China

China Corruption Report

Snapshot

China_230x151.pngThe Chinese government, led by President Xi Jinping, is in the midst of a sweeping anti-corruption campaign that has led to thousands of arrests. Despite this reform effort, corruption continues to negatively influence the business environment. Companies are likely to experience bribery, political interference or facilitation payments when acquiring public services and dealing with the judicial system. The common practice of guanxi is a custom for building connections and relationships based on gifts, banqueting, or small favours. Guanxi-related gifts can be considered bribery by foreign companies and by national and international anti-corruption laws. Companies are advised to carefully consider the type and value of gifts, the occasion, and the nature of the business relation.

China offers a comprehensive legal framework in both the public and private sectors to criminalise several corrupt practices such as facilitation payments, money laundering, active and passive bribery, and gifts. In line with the anti-corruption campaign, legislation is enforced. Anti-bribery laws target corporate and individual offenders. The Criminal Law covers criminal bribery offences, and the Anti-Unfair Competition Law focuses on commercial bribery. Punitive measures range from fines to capital punishment, depending on the severity of the case. 

Last updated: October 2015
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Judicial System

The Chinese judiciary is impacted by corruption and undue political influence. The Chinese Communist Party (CCP) rejects the principle of separation of powers and does not provide for an independent judiciary (Reuters, Feb. 2015). Instead, the judiciary is institutionally differentiated and subject to interference by the CCP (BTI 2014). Lower-level courts are particularly susceptible to outside influence and corruption, and they operate in an opaque manner (ICS 2015). Local governments appoint and pay judges, which can result in biased, vague or poorly enforced decisions (HRR 2015). Companies report the legal system is not efficient in settling disputes and challenging regulations, but enforcing contracts is faster and much less expensive than the regional average (GCR 2014-2015DB 2015). 

China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). In September 2015, China fired Supreme Court deputy justice Xi Xiaoming and expelled him from the CCP after announcing corruption charges will be brought against Xiaoming (Washington Post, Sept. 2015).

Police

Corruption in the Chinese police, especially at lower levels, results in a risk for companies doing business in China (HRP 2014). Companies report that police services are unreliable (GCR 2014-2015). China has reportedly extended its anti-corruption campaign abroad, with the aim of repatriating and prosecuting Chinese fugitives accused of economic crimes, including corruption, embezzlement, bribery and the abuse of power (International Business Times, Apr. 2015). Agents from the Ministry of Public Security, China’s law enforcement branch, are part of the so-called Operation Fox Hunt and are allegedly operating covertly in the US and elsewhere abroad (New York Times, Aug. 2015).

Public Services

Corruption is a high risk for businesses when acquiring public services in China. Companies report the exchange of irregular payments and bribes and consider government regulations to be burdensome and at times inefficient (GCR 2014-2015). Anecdotal information indicates that public officials actively slow down approval of foreign investment projects in order to not arouse corruption suspicions (ICS 2015). Starting a business takes about 11 days and is much less costly than elsewhere in East Asia (DB 2015).

In August 2015, the Tianjin explosion was investigated as licences had seemingly been obtained through the principle ofguanxi and collusion with government officials (New York Times, Aug. 2015; Xinhua, Aug. 2015). Since taking office, President Xi has vowed to fight corruption, along with 'tigers' and 'flies' (high-ranking and low-ranking officials) (Guardian, Jan. 2013). The crackdown on corruption has resulted in thousands of investigations and arrests, including many high-ranking officials (Guardian, Feb. 2015).

Land Administration

Corruption is a concern in China's land administration sector. Large-scale governmental construction projects and illegal land grabs by local authorities take place unchecked due to a corrupt judiciary (BTI 2014). Public officials collude with land developers in order to pay little or no compensation to displaced residents (HRR 2014). The lack of transparency, oversight and remedies have sparked violent disputes (HRR 2014). Registering property takes around 28 days, which is much less than the regional average, and dealing with construction permits is more time consuming and costly than elsewhere in East Asia and the Pacific (DB 2015).

Tax Administration

Companies have identified tax regulations and rates as problematic factors for conducting business in China (GCR 2014-2015). Paying taxes takes more time than the regional average and is twice as costly (DB 2015). China has responded to the issue by enhancing its electronic system for filing and paying taxes, and by unifying the criteria and accounting methods for tax deductions (DB 2015). 

China has recently ramped up its efforts to tackle tax evasion, especially by foreign firms. In the biggest case of cross-border tax evasion, China in 2014  charged Microsoft $140 million (Bloomberg Business, Nov. 2014); Microsoft refers to the payment as part of a 'bilateral advanced pricing agreement' (FT, Nov. 2014).

Customs Administration

Corruption in the form of irregular payments is a high risk for companies who import and export in China (GETR 2014). Despite the costs to export and import being lower than the regional average (DB 2015), companies report burdensome paperwork when clearing customs, indicating a vulnerability to bribery (GETR 2014). In one case, several Huanggang customs officials were detained in February 2015 for taking bribes to let trucks pass from Hong Kong into Shenzhen (South China Morning Post, Feb. 2015).

Public Procurement

Public procurement in China is often affected by favouritism. Foreign investors should note that China continuously encourages foreign investment in certain sectors of the economy, while restricting or even prohibiting it in others (ICS 2015). Regulations related to monopolies are inconsistent and affected by protectionism (ICS 2015). Businesses are aware that favouritism of government officials towards well-connected companies and individuals occurs when deciding upon policies (GCR 2014-2015). Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in China's procurement process.

