The Crack down on Compliance in China

By Richard Hoffmann, ECOVIS Beijing

Compliance in China is often thought to be easily persuaded. However, that is no longer the case. The Eight-Point code (八项规定), passed in December 2012 by the Political Bureau of the CPC Central Committee, was adapted to reject the practice of formality, extravagance and bureaucracy, and putting further emphasis on building closer ties with the people.

The Eight-Point code is mainly targeted at senior officials, but it has also sent a strong message to the society as well. To reinforce this code, the Supreme court, high and middle courts have established inspection teams to spot check various jurisdictions and courts. Additionally, the Central Commission for Discipline Inspection has introduced a monthly reporting system throughout 31 provinces and municipalities in China including the Xinjiang Production and Construction Corporation alongside 60 other state-owned organizations.
Since the reinforcement of the Eight-Point code, over 30,420 people have been punished for breaking it and amongst them, 7,692 people have received disciplinary punishment. It isn’t just the senior officials that are being punished, but all parties involved or engaged in such acts – especially bribery cases.

For most of us foreigners in China, when we read the news that an investigation on a senior officier of Hainan province, has begun, it seems irrelevant to our day-to-day business. But realistically, the distance is not actually that far. Since the establishment of the Eight-Point code, there have been cases of international companies getting mixed into the mess as well. Avon, the world’s largest cosmetic distributor, is now under investigation for a case regarding their entry into the Chinese market. They are under investigation of a possible improper payment to Chinese officials as their entry year was suspiciously close to the implementation of the ban on direct sales in 2006. It is said that Avon may face a penalty worth RMB800 million for bribery.

Another case of an international company being penalized based on the Eight-Point code would be Abbott. Abbott tries to promote their products by giving 10 percent of sales as “incentives” to doctors. In order to reduce bribery amongst the medical and health sectors, the National Health Family Planning Commission has established a provision to establish a record of commercial bribery in the pharmaceutical sales area, where those with past records would be scored lower or even refrained from participation.

But amongst the non-compliance cases, one of the more well known cases would be the GlaxoSmithKlein case, where the European pharmaceutical company went under thorough investigation for corruption and bribery mid 2013. Similar to Abbott, GSK was accused of providing bribes and personal benefits to doctors and public officials to increase their sales. Involving over $500 million bribes, the investigation detained over 20 employees and other medical personnel. This showed a change in the Chinese government’s attitude that they will be cracking down on foreign international scale companies as well.

Compliance can also come in smaller, other forms such as reporting your individual income tax amount. In March 2012, a German art shipper was imprisoned under the suspicion of under-reporting the value of the art in which he sold. As a result, he evaded more than RMB10 million worth of tax. This German art shipper, who was the Beijing-based general manager of Fine Arts Solutions, though currently released to Germany, is still an on-going case where he faces imprisonment of up to 10 years.

Let it be through active non-compliance, or subconscious action, the breaking of Chinese regulations will lead to large penalties and consequences. Therefore, it’s important to know exactly what you can and cannot do in China, especially in now since the Chinese government is cracking down on existing cases. China, though a growing, opportunistic market, is also becoming a more inspected market. China is cleaning up their mess and you want to make sure you’re not stuck in the middle of it. If you are unsure if you are compliant or not, please do not hesitate to contact us. We would be more than happy to support you.

Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. Moreover, Ecovis was awarded the No. 1 auditing firm for mid-sized companies in Germany in 2013.If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our newsletter or give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com