China Corruption Report

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Snapshot

Corruption 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. 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.

  • Risk key
  • Low
  • MODERATELY LOW
  • MODERATE
  • MODERATELY HIGH
  • HIGH
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Judicial System

The judiciary in China carries high corruption risks for business. The Chinese Communist Party (CCP) rejects the principle of separation of powers and does not provide for an independent judiciary (Reuters, Feb. 2015). Judges receive guidance from the government and the ruling party regularly, particularly when it comes to politically sensitive cases (HRR 2015). Lower-level courts are particularly susceptible to outside influence and corruption, and they operate in an opaque manner (HRR 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 2015-2016, DB 2017). Despite that a high number of prosecutions have been carried out in the last couple of years in China, some judgments were 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 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 for alleged corruption (Washington Post, Sept. 2015). In late 2016, Xiaoming has been formally indicted in late 2016 for taking bribes (Shanghai Daily, Oct. 2016).

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Police

Corruption in the Chinese police constitutes high risks for companies. Companies report that police services are unreliable in protecting them from crime and enforcing the law (GCR 2015-2016). Further, two-thirds of business report paying for security in China (ES 2012). Abuses of power among police officers were rarely prosecuted (HRR 2015). Nonetheless, only slightly over one-tenth of companies report that the road police impacted the circulation of goods by extorting bribes (Charney Research, Jan. 2015).

In one corruption case, in mid-2015, Zhou Yongkang, a former member of the Politburo Standing Committee and chief of the internal security apparatus, was sentenced to life imprisonment for extortion USD 19.9 million, abuse of power and disclosing national secrets (HRR 2015).

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Public Services

Corruption is a high risk for businesses when acquiring public services in China. Companies report the exchange of irregular payments and bribes is widespread and consider government regulations to be burdensome and at times inefficient (GCR 2015-2016). Surveys show that more than a third of companies report having to pay bribes to public service sector (Charney Research, Jan. 2015). Furthermore, foreign companies might contend with arbitrary regulatory obstacles imposed by officials to extract bribes (FitW 2016). 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 2016). 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).

Starting a business is more time-consuming in China compared to the regional average; taking nine procedures and requiring 28 procedures (DB 2017).

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Land Administration

Corruption is a concern in China’s land administration sector. 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 realty and home building (Charney Research, Jan. 2015). Property-related disputes are widespread and often stemmed from local officials’ collusion with property developers in order to pay little or no compensation to displaced residents (HRR 2015). Large-scale governmental construction projects and illegal land grabs by local authorities take place unchecked (BTI 2016). Several corruption cases have been reported in the areas of land-usage rights, real estate and infrastructure development; areas which are heavily regulated by the government (HRR 2015). In one case in April 2015, former Qing’an Discipline and Inspection Department cadre Fan Jiadong was beaten to death after he had blown the whistle on the corruption of government officials in Qing’an county. Reportedly, the suspects arrested in the case were related to real estate developers with close ties to local government officials (HRR 2015).

Property rights are protected under the law, however, enforcement is impaired by a weak judiciary and corrupt administrative agencies (BTI 2016). The courts have an inconsistent record in protecting foreigners’ legal property rights (ICS 2016). Registering property takes around 28 days, which is much less than the regional average, yet dealing with construction permits is more time consuming and costly than elsewhere in East Asia and the Pacific (DB 2017).

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Tax Administration

The tax administration carries high corruption risks 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). China has eased the process of paying taxes by enhancing its electronic system for filing and paying taxes, and by unifying the criteria and accounting methods for tax deductions (DB 2015). Paying taxes in China takes 263 hours per year, an average that is still higher than the regional one (DB 2017).

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Customs Administration

The customs administration carries a moderate to high corruption risk for business. Companies rate transparency levels at the borders as moderate, however, corruption in the form of irregular payments is pervasive when importing and exporting (GCR 2015-2016, GETR 2014). While approximately two in every ten surveyed companies expect to give gifts to officials to obtain import licenses (ES 2012). Despite the costs to export and import being lower than the regional average (DB 2017), 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).

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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 that favoritism of government officials towards well-connected companies and individuals occurs when deciding upon policies and companies also report that public funds are often diverted due to corruption (GCR 2015-2016).

