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Caixin Global
Caixin Global
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Editorial: Staying True to the Mission of Corporate Compliance Reform

The Supreme People’s Procuratorate and the All-China Federation of Industry and Commerce convenes a meeting on April 2 in Beijing to launch the pilot program of compliance reform of enterprises involved in criminal cases. Photo: spp.gov.cn

The enterprises involved in criminal cases will get more opportunities to rectify and correct themselves. Recently, the Supreme People’s Procuratorate of the People’s Republic of China and the All-China Federation of Industry and Commerce convened a special meeting to launch a pilot program of compliance reform for enterprises involved in criminal cases. This reform aims to protect private small and medium enterprises, and embodies the spirit of the rule of law combining punishment with leniency. It will provide a valuable reference for other reforms. Giving enterprises the opportunity to rectify lays a vigorous and well-regulated micro foundation for the Chinese economy.

The compliance reform has been one of key tasks of the Supreme People’s Procuratorate in recent years, aiming to implement a policy of fewer arrests, prudent prosecution and custody in enterprise-related crimes. The main idea of this system is that enterprises should make compliance commitments, put forward compliance plans, and make rectification under strict supervision and evaluation as required by the procuratorial organs. Only in this way, the procuratorial organs will not prosecute them. In other words, enterprises obtain the opportunity to get a mitigated punishment or be exempt from punishment through rectification. The reform was launched in 2020 and has been piloted twice so far. The corporate compliance and leniency system has been implemented in the United States for more than 100 years, introduced into criminal justice procedures for more than 30 years, and widely implemented in other countries under the rule of law. In the process of building a country under the rule of law, China also urgently needs to establish this system. Of course, how well it can be integrated with China’s national conditions remains to be explored.

Since the market economy is based on the law, the importance of corporate compliance is increasingly prominent. The causes of corporate noncompliance are extremely complex, ranging from an unrestricted growth environment, to poor social integrity and traps laid by unreasonable laws. In any case, sanctions may affect the operations of enterprises and even bring bankruptcy. It is easier for a business to fall than to rise. Criminal cases often cause negative knock-on effects like unemployment, financial and tax losses, and social disorder. As downward pressure on the economy has increased since the Covid-19 outbreak, the negative effects of incarceration and imprisonment of entrepreneurs will be amplified. Zhang Jun, procurator-general of the Supreme People’s Procuratorate, said that the pilot compliance reform is aimed at preventing the failure of enterprises caused by the improper handling of criminal cases. The higher goal is to create a law-based business environment and promote standardized development of enterprises by handling each case well. We hope the procuratorial organ will stick to this mission.

The sweeping roll-out of the reform heralds a flood of compliance reform cases to come. According to the reform plan, county-level procuratorates will try to handle several corporate compliance reform cases, if conditions permit. Sufficient cases of high quality will help the reform progress smoothly and improve the details of the system. Moreover, China’s trials have focused on SMEs and have yet to be extended to large private enterprises, as is the common practice in law-based countries.

Admittedly, this reform has been accompanied by controversy. Some concerns still exist, such as whether non-prosecution will result in some businesses “legitimately breaking the rules,” or whether it will be unfair to compliant businesses, or whether the enterprises involved will correct themselves now that there is a “relative non-prosecution” rule for minor offences. In addition, insiders hold different opinions on whether this reform breaks existing laws. All disputes will ultimately be settled by practice. When conditions permit, amending the Criminal Procedure Law will not only consolidate the achievements of the reform, but also mark the periodical success of the reform.

At present, the biggest concern is that the reform does not go as expected, resulting in power-for-money deals and judicial corruption. This concern is even more acute in the supervision and evaluation mechanism of corporate compliance. In June 2021, the Supreme People’s Procuratorate, together with the Ministry of Justice, the Ministry of Finance, and the All-China Federation of Industry and Commerce, issued the Guiding Opinions on Establishing a Third-Party Supervision and Evaluation Mechanism for the Compliance of Enterprises Involved (Trial). The neutrality of third-party supervision and evaluation attracted much attention. The Jinjiang Municipal People’s Procuratorate of Fujian province set up the country’s first corporate compliance office together with a law firm, which immediately sparked controversy over professional norms. Undoubtedly, as the main promoter of the reform, the procuratorial organ should act as a judge. Otherwise, the public will have suspicions about the reform, which will undoubtedly undermine its credibility.

All judicial reforms are based on existing laws, and the compliance reform cannot go beyond the overall environment of China’s development of its judicial system. This is the root cause of the concern that the reform may not go as expected. Problems like the unclear role of the leading authority in the reform and relevant parties making profits from the reform are hard to address. Taking enterprises as another example, although compliance construction has gradually gained attention in recent years, the overall compliance awareness of enterprises is not strong enough. They take remedial action only after a problem occurs, and only fix the area where a problem arose. Acknowledging these difficulties does not mean being negative about the reform. A clear mind is needed to stand firm in the face of challenges in the reform. Even if this reform cannot make great breakthroughs in specific areas, it should hold on to each key task from the beginning to progress as planned and fulfill the original mission.

The compliance reform is not isolated, but has a significant background. In recent years, decision-makers have attached great importance to protecting the interests of enterprises, especially private ones, and building a business-friendly environment and a clean government. The central government has issued top-level design documents like the Opinions on Improving the Property Rights Protection System to Protect Property Rights According to the Law as well as the Opinions on Creating a Healthy Growth Environment for Entrepreneurs, Promoting Excellent Entrepreneurship and Better Playing the Role of Entrepreneurs. If these documents can be thoroughly implemented and the positive factors in the current laws can be fully utilized, businesses will surely fare much better than they do now. The compliance reform is part of the pursuit of a higher goal. The most urgent task is that the judicial organs at all levels “rationally reduce arrests and prosecutions, and propose light sentences in accordance with the law,” and avoid wrongful convictions.

Private enterprises are now facing daunting challenges, which is a point of concern for governments at all levels. Relief policies such as tax cuts and fee reductions are undoubtedly helpful, but systemic changes that benefit private enterprises are more valuable because of their lasting effects. We appreciate the positive role of the procuratorate in the compliance reform, and hope that it will become another driving force in judicial reform, so that a large number of enterprises will not close down due to improper handling of cases, but will be reborn by learning from international best practices.

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