Identifying and prosecuting internal fraud

With the new Company Law and Criminal Law Amendment (XII) improving the provisions concerning the responsibilities of directors, supervisors, executives and employees regarding internal corporate fraud, the issue has garnered increased attention. This article provides a brief overview of common types of internal fraud and explores pathways to enhance the likelihood of successful criminal prosecution.

Fraud types and associated charges

Asset misappropriation and embezzlement.
Unauthorised use or transfer of corporate assets by management or employees, involving charges such as misappropriation of funds, embezzlement, theft and issuing fake invoices.

Commercial bribery.
Commercial bribery encompasses charges of accepting a bribe, offering a bribe, acceptance of a bribe by an entity and offering a bribe to a foreign public official. With Chinese companies increasingly operating abroad, they face constraints from various anti-commercial bribery laws such as the US Foreign Corrupt Practices Act. The amendment (XII) has significantly adjusted penalties for such crimes, necessitating heightened attention from corporations.

Horizontal competition or unfair competition.
Executives and employees may engage in unfair competition by leveraging trade secrets and resources such as establishing or joining competitor companies during their tenure, or misappropriating company opportunities and client resources. The amendment (XII) extends the scope of relevant charges from state-owned enterprises to private ones, providing new mechanisms for addressing these offences.

Bid rigging.
Employees may collude with external parties in bid-rigging schemes, particularly evident in core management departments, engineering divisions and tender-related positions, and often closely linked with bribery. When identifying internal fraud, comprehensive methods including financial data analysis and internal reporting mechanisms are essential. Additionally, vigilance against abnormal consequences – such as frequent legal disputes and customer attrition, along with observing patterns in employee behaviour – is crucial.

Prosecution process

Internal investigation:
Establishing an investigation team. The team comprises legal, financial and human resources department heads, with the option to engage external legal and financial advisers if necessary.

Collecting and reviewing evidence:
Background checks. Conduct identity checks on involved individuals, review their employment history, job responsibilities and, within compliance boundaries, understand their social networks.

Document collection.
Gather documentary evidence such as contracts, financial records, etc., ensuring timely fixation and confidentiality to prevent evidence destruction or loss.

Obtaining electronic data.
Preserve electronic data including financial reports, sales records, communication content and work computer data.

Conducting audits.
In cases requiring evidence of corporate losses, conduct audit assessments beforehand to serve as evidence for prosecution.

Interview transcripts.
Interviews serve as effective means of obtaining direct evidence of illegal activities. Conduct background research prior to interviews, select appropriate locations and participants, clarify roles, inform interviewees of their rights and obligations, and record details meticulously.

Confidentiality and compliance.
During the investigation process, it’s crucial to maintain a high level of confidentiality, ensure that the investigation procedures comply with regulations, and protect the legitimate rights of employees.

Legal analysis and subsequent actions.
Conduct a legal analysis of the evidence to determine whether the behaviour constitutes a crime, and decide whether to initiate criminal prosecution or take other legal actions.

Initiating criminal charges

Steps to improve the probability of acceptance and filing by public security authorities:

Selecting appropriate charges.
Priority should be given to charges with lower thresholds for filing and easier evidence collection. For instance, in cases where proving corporate losses is challenging, charges such as computer information system sabotage may have lower filing standards and simpler evidence collection compared to charges of violating trade secrets. Additionally, consideration should be given to selecting crime types currently under focused crackdowns to increase the likelihood of case prioritisation.

Identifying the accused.
Among the involved individuals, select suspects based on factors such as age, gender, position and place of residence to facilitate subsequent summons and obtaining of confessions by law enforcement. To facilitate evidence collection and case resolution, multiple individuals suspected of collusion can be simultaneously charged.

Determining jurisdictional unit.
When choosing the jurisdictional unit, careful attention should be paid to the jurisdictional territory and authorities in criminal cases. In practice, it’s advisable to report to the public security authority in the location most closely associated with the criminal activity, which tends to yield higher success rates.

According to legal provisions, crimes involving official duties are categorised into three types: exclusive jurisdiction of supervisory authorities; joint jurisdiction of supervisory and public security authorities; and joint jurisdiction of supervisory and procuratorial authorities. It is essential to clarify which is relevant before filing a report.

If the jurisdictional unit is arbitrarily chosen and leads to unsuccessful criminal charges, even if the jurisdictional unit is changed for subsequent charges, the likelihood of acceptance and filing will decrease.

Drafting the report.
The report should be based on the intended charges, stating the facts relevant to the elements of the charges and accompanied by evidence supporting each fact. The report should be concise and to the point.

Participating throughout the investigation.
During the acceptance stage, actively assist the police to reduce the workload of public security authorities and increase the likelihood of filing. After filing, the reporter should deploy legal personnel or external lawyers to participate in the investigation process and promptly express opinions to the investigation and arresting personnel.

Exhausting remedies

Receiving a notice of refusal to file does not mark the end of the prosecution process. Legal provisions offer remedies in such situations.

Internal remedies within public security authorities.
Within the statutory time limit, businesses can promptly submit a request for reconsideration or review to the public security authorities that made the decision not to file charges, avoiding the loss of rights.

External remedies through the procuratorate.
Businesses can also appeal the decision of the public security authorities not to file charges to the investigation and supervision department of the same-level People’s Procuratorate. If the procuratorial authorities find the reasons for the refusal to file charges unsubstantiated, they can request the public security authorities to investigate and file the case according to the law.

Song Tangyin is a senior counsel at Anli Partners