Hina Corruption Report

Сhina Corruption Report

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Snapshot

Сorruption in China presents business operating or planning to invest in the country with high risks. The Chinese government, led by President Xi Jinping, is in the midst of a sweeping anti-corruption campaign that has led to thousands of arrests, nonetheless, corruption continues to negatively influence the business environment. However, it has been alleged that the anti-corruption campaign is at least partly politically motivated. 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 favors. 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 criminalize several corrupt practices such as facilitation payments, money laundering, active and passive bribery, and gifts in the public and the private sector with the Anti-Unfair Competition Law focusing on commercial bribery. Anti-corruption laws are inconsistently and selectively enforced.

Last updated: August 2018
GAN Integrity

Judicial System

The judiciary in China carries high corruption risks for business. Companies express moderate confidence in the judiciary’s independence but are not satisfied with the efficiency of the legal framework pertaining to the settling of disputes and challenging regulations (GCR 2017-2018). Companies indicate that bribes and irregular payments are occasionally made in return for favorable judicial decisions (GCR 2015-2016). Investors should be aware that there is no separation of the powers in China, meaning that the judiciary is responsible to the ruling National People’s Congress (NPC) and local People’s Congresses (BTI 2018). Safeguards against corruption in the judiciary are vague and poorly enforced (ICS 2018). Local governments are able to exert influence over rulings as judges are appointed and paid by the local government (ICS 2018). Judges receive guidance from the government and the ruling party regularly, particularly when it comes to politically sensitive cases (HRR 2017). Despite a high number of prosecutions for allegations of corruption that have been carried out in the last couple of years in China, judgments are often not enforced against powerful special entities, such as government departments, state-owned enterprises, military personnel and some members of the Communist Party of China (CCP) (HRR 2017). The U.S. State Department reports that American companies tend to avoid challenging administrative decisions or launching action in commercial disputes before local courts out of fear of retaliation (ICS 2018).

Enforcing a contract is less time-consuming and less costly than elsewhere in the region (DB 2018).

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 for alleged corruption (Washington Post, Sept. 2015). Xiaoming was sentenced to life in prison after finding him guilty of graft (Reuters, Feb. 2017). In another case, a real estate developer named Wu Zhengge from Hunan Province was arrested after he tried to blackmail local judges with evidence of their corruption (HRR 2017). The judges were placed under investigation for public corruption, but Wu Zhengge was subsequently arrested and charged with disclosing personal information (HRR 2017).

Police

Corruption in the Chinese police constitutes a moderate risk for companies. Companies report that police services are moderately reliable in protecting them from crime and enforcing the law (GCR 2017-2018). Only slightly over one-tenth of companies report that the road police impacted the circulation of goods by extorting bribes (Charney Research, Jan. 2015). The extent of impunity for the security forces has been difficult to ascertain due to a lack of transparency in official investigations (HRR 2017).

The authorities stated they have taken aim at police officers collaborating with triad members in a mafia crackdown in 2018 (SCMP, Feb. 2018).

Public Services

Corruption is a high risk for businesses when acquiring public services in China. Surveys show that more than a third of companies report having to pay bribes to the public service sector (Charney Research, Jan. 2015). Moreover, inefficient government bureaucracy is cited as the second most problematic factor for doing business in the country (GCR 2017-2018). Furthermore, foreign companies might contend with arbitrary regulatory obstacles imposed by officials to extract bribes (FitW 2018). One reason for the high levels of corruption may be the low salaries of government employees (BTI 2018). Foreign investors have noted a lack of transparency and a weak rule of law in China’s legal and regulatory systems (ICS 2018). Complaints include discriminatory practices and selective enforcement of regulations (ICS 2018). Following China’s crackdown on corruption and abuse of administrative power, particularly officials colluding with the private investors, anecdotal information indicates that public officials actively slow down approval of foreign investment projects in order to not arouse corruption suspicions (ICS 2018). Moreover, Chinese authorities have a great deal of discretion to impose deal-specific conditions beyond the written requirements in an effort to bolster the technological capabilities of local competitors (ICS 2018).

China is in the midst of a widespread corruption crackdown led by President Xi Jinping. In the first half of 2017, the Central Commission for Discipline Inspection (CCDI) received 1.31 million complaints and opened 260,000 cases (OCCRP, Jul. 2017). Over 210,000 officials were punished for corruption in the first half of 2017 (OCCRP, Jul. 2017). In one corruption case in August 2015, the Tianjin explosion was investigated as licenses had seemingly been obtained through the principle of guanxi and collusion with government officials (New York Times, Aug. 2015; Xinhua, Aug. 2015). The mayor of Tianjin, Huang Xingguo, was jailed for twelve years in September 2017 for admitting over USD 6 million in bribes to accept promotions and issue land approvals (The Guardian, Sept. 2017).

