环球律师事务所

On October 26, 2018, the Standing Committee of the National People's Congress of China promulgated the International Criminal Judicial Assistance Law (“ICJAL”), which came into effect on the same day. During the past 6 months since its promulgation, wide discussions regarding the law’s legislative intent, scope of application, and the enforcement trend have taken place among the legal and compliance practitioners, in particular regarding one article in the law that explicitly prohibits any assistance by individuals or entities in China related to the criminal proceedings of foreign governments, which is accompanied by conceivably substantial impacts and challenges to the common practice in Foreign Corrupt Practices Act (“FCPA”) investigations adopted by the multinational companies (“MNCs”) in China. While different MNCs may hold different viewpoints in practice, underestimating this legal obligation and the potential legal implications without any preventative measures will significantly increase the legal risks, especially for issues intimately entangled with judicial sovereignty and political complications.

This article aims to reveal the potential legal implications of the ICJAL on the practice of carrying out FCPA investigations by MNCs in China, point out the pitfalls and boundaries, and most importantly provide corresponding suggestions and recommendations as to how to lawfully conduct FCPA related investigations in China to mitigate the potential legal risks of violating the ICJAL.

For the purpose of this article and to avoid confusion, FCPA investigations discussed hereafter are limited to any FCPA investigation practice privately undertaken in China without any official approval or recognition by the Chinese authorities through the formal international judicial assistance channel.

I. Legislative Background of the ICJAL

The drafting process of theI CJAL dates back to 2008, 3 years after China ratified the United Nations Convention against Corruption in 2005, but the first draft was not released for public comment until the end of 2017. Notably, during the public comment period in 2017, certain government agencies raised concerns specifically about extraterritorial law enforcement adopted by certain foreign governments through directly requesting the evidence and materials from Chinese citizens and entities, in this way circumventing the process of obtaining the approval from Chinese authorities. Thereafter, Article 4 of ICJAL stating that “institutions, organizations and individuals within the territory of China shall not provide evidence materials and assistance provided in this Law to foreign countries, without the consent of the competent authority of China” was prescribed into the second draft of the ICJAL, which was the version finally approved and promulgated by the Standing Committee of the National People's Congress of China, indicating a substantial conversion from the principles level into specific legal obligations on each individual and entity within China.

Meanwhile, the enactment of ICJAL to some extent reflects the counter-balancing dynamics between China and the foreign countries, particularly the United States as the top of mind in this regard. The timing of the enactment of the ICJAL coincides with the current crescendo of tensions between China and the United States in view of the Clarifying Lawful Overseas Use of Data Act (“CLOUD Act”), which was enacted by the United States in May 2018 intending to exercise an overreaching approach in unilaterally increasing its access to the data stored in foreign countries. Further, in November 2018, the Department of Justice of the United States (“DOJ”) announced the “China Initiative” promising to investigate and prosecute Chinese companies aggressively for alleged trade secret theft, economic espionage, FCPA offenses and other violations of US laws.

II. Analysis of Key Provisions of the ICJAL and Its Impacts on Private FCPA Investigations in China

The ICJAL applies to criminal proceedings with a wide coverage of activities potentially deemed assistance thereto. Upon analysis of different types of FCPA investigations in China, it is our view that as long as the investigation could potentially lead to a criminal resolution with the US authorities, it is within the zone of danger and the likelihood of the applicability of the ICJAL on the current FCPA investigations is substantially high with legal implications to be ascertained.

Interpretation of Key Provisions of the ICJAL

Article 2 of the ICJAL states that “the law applies to criminal judicial proceedings including criminal inquiry, investigation, prosecution, trial and execution.” In addition, Article 4 states that “foreign institutions, organizations and individuals may not conduct criminal proceedings under this law and the institutions, organizations and individuals within the territory of China shall not provide evidence materials and assistance provided in this law to foreign countries, without the consent of the competent authority of China.”

From a literal interpretation, the prohibitions shall include:

(1) unauthorized criminal proceedings in China conducted by foreign governments and the foreign agents empowered with the criminal judicial authorities; and

(2) unauthorized provision of evidence materials to foreign governments and the foreign agents empowered with the criminal judicial authorities or cooperation in providing assistance including the service of documents, investigation and evidence collection, arrangement of witnesses to testify or assist in investigations, seizing, detaining, or freezing the property involved, confiscation or return of illegal income and other property involved, transfer of a sentenced person, and other assistance by an entity or individual located within China.

Application of the ICJAL on Private FCPA Investigations

As analyzed above, the scope of the ICJAL is limited to criminal proceedings, which in any specific jurisdiction will correspond to any criminal investigations initiated by judicial authorities or quasi-judicial government branches. For FCPA investigations, the competent authorities are the DOJ and the Securities Exchange Committee (“SEC”). Moreover, the parameters of criminal proceedings could be further expanded to include the FCPA investigations privately undertaken by companies, since it is a common approach adopted by the DOJ or SEC to request the companies to provide all the relevant information regarding the misconduct under investigation, including but not limited to the involved personnel, entities, bribery methods, values and transactions, etc.

