- posted: Jul. 15, 2019
- Labor and Employment Law
As recently as the 1990s when investment in China was used primarily as a means of exploiting cheap labor resources, skepticism abounded as to whether China itself would ever become a consistently profitable market for Western companies. China’s consumption market has exploded since then, however, and this new prosperity has fueled a high demand for Western products.
Naturally, fraud and corruption remain substantial business risks. Mishandling an internal investigation, however, can make a difficult situation worse. Due to the unique features of the Chinese business and legal environment, the “standard” investigative approach will have to be substantially modified in order to avoid harming your company. The following is a rundown of some of the unique features that you need to take into account.
Article 108 of the PRC Criminal Procedure Law requires both companies and employees to report any suspected criminal activity to the enforcement authorities. Although the statute does not list any penalties for failing to do so, in view of the broad discretion granted to the PRC government, it is best to report any suspected criminal activity by the company or its employees to the authorities.
Legal Protections for Whistleblowers
In most cases, employee misconduct is uncovered through a tip offered by a whistleblower. PRC law protects the right of a whistleblower to report illegal activity, and limited protection is offered to those who both report criminal activity and cooperate with the police. Chinese law also offers protection of confidentiality, safety, and property of whistleblowers and their close relatives in case of any attempted retaliation. “Retaliation” can include termination or demotion.
In light of these protections, it is critical that an international company operating in China establish an internal reporting system designed to effectively deal with suspected misconduct.
Privacy, Secrecy, and Privilege: The Dark Triad
In China, an internal investigation can be hobbled by a number of limitations that either do not exist or are much more relaxed in the West.
PRC law contains numerous restrictions on the handling of sensitive information, particularly employee personal data and information that has been identified as a “state secret.” The Cybersecurity Law, for example, requires that personal information and other important data be stored in China. Other provisions require employee consent before data is collected from their workspace or communication devices – even devices were given to them by their employer.
In the West, the obvious solution would be to draft employment contracts and employee handbooks to condition employment upon providing advance consent. This approach is dangerous in China, however, since its legality has never been tested in court. In an internal investigation, it would be wise to exclude personal information unless the affected employee gives explicit advance consent. Obviously, this limitation could hobble an internal investigation.
An even more problematic limitation is the extent to which privacy laws protect data contained in devices that belong to the employee (not provided by the employer). Such data is likely to be relevant since conducting business through social media apps, such as WeChat, is common in China.
State Secrets and Restrictions on Transferring Information Out of China
In the West, an investigation conducted by a multinational company is likely to involve the sharing of information with lawyers, accountants, and other professionals who might not be based in the jurisdiction in which the investigation is taking place. In China, however, it can be dangerous to transfer information abroad or even to allow information stored in China to be viewed from abroad. In a worst-case scenario, criminal liability could be imposed.
Under the Law of the People’s Republic of China on Guarding State Secrets, exporting “state secrets” outside of China, perhaps even to Hong Kong or Macau, is a criminal offence. Since the exact meaning of the term “state secrets” is not specific enough to provide a company with clear guidance on which information can and cannot be exported, it is critical that you consult a local attorney before you export any data or make it available for remote viewing from overseas.
Keep in mind that “state secrets” might include employee personal information (in some cases, even if advance consent is obtained) and data that belong to state-owned companies. Also, note that you may face contradictory demands in the midst of an internal investigation – your home office or government may demand that you provide certain information that the PRC government forbids you from divulging or from transferring out of China.
In China, there is no formal concept of attorney-client privilege. Although the concept of confidentiality protects private attorney-client communications in favor of the client, a lawyer can still be compelled to disclose such communications in response to a court order or a demand from a regulator or a government official. A lawyer may also be required to testify on confidential matters in court
What this means in the context of an internal investigation is that your staff must be directed not to create documents dealing with the subject matter of an internal investigation unless it is deemed absolutely necessary by top management. Even the investigation team itself should exercise extreme caution.
The Use of Private Investigators
In 2014, U.K. citizen, Peter Humphrey, and his wife, who operated a risk advisory firm servicing multinational companies doing business in China, were arrested and charged with criminal offenses for purchasing private information concerning Chinese citizens incident to an investigation of employee corruption conducted on behalf of the employer. This case illustrates the risks of hiring a private investigator in China.
An additional barrier to the use of private investigators is the increasing tendency of PRC authorities to restrict or deny third-party access to corporate records that were formerly publicly available.
Terminating Employees in China
You may need to terminate an employee in response to suspected misconduct in order to protect the company from further damage. Terminating an employee in China can be problematic, however, because PRC labor law is decidedly employee-friendly. Early termination of an employment contract, for example, must be based on statutory grounds – and even then the employer must consult with the appropriate labor union before terminating the employee
One of the ways in which you can enjoy partial protection against the possibility of a rogue employee is to draft employment contracts and the employee handbook very carefully, with an eye to protecting the company in this kind of situation.
Given the restrictive limitations and significant legal risks involved in conducting an internal investigation in China, it is critical that you create contingency plans for various possible scenarios before they actually arise, and that you consult with local advisors before taking any action.
IPO PANG XINGPU, with headquarters in Shanghai China, we have been helping clients from all over the world with their legal matters since 1992. We are a group of dedicated attorneys and professionals with expertise and experience in a variety of legal disciplines. Clients come to us “When Being Right Matters ®”.