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China’s Blocking Statute Creates New Challenges for Multinational Companies

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A guest post today from Ropes & Gray attorneys Ryan RohlfsenDavid Zhang and Karen Oddo.

Introduction

The People’s Republic of China (“PRC”) recently enacted the International Criminal Judicial Assistance Law (“ICJAL”).  The ICJAL effectively serves as a blocking statute that requires approval by PRC governmental authorities before any institution, organization or individual within the territory of the PRC can provide evidence, materials or assistance to any foreign countries’ criminal proceedings.

As such, the ICJAL could significantly impact cross-border criminal enforcement and prosecutions.  The context is particularly salient when viewed in light of the U.S. Department of Justice’s (“DOJ’s”) recent enforcement focus on China.  While the ICJAL is new, and its actual enforcement and interpretation is yet unclear, it stands to significantly impact multinational companies (“MNCs”) doing business in China when they face potential criminal enforcement, including with respect to the Foreign Corrupt Practices Act (“FCPA”).  In particular, it could potentially complicate disclosures to the DOJ and other criminal enforcement agencies outside China, affect the level of cooperation MNCs are able to provide such agencies, and impact an MNC’s ability to secure a favorable resolution with foreign enforcement authorities.

What the ICJAL Does

The ICJAL’s provisions govern both situations where the PRC requests criminal assistance from other countries, and where other countries request criminal judicial assistance from the PRC (though the latter may be more pertinent to MNCs doing business in China).  In both situations, the requesting agency must undergo procedures specified by the ICJAL and obtain approval by competent Chinese authorities.

The relevant “assistance” enumerated under the ICJAL is broad, comprehensively covering service of documents; investigation and evidence collection; witnesses testimony; seizing, detaining and freezing properties; confiscation and return of illicit gains; and transferring sentenced individuals.  Two particular types of assistance – evidence collection and access to witnesses – are particularly noteworthy for MNCs doing business in China.


In both cases, a requesting foreign country must submit written requests and various accompanying materials to PRC governmental authorities for review before such information can be provided to the foreign country.  The ICJAL also affords the PRC authorities significant discretion to reject the assistance request – including where the request is “clearly harmful to the sovereignty, security, or social public interest” of the PRC.  Even if the request is granted, the PRC authorities could have the power to monitor and intervene in the foreign country’s evidence gathering or testimonial process in China – for example, by sending personnel to accompany certain witness testimony proceedings.

While the ICJAL provides general procedures for approval requests for criminal assistance, it also defers to applicable mutual legal assistance treaties (“MLAT”) between China and the requesting nation.  However, with respect to the China-U.S. MLAT in particular, the MLAT has historically been invoked with mixed results.  

What the ICJAL Does Not Do

Internal investigations and civil proceedings do not fall within the scope of the ICJAL. Hence, such procedures are not expected to be significant impacted. Rather, the ICJAL applies only to “criminal” proceedings. However, the ICJAL does not clearly define when a “criminal proceeding” is interpreted to have commenced.  For example, if an internal investigation is conducted in response to a DOJ inquiry or if a company decides to self-disclose conduct identified in China to the DOJ following an internal investigation, it is unclear whether the ICJAL becomes applicable.  Additionally, PRC authorities could potentially make their own determination on whether a foreign country’s proceeding is “criminal,” and there is no clear guidance on how PRC authorities might do so.

Implications for FCPA Enforcement

Recent years have witnessed a great surge in the number of U.S. enforcement actions related to China.  In particular, the DOJ’s 2017 Corporate Enforcement Policy regarding the FCPA and recent enforcement actions make it clear that full cooperation is expected from companies under investigation, which is critical to securing cooperation credit and the possibility of a deferred prosecution or declination.  While new enforcement cases may clarify the approaches of both the PRC authorities and foreign criminal agencies, including both how PRC authorities will apply the ICJAL and how the DOJ might factor the ICJAL in its calculus of cooperation credit going forward, it is currently unclear how this will play out.