Natural Resources

China's natural resource industries are non-transparent, leaving signifcant room for corruption. China is accused of opaque and even illegal trade of products including fish, wood and ivory (Diplomat, Feb. 2015). China's extractive sector lacks oversight, has low-quality government reports, and provides no procedures for appealing licensing decisions (NRGI 2013). In February 2015, China executed Liu Han, chairman of the Hanlong Group, a Chengdu-based mining firm, after finding him guilty of corruption and organised crime (Financial Times, Feb. 2015). 

Legislation

As part of China's sweeping anti-corruption campaign, the government is effectively enforcing its comprehensive anti-corruption framework. The Criminal Law legislates criminal bribery offences, including active and passive bribery in the public and private sectors. From November 2015, bribery of relatives or persons close to a current or former state personnel will be criminalised (Herbert Smith Freehills, 2015). Assisting with exposing corrupt activities mitigates liability for bribery (HSF 2015). The Supreme People's Court and the Supreme People's Procuratorate (in Mandarin) offer interpretations (unofficial translation) of the rules for these offences (HSF 2015). The Anti-Unfair Competition Law (AUCL) penalises commercial bribery in relation to sales of commodities and profit services; the State Administration for Industry and Commerce (SAIC) enforces and investigates the AUCL (HSF 2015). Various state organs have issued internal anti-corruption codes for public officials, serving as guidelines to estimate appropriate gifts, acts of hospitality and guanxi (HSF 2015). Other relevant laws include the Anti-Money Laundering Law and the Anti-Money Laundering Regulation Concerning Financial Institutions (HSF 2015). 

Several agencies can start an investigation, but only the People's Procuratorate can start a prosecution (HSF 2015). The private sector is usually investigated by the Public Security Bureaus and the SAIC (HSF 2015). The maximum sanction for public officials can be execution, while for private sector individuals it is 10 years' imprisonment plus fines and confiscation of property (HSF 2015). Whistleblowers are protected by the Provision on the Reporting of Crimes to the SPP and the Criminal Procedure Law. China has ratified the UN Convention Against Corruption but has not signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. It is part of the Asia-Pacific Economic Cooperation (APEC) and Organization for Economic Cooperation and Development (OECD) anti-corruption initiatives.

Civil Society

China has one of the most restricted media environments in the world (FotP 2015). The news and media are overseen by the Chinese Communist Party (FotP 2015), and the internet is heavily censored by a sophisticated mechanism called the "Great Firewall" (Guardian, Aug. 2015). In August 2015, in the course of the 'Cleaning the Internet' program, the Chinese police investigated 66,000 websites and arrested over 15,000 people (Guardian, Aug. 2015).

Freedom of association and of assembly are severely restricted, and NGO's need to follow strict regulations (FitW 2015). Public officials employ methods of harassment, repression and intimidation against rights advocates (HRR 2015). 

Sources

  • US Department of State: Investment Climate Statement - China 2015.
  • World Bank Group: Doing Business - China 2015.
  • Herbert Smith Freehills: 'Anti-Corruption Regulation in Asia Pacific - Legal Guide', May 2015.
  • Freedom House: Freedom in the World - China 2015.
  • Freedom House: Freedom of the Press - China 2015.
  • Reuters: 'Chocolate demand melts in China as stocks and bribes decline', 20 August 2015.
  • Xinhua: 'China Focus: Doubts cast over legitimacy of Tianjin blast warehouse', 19 August 2015. 
  • The New York Times: 'Chinese Report Details Role of Political Connections in Tianjin Blasts', 19 August 2015.
  • The Guardian: 'Chinese police arrest 15,000 for cybercrimes', 18 August 2015. 
  • The New York Times: 'Obama Administration Warns Beijing About Covert Agents Operating in U.S.', 16 August 2015.
  • International Business Times: 'Chinese Agents In US Try To Lure Expatriate Fugitives Home, Obama Warns Beijing: Report', 16 August 2015.
  • Reuters: 'China to audit government land income in corruption fight: paper', 16 August 2015.
  • Foreign Policy: 'A Chinese Supreme Court Justice Falls from Grace', 28 July 2015.
  • Business Insider UK: 'A surprising number of luxury brands depended on bribery in China to generate their revenues', 21 July 2015.
  • The Diplomat: 'China's Next Challenge: The Depletion of Global Natural Resources', 28 February 2015.
  • Reuters: 'China's top court says no to West's model of judicial independence', 26 February 2015. 
  • The Guardian: 'Politburo, army, casinos: China’s corruption crackdown spreads', 14 February, 2015.
  • Financial Times: 'Chinese mining tycoon executed', 9 February 2015.
  • South China Morning Post: 'Eight Chinese customs officials on trial accused of taking bribes from Shenzhen smugglers', 6 February 2015. 
  • World Economic Forum: Global Competitiveness Report - China 2014-2015.
  • World Economic Forum: Global Enabling Trade Report - China 2014.
  • US Department of State: Human Rights Report - China 2014.
  • Bertelsmann Foundation: Bertelsmann Transformation Index - China 2014.
  • Bloomberg Business: 'China Widens ‘Tax-Evasion’ Net Amid Microsoft Case', 26 November 2014.
  • Financial Times: 'China charges Microsoft $140m for tax ‘evasion’', 26 November 2014.
  • The Guardian: 'Xi Jinping vows to fight 'tigers' and 'flies' in anti-corruption drive', 22 January 2013.
Topics: East Asia & The Pacific