. Many enterprise governance systems are not yet sound, focusing on business than compliance in early stages of development while turning a blind eye to internal corruption and other risks.

As enterprises gradually grow, internal corruption issues escalate, and when they become difficult to resolve independently, exposure to the public eye not only severely damages corporate reputation but also significantly impacts business development.

To better address rapid development of the private economy and frequent internal corruption crimes within private enterprises, companies should adhere to the concept of systematic and comprehensive governance.

They should emulate the Measures for the Compliance Management of Central Enterprises and establish sound internal compliance management systems, enhancing staff awareness of compliance and preventing the occurrence of criminal offences by addressing both symptoms and root causes.

Building a compliance system

The Report on the Work of the Government 2024 has identified boosting the growth of the private sector as one of the government’s priorities in the year ahead.

For private enterprises to adapt to new changes in the economic environment and pursue high-quality development while ensuring compliance, the authors suggest they prevent and control corporate corruption from the source. This requires establishing a sound organisational system for compliance and refining the functions of corporate governance and management:

• Establishing specialised compliance management systems including mechanisms for compliance operations, assessment and accountability;
• Conducting comprehensive screening to identify compliance risks in important areas of the enterprise;
• Creating risk control lists for key business processes, outlining corresponding control measures for potential compliance risks within these processes;
• Developing a corporate compliance culture plan to foster compliance awareness among employees; and
• Conducting compliance training for high-risk areas, management personnel, and key position employees.

Zhang Xiaojin, director general of the Fourth Procuratorial Office of the Supreme People’s Procuratorate, said that China will further promote compliance reform for enterprises involved in criminal cases. That means there will be more room for private enterprises involved to seek leniency through their internal compliance reform.

Under such circumstances, if a private enterprise detects internal criminal risks early through an established comprehensive compliance system, it will not only help them avoid criminal crises and penalties, but it will also ensure its steady and high-quality development, enhance its ability to compete with state-owned enterprises, and guarantee its eligibility to participate in large projects.

This is well aligned with the national policy orientation of “encouraging legal and compliant operations of enterprises to promote governance at the source”.

Wang Weining is a founding partner and Chen Yujie is a paralegal at Starrise Law Firm