Since the ICJAL’s enactment, the only FCPA settlement reached involving China has been the December 2018 Polycom settlement. Public information on this matter does not shed light on the ICJAL’s potential impact.  In this matter, the California-based communication technology company received a declination letter from the DOJ, in connection with FCPA charges relating to improper payments made by its Chinese subsidiary to Chinese government officials through local distributors and resellers in an effort to secure business.  In declining to bring criminal charges, the DOJ, in addition to noting the company’s prompt and voluntary self-disclosure of the misconduct, cited the company’s full cooperation.  This cooperation included providing all facts relating to the misconduct, making employees available for interviews and assisting the Department’s efforts to interview a former employee, and translating foreign language documents to English.  In a parallel SEC settlement, the SEC also credited Polycom’s self-disclosure and cooperation, including the company’s production of all documents requested by the SEC.  While the settlement was reached approximately two months after the ICJAL’s enactment, it is unclear whether the ICJAL was a factor in the case – given that enforcement cases often span multiple years, most if not all of Polycom’s cooperation efforts likely preceded enactment of the ICJAL in late October 2018.  However, in underscoring the importance of full cooperation, the case highlights the challenge MNCs may face going forward – avoiding being deemed uncooperative by a foreign regulator while not risking violation of ICJAL requirements.

Another notable factor is the application of DOJ’s increasing focus on individual culpability.  For example, a February 2016 enforcement action relating to Massachusetts-based software company PTC Inc. (“PTC”), while pre-dating the ICJAL, similarly highlights the potential tension between complying with the ICJAL and satisfying U.S. regulators’ expectation of cooperation to achieve for leniency or deferred prosecutions. In PTC, the company and its Chinese subsidiaries (“PTC China”) agreed to pay more than $28 million to resolve civil and criminal cases involving FCPA violations, relating to travel and improper payments provided by the Chinese subsidiaries to government officials in an effort to generate business.  Consistent with recent enforcement trends, the SEC and DOJ each described the extent of PTC and PTC China’s cooperation with the government’s investigation.  Upon learning of the improper payments to Chinese officials, PTC engaged independent counsel and an independent forensic consulting firm to conduct an investigation.  PTC then voluntarily disclosed the results of its investigation to the government and cooperated in the government’s investigation.  In a particularly notable aspect of the case, the SEC entered into a deferred prosecution agreement (“DPA”) with a former sales executive of one of the Chinese subsidiaries – its first DPA with an individual in an FCPA case.  The former employee was a Chinese citizen who resides in Shanghai.  Under the DPA, FCPA charges were deferred for three years against the former employee, as a result of “significant” cooperation he provided during the investigation.  This cooperation included producing documents, appearing for interviews, testifying at trial or judicial proceedings when asked, and accepting service by mail or fax for notices of subpoenas.  While the individual DPA was with the SEC, a non-criminal enforcement agency, PRC authorities could show particular scrutiny and take a broader read of the ICJAL’s scope towards future enforcement actions targeting PRC nationals and residents.

The ICJAL (along with the PRC’s pre-existing state secrets and personal data privacy laws) could potentially “block” MNCs like Polycom and PTC from making a full and complete voluntary disclosure of all relevant facts (including allowing government interviews with, providing culpable evidence against, and securing cooperation from PRC nationals and companies).

Limited Guidance and Key Open Questions

The ICJAL is silent on a number of key questions, such as:

  • What precise information needs to be submitted in seeking approval?
  • Which PRC enforcement entities are responsible for making key approval decisions?
  • What key factors will PRC authorities will consider in assessing requests?
  • How long would review and approval take?
  • What are the consequences for failure to comply with the ICJAL’s requirements?
  • Are companies exposed to enforcement risk by Chinese regulators after submitting information regarding any underlying misconduct in the approval process?
  • What is the extraterritorial applicability of the ICJAL (e.g., application to PRC individuals or nationals residing outside China)?
  • How will the ICJAL impact the use of MLATs?

These uncertainties could leave great latitude to PRC authorities in implementing the ICJAL.  Because the ICJAL has only recently been enacted and become effective, relevant PRC authorities might promulgate further guidance and measures to fill in these gaps.  In the meantime, MNCs should continue to monitor new ICJAL guidance and implementing rules, and foreign criminal enforcement and settlement cases involving China that could signal the approach taken by both the PRC authorities and foreign criminal agencies, particularly in the context of self-disclosure and cooperation credit with the DOJ.

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