Starting a business in China takes the same amount of steps and time as elsewhere in the region, but the costs involved are much lower (DB 2018).

Land Administration

Corruption is a concern in China’s land administration sector. Property rights are protected under the law, however, enforcement is impaired by a weak judiciary (ICS 2018) and corrupt administrative agencies (BTI 2018). Companies indicate moderate confidence in the government’s ability to uphold property rights (GCR 2017-2018). However, almost half of companies report the need to offer gifts or make payoffs when operating in the construction sector, thus ranking the land administration as the sector with the highest corruption incidents (Charney Research, Jan. 2015). Specifically, 44% of respondents report corruption in residential realty, 42% in transport infrastructure and 32% in commercial real estate and home building (Charney Research, Jan. 2015). Property-related disputes are widespread and often stems from local officials’ collusion with property developers in order to pay little or no compensation to displaced residents (HRR 2017). Large-scale governmental construction projects and illegal land grabs by local authorities frequently take place (BTI 2018). There are a number of reports by foreign investors that their land use rights were revoked by government officials and given to developers to build new neighborhoods (ICS 2018). In these cases, compensation was nominal (ICS 2018).

Registering property is less time-consuming and takes fewer steps than elsewhere in the region (DB 2018). However, dealing with construction permits takes twice as long as elsewhere in the region and requires significantly more steps (DB 2018).

Tax Administration

The tax administration carries a high corruption risk for business. Bribes and irregular payments are often exchanged when meeting with tax officials (GCR 2015-2016). Tax collectors were ranked as the second most frequent recipients of bribes, with more than half of surveyed companies citing the administration to be susceptible to corruption (Charney Research Jan. 2015).

Companies in China pay taxes fewer times each year, but the total time they spend on filing their taxes exceeds the regional average (DB 2018).

Customs Administration

The customs administration carries a moderate corruption risk for business. Companies express overall satisfaction with the efficiency of the clearance process, but bribes and irregular payments are occasionally made in the process (GETR 2016). The time-predictability of the clearance process is perceived as moderately satisfactory (GETR 2016). 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

Businesses dealing with public procurement in China contend with high corruption risks. Bribes and irregular payments are pervasive in the process of obtaining contracts and licenses (GCR 2015-2016). Businesses are aware of favoritism of government officials towards well-connected companies and individuals when deciding upon policies (GCR 2017-2018). Companies also report that public funds are sometimes diverted due to corruption (GCR 2017-2018). 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 2018). Provincial and local governments have sometimes restricted foreign firms from competing in public tenders (ICS 2018).

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 significant room for corruption. The mining sector, an area highly regulated by the state, is susceptible to fraud, bribery, and kickbacks (HRR 2017). China’s extractive sector suffers from weak governance; it scores poorly in terms of licensing and accountability (NRGI 2017). Information on ownership and contracts in the oil sector is not publicly available (NRGI 2017). As part of its anti-corruption campaign, the government of China has investigated several state-owned enterprises – specifically, 10 enterprises during 2014 and 43 in 2015 – and approximately 40% of these were from the energy sector (ICS 2016).

In February 2015, China executed Liu Han, chairman of the Hanlong Group, a Chengdu-based mining firm, after finding him guilty of corruption and organized crime (Financial Times, Feb. 2015). In another corruption case, the previous executive chief of China National Petroleum Corporation (CNPC) and its listed firm PetroChina, Jiang Jiemin, was sentenced to 16 years’ imprisonment for bribery and abuse of power. Reportedly, Jiang Jiemin, had amassed USD 2.3 million in assets while in office through corrupt schemes such as approving construction projects and offering personal job promotions (BBC News, Oct. 2015). In a similar case, in mid-2016, former Deputy Environment Minister, Zhang Lijun, stood trial after he was charged with taking bribes amounting to USD 361,500 in exchange for the approval of projects and appointments (South China Morning Post, Jun. 2016). Politically motivated prosecution within the natural resources sector has also occurred. In late 2015, environmentalist Tian Jiguang was sentenced to 12 years’ imprisonment for extortion and embezzlement (HRR 2015). The charges were reportedly trumped-up after Tian Jiguang had published a blog post in 2013 exposing a subsidiary of China National Petroleum Corporation for pollution (HRR 2015, China Change, Oct. 2016). Jiguang’s sentence was commuted to four and a half years after a retrial in 2017 (Caixin, Jun. 2017).