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 2016). Regulations related to monopolies are inconsistent and affected by protectionism (ICS 2016). Companies are recommended to implement special due diligence procedures to counter the likelihood of encountering corruption in China’s procurement process.

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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 and has, in effect, witnessed several corruption cases (HRR 2015). China’s extractive sector lacks oversight and transparency: this is mainly due to low-quality government reports, lack of transparency in contract terms, revenue streams and resource-funded subsidies (NRGI 2013). Furthermore, there are no procedures for appealing licensing decisions (NRGI 2013). 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, 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). On the other hand, 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).

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Legislation

As part of China’s sweeping anti-corruption campaign, the government has rigorously enforced its comprehensive anti-corruption framework. Nonetheless, the application of the laws is inconsistent and selective, owing in part to the lack of independence of the responsible bodies (ICS 2016, HRR 2015). 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). Punishment for ‘relatively large’ bribes include prison sentence up to three years and monetary fines, ‘huge’ bribes incur prison sentences ranging between three and ten years, fines and confiscation of property, while prison sentences ranging between ten years and life or even the death penalty are provided for the ‘especially huge’ bribes category (Mondaq, Jul. 2016). Bribery inferior to the ‘relatively large’ category threshold is also punished when offered to management or supervisory officials in key sectors or to judges (Mondaq, Jul. 2016). The bribery of foreign officials is also criminalized and is punishable by up to 10 years’ imprisonment and a fine (HRR 2015). Bribery of relatives or persons close to a current or former state personnel is also criminalized (ICS 2016). Monetary fines are imposed on passive and active bribery in these cases (ICS 2016). Assisting with exposing corrupt activities mitigates liability for bribery (HSF 2015). Offenders found guilty of serious embezzlement crimes are denied commutation or release on parole (HRR 2015). Public officials, as well as their spouses and children, are subject to comprehensive financial disclosure laws (HRR 2015). It is not a requirement that the declarations be made public (HRR 2015). The Shanghai Municipality banned family members of local officials from starting businesses in the city (HRR 2015).

The Supreme People’s Court and the Supreme People’s Procuratorate (in Mandarin) offer interpretations (unofficial translation) of the rules for these offenses (HSF 2015). 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) 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). 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.

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Civil Society

China has one of the most restricted media environments in the world (FotP 2016). The news and media are overseen and controlled by the Chinese Communist Party (FotP 2016). There are no press provisions that provide for the protection of journalists and their rights. Instead, vaguely formulated legislation is often employed to crack down on peaceful expression of criticism (FotP 2016). Several journalists were detained, imprisoned; specifically, 49 journalists ended up behind bars in 2015, the largest number of imprisoned journalists in the world (FotP 2016). The charges on which journalists were detained were apparently trumped-up to mask the government’s efforts to cracked down on critical reporting (FotP 2016). In mid-2015, the government revoked the publishing permit of the newspaper Moneyweek and shut down the website of the 21st Century Business Herald for reporting on corruption (FotP 2016). There were reports of corruption among journalists and media outlets during 2015 and reporters were commonly bribed by firms in return for favorable coverage. The government cracked down on internet users through cyber attacks and intimidation of software developers, yet activists continued to expose government abuse and corruption online (FotP 2016, HRR 2015). The open-government information regulations allow citizens to request information from government agencies, except for the judiciary, the legislature and the CCP (HRR 2015, Article 19, Oct. 2015). Citizens might have to cite the reasons motivating their request (Article 19, Oct. 2015). Government bodies have routinely withheld information when it comes to matters of vital public concern (FotP 2016). The media environment in China is considered ‘not free’ (FotP 2016).

China does not enjoy a robust tradition of civil society (BTI 2016). Freedom of association and of assembly are severely restricted, and NGO’s need to follow strict regulations (FitW 2016). Civil society’s participation in policy formulation and debate is strongly regulated and controlled (BTI 2016). In some cases, public officials employ methods of harassment, repression, and intimidation against civil society advocates (BTI 2016). Only NGOs with non-political agendas are tolerated by the Chinese government and even previously-tolerated NGOs witnessed increased harassment during 2015 (BTI 2016, FitW 2016).

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Sources

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