Although non-cooperation is not itself evidence of misconduct, the majority of the companies would still choose to cooperate with the DOJ to gain credit in a case that otherwise is appropriate for indictment and prosecution. Often, companies gather facts through internal investigation conducted or guided by US lawyers involving large-scale document review, financial review, interviews with personnel in China and other countries. The findings and facts are later submitted to the DOJ on a regular basis or upon the request from the DOJ, which would be considered a direct violation of the ICJAL. The rationale behind is that even though there is no physical entry by the DOJ into China, a company’s efforts in cooperation could in reality facilitate the criminal judicial proceedings, and further, constitute part of or the extension of the process. As for the SEC, the complication is that although the SEC is not a criminal enforcement agency, it usually conducts joint enforcement in FCPA matters with the DOJ. As a result, it is advisable to adopt a more conservative approach to conclude that SEC’s investigation could be closely entangled with the criminal judicial proceedings and there is likelihood that cooperation with the SEC would also be deemed a violation of the ICJAL.

Another type of common practices of MNCs in China which is very likely to be deemed FCPA investigation comes up where an internal investigation is initiated by the company as an internal control mechanism in response to the compliance requirements imposed by the FCPA, and later the company chooses to self-disclose the findings and results obtained during the course of the internal investigation to the US authorities in order to obtain self-disclosure credit in FCPA matters.

Moreover, companies which have previously resolved FCPA matters with the US authorities are usually committed to self-disclose any potential FCPA violation to the US authorities for a fixed term, or are even monitored by a third party designated by the US authorities, which may recommend internal investigations and report the findings to the US authorities. Whenever the company or the monitor chooses to disclose the findings and materials to the US authorities, there is a high likelihood that the internal investigations and the evidence production would violate the ICJAL.

Implications of the ICJAL on Private FCPA Investigation in China

Currently, there remain a few gaps in the ICJAL with regard to the implementation of Article 4 of the ICJAL, including the legal consequences for violation, the designated authorities for enforcing the article, and the regulatory approach that the authorities would take. The detailed implementation rules are also expected to be promulgated. However, based on our experiences in this area, the Chinese authorities are not likely to place an explicit and abruptly harsh stop on all the ongoing FCPA investigations by MNCs in China considering the administrative cost and unascertained difficulties. Rather, a post-event punishment is reasonably foreseeable when there is undeniable evidence published by a foreign government, open and notorious, which cannot be unseen by the Chinese authorities, or otherwise would render the new law of no effect.

The possibility will be especially high for FCPA cases, where an FCPA investigation ends up in criminal trial or through a negotiated resolution. Such resolutions may include a plea agreement, deferred prosecution agreement (“DPA”), non-prosecution agreement (“NPA”), or a declination, which generally means a voluntary alternative to adjudication in which a prosecutor agrees to grant amnesty in exchange for the defendant agreeing to fulfill certain requirements. Regardless of the resolution manners of an FCPA matter, the legal instruments related to the resolutions, such as the DPA, NPA, or letter of declination will all be published by the US authorities, which usually include the details regarding the case facts as well as the company’s cooperation efforts during the FCPA investigation. A direct consequence of the publication is the attention from the Chinese authorities. For example, in one recent FCPA case, immediately after an NPA was published by the DOJ, the Chinese authorities initiated a government investigation on that specific bribery related matter and requested all the relevant materials that had been produced to the DOJ. Monetary penalty was eventually imposed on that company by the Chinese authorities for the bribery conduct. After the enactment of the ICJAL, what could be reasonably anticipated is that one more layer of the legal implications will arise with this regard.

III. Suggestions and Recommendations on Compliance Boundaries of Private FCPA Investigations in China

In practice, all kinds of internal investigations conducted by MNCs will continue to be an essential part of the internal controls and corporate governance program to identify and remediate any potential compliance risks on a daily basis. Nevertheless, considering the legal obligations undertaken on each individual and entity located in China, how to lawfully conduct FCPA related private investigations has now become an important proposition to consider.

1. Suspension of Any Unauthorized Criminal Judicial Assistance

In terms of MNC’s assistance with any ongoing investigation under the direct instruction from relevant foreign judicial authorities without the official authorization by the Chinese authorities, the bottom line is that such efforts should be suspended according to the ICJAL. In addition to a direct violation against the ICJAL, the common practice of cooperating with the foreign government investigation is inherently risky where large-scale data collection and cross-border data transfer are directed by the foreign government through the foreign attorneys, who could potentially gain unlimited access to the data located in China either through remote review platform or even on-site in China.

