China Compliance and Why You Should be Worried

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The article points out that getting your employees to sign something saying that they will comply with the company’s code of conduct on such things as kickbacks and conflicts of interest and discrimination and harassment. The company must also engage in sufficient effort to ensure that its China “employees understand what these policies require, that they are being enforced, and appropriate sanctions are applied.” See China Compliance: Don’t Rely on Your China Staff.

I read this line to a number of the China lawyers in my firm and their common response was “just one?” I know that as lawyers we tend to see the underbelly of companies doing business in China, but I also know that we deal with a steady stream of matters for U.S. and European companies that are losing money in China because one (or usually more) of their employees is stealing from them in China. Recently — and I am not entirely sure why, we are seeing a lot more cases involving someone from the home office in the United States or in Europe (for us that is mostly Spain, Germany or the United Kingdom) on the take from some supplier or some other company in China. And here’s the thing: nine out of ten times it should have been fairly obvious what was going on, but nobody wanted to be the one to raise a stink about it. Nobody wanted to be the accuser.

Orr then talks about China’s “own growing set of laws and policies” that need compliance planning and reviews and audits:

In 2017 new cybersecurity laws have been a central focus. Companies need to understand the scale and nature of the data they create in China and ensure this data is only transferred across borders (even just to back it up) if it falls into categories where this is allowed.

Also, when buying consumer data from third parties, are you sure about how it was acquired and that consumers gave their consent?  More basically, protecting your own corporate data from hacks and from employees walking out the door with it needs extra attention as global IT security tools may not be permitted in China.

Compliance with increasingly burdensome employment and compensation laws is also a major issue.  Getting employee pay and tax benefits correct from city to city is so complex that it is being outsourced by more and more companies. Remitting capital out of China is a process fraught with opportunities for missteps, steps that at times could be omitted but today must all be followed.

Employer-employee problems are a massive growth area for our law firm and within that category, employer audits easily comes in first. Our lead China employment lawyer has so many stories to tell about China’s increasingly complex employment laws she could write a book about it. Which is my not-so-subtle way of setting up a mention that she just did and it went live on Amazon only yesterday. I cannot urge you enough to buy this book (heck, it’s only USD$2.99!) if you have any employees or independent contractors in China, or even if you are just thinking of getting some.

Orr then talks of the compliance problems inherent when you “partner” with a Chinese enterprise and advices being “hesitant to be the first to become a partner to a Chinese enterprise, otherwise the burden of ‘educating’ your partner on the necessity of compliance with policies they may simply believe are irrelevant will all fall on you. This won’t be something you can fix after the deal is struck; ensure that the issue is addressed in upfront negotiations so that at least some basic expectations have been set.” This is some seriously great advice!

Orr then ends his piece with the following three questions salient for any foreign company doing business in or with China today:

1. Global competition from China. When, how and where will Chinese competitors become, if they are not already, effective global competition? What is our strategy to pre-empt and mitigate?
2. Preparedness for discontinuity. What would happen if there was a major economic discontinuity in China, arising from global geopolitics, a shock to the domestic financial system, a natural disaster or other? Do we have a play book worked through?
3. Should we be performing better in China today? Is the shortfall to expectations due to external factors? Or is it our own team?

Does your company have answers?