Legislation

As part of China’s sweeping anti-corruption campaign, the government has rigorously enforced its comprehensive anti-corruption framework (BTI 2018). Nonetheless, the application of the laws is inconsistent and selective (HRR 2017) and has also been used as a political tool (BTI 2018). The Criminal Law legislates criminal bribery offenses, including active and passive bribery in the public and private sectors. Bribery is categorized into ‘relatively large’ (more than CNY 30,000 and up to CNY 200,000), ‘huge’ (more than CNY 200,000 and up to CNY 3 million) and ‘especially huge’ (more than CNY 3 million) (GLI 2018). Facilitation payments are not directly addressed by the law (TLR 2018). The revised Anti-Unfair Competition Law (AUCL) became effective on January 1st, 2018. The law expands the definition of commercial bribery to include “seeking transaction opportunities” and captures third party transactions (Baker McKenzie, Dec. 2017). Under the AUCL, companies risk losing their license to operate when a violation is deemed severe (Baker McKenzie, Dec. 2017). Punishment for bribery may range from one year to a life sentence depending on the severity of the offense (Lexology, Jul. 2018). Companies may be fined up to RMB 100,000 or up to twice the value of the bribe (Lexology, Jul. 2018). The bribery of foreign officials is also criminalized for Chinese nationals (CMS 2018).

Bribery of relatives or persons close to a current or former state personnel is also criminalized (ICS 2018). Monetary fines are imposed on passive and active bribery in these cases (ICS 2018). Assisting with exposing corrupt activities mitigates liability for bribery (TLR 2018). Public officials, as well as their spouses and children, are subject to comprehensive financial disclosure laws (HRR 2017). It is not a requirement that the declarations are made public (HRR 2017).

The Supreme People’s Court and the Supreme People’s Procuratorate (in Mandarin) offer interpretations (unofficial translation) of the rules for these offenses. The Anti-Unfair Competition Law (AUCL) penalizes commercial bribery in relation to sales of commodities and profit services; the State Administration for Industry and Commerce (SAIC) (in Mandarin) enforces and investigates the AUCL. Various state organs have issued internal anti-corruption codes for public officials, serving as guidelines to estimate appropriate gifts, acts of hospitality and guanxi. Other relevant laws include the Anti-Money Laundering Law and the Anti-Money Laundering Regulation Concerning Financial Institutions. A new super anti-graft body called the National Supervision Commission (NSC) placed above the Supreme Court will oversee all public servants exercising public power (BBC News, Mar. 2018). 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 2017). While the constitution grants “freedom of speech”, the authorities in practice limit and do not respect these rights (HRR 2017). The news and media are overseen and controlled by the Chinese Communist Party (CCP) which accredits journalists, doles out penalties for online criticism, and owns media outlets (FotP 2017). There are no press provisions that provide for the protection of journalists and their rights (FotP 2017). Instead, vaguely formulated legislation is often employed to crack down on peaceful expression of criticism (FotP 2017). Journalists are routinely arrested on charges that appear to be trumped-up to mask the government’s efforts to crack down on critical reporting (FotP 2017). The CCP has ordered media outlets to strictly adhere to official information provided by government authorities when reporting on officials suspected of graft or bribery (HRR 2017). Investigative journalism has declined rapidly under the rule of Xi Jinping (The New York Times, Apr. 2018). A series of new laws tightened internet censorship further in 2016 (FotP 2017). Corruption among journalists also remains common; PR firms often pay journalists for favorable coverage and bribes are also occasionally paid to remove negative stories (FotP 2017). There is no guarantee of access to government information in China (FotP 2017). However, in 2016 the government reaffirmed its commitment to increasing government transparency, but so far courts have been hesitant to enforce information requests and government bodies routinely withhold information (FotP 2017). China extensively censors online content and laws continue to be tightened (FotN 2017). China’s internet environment is rated as ‘not free’ and it has been ranked the world’s worst abuser of internet freedom for three years straight. The media environment in China is also considered ‘not free’ (FotP 2017).

China does not enjoy a robust tradition of civil society (BTI 2018). Freedom of association and of assembly are severely restricted (FitW 2018). Civil society participation in policy formulation and debate is strongly regulated and controlled (BTI 2018). The number of registered civil society organizations has increased dramatically over the past decade and a half, but these organizations do not operate independently as they need to find a governmental host organization and subject themselves to demanding registration procedures (BTI 2018). Moreover, NGOs are restricted in their capacity to obtain funding or support from foreign organizations and donors (BTI 2018). Only NGOs with non-political agendas are tolerated by the government (BTI 2018).