Moreover, it should be noted that the potential legal liabilities for other related criminal offenses under the Chinese laws will also be significantly increased from the above practice, especially in those highly sensitive industries such as telecommunication and infrastructure. For example, cross-border data transfer might constitute the crime of supplying state secrets or intelligence for an agency, organization or individual outside the territory of China if the transferred information is not lawfully and accurately screened and desensitized and is deemed to contain state secret at a later stage.

On the other hand, depending on the nature and severity of the issue under investigation, uncertainties remain since the Chinese authorities might assert their discretion and refuse to provide judicial assistance if the issue is implicated with China’s ongoing criminal procedures or other factors. Therefore, proper communications with the Chinese authorities in advance are highly recommended and it is necessary to engage competent local counsels to navigate the whole process, control the pace and effectively direct the conversations and interactions among the multiple parties.

2. Localization of FCPA Related Internal Investigations in China

As for the ongoing FCPA related internal investigations initiated by the MNCs, it is suggested that companies should properly localize the internal investigation efforts to mitigate the risk exposure based on the considerations including the nature of the issue under investigation, legal implications in different jurisdictions, the applicability of extraterritorial legislations, and the scope of the investigation (i.e. the nationality of the involved personnel and entities), etc.

The key for such localization is to demonstrate the “independence” of the investigation which is designed and conducted pursuant to relevant Chinese laws: while the ICJAL prohibits providing unauthorized assistances to foreign judicial authorities, it by no means bans companies in China to lawfully conduct internal investigations in accordance with Chinese laws. (To the contrary, the practice of conducting internal investigations are sometimes indirectly encouraged by the Chinese laws under specified circumstances. For instance, the Anti-Unfair Competition Law states that if a company has evidence to prove that the illegal activities of offering bribes by its employee are irrelevant to the seeking of transaction opportunities or competitive advantages for the company, then the company will not be subject to the legal liabilities for employee’s misconduct. This provision is commonly interpreted in away that a defense for company could be sustained if a company establishes adequate compliance mechanism including conducting internal investigation to properly identify and rectify the wrong doers.) Below are a few tips on “independence” accordingto our experiences to mitigate (not entirely eliminate) the potential legalrisks:

(1) For the general framework of the investigation arrangement, the local investigation team is required to assume independence in planning and conducting internal investigations. That means, while the local investigation team will still interact with the global team and its counsels, the main direction and methodology of the investigation will need to be decided by the local team with its competent internal and external counsels (for example the licensed Chinese lawyers in practice) from the Chinese law perspectives to demonstrate the independent nature of a localized investigation and to minimize the entanglement with potential foreign criminal judicial investigations. Though it is still possible that the investigation and the corresponding findings might later be disclosedto a foreign judicial authority and thus be deemed as violating the ICJAL, such arrangement will at least help to provide necessary defenses for the company regarding the independent nature of such localized investigation so as to negate the willful intent for violation of the ICJAL.

(2) For internal reporting and sharing of the investigation results, Chinese laws do not explicitly prohibit cross-border communications and brief sharing for management and internal control purposes between foreign headquarters and its Chinese subsidiaries so long as such information sharing is necessary and conducted in a reasonable manner without violation of any Chinese laws. Additionally, when evaluating the issues regarding the self-disclosure to foreign authorities, in addition to the foreign law requirements, Chinese law considerations must also be weighed as determinative factors to balance against the regulatory requirementsin various jurisdictions. It is suggested that the company should consult with competent local counsel in China and other relevant jurisdiction before a prudent decision could be reached.

(3) For any cross-border data transfer, proper screeningand evaluation process should be carefully designed and implemented by competent local counsels to make sure the legitimacy and strict compliance with the laws and regulations in both the data exporting and importing countries. It is worth mentioning that Chinahas promulgated a series of legislations prohibiting the cross-border transfer of certain categories of data in specific industries such as healthcare and financial industries, and the general legislation and enforcement trendindicates a more restrictive approach by the Chinese authorities.

Under the increasinglyintricate and complex international environment, direct or indirect conflicts among different countries in politics, religions and legal systems will definitely create more and more challenges to MNCs, especially when conductingcross-border internal investigations such as private FCPA related investigations. Echoing the name of the ICJAL, we hope that more in-depth and substantial cooperation and assistance in combating briberies crimes could be reached in the near future, as is reiterated by China’s topleadership that China has zero tolerance for corruption,and strengthening on internal cooperation with deterrent impacts should be a significant step in achieving this goal. But at the current stage, our recommendation is to keep a close eye on any development of the law and its implementing rules, adopt a conservativeapproach for interpretation, seek professional guidance case by case and beespecially prudent when conducting any FCPA related internal investigations in China.

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