Government Investigations in China: How to Navigate a Complex Network
U.S. lawyers are often flat out flabbergasted by the prospect of having to deal with a Chinese government investigation, because Chinese laws are perceived to be ambiguous and their enforcement selective. U.S. lawyers trained to argue their cases in court through a system of discovery that places great emphasis on giving each side ample opportunity to discover the other’s evidence and avoid trial by ambush will find the Chinese system particularly unsettling, and oftentimes, completely incomprehensible. This is not surprising.
To effectively handle a Chinese government investigation requires a radically different mindset and approach. If the U.S. litigation system is a ladder, with each step signaling a different set of rules, the Chinese government investigation system is a network where success depends on creating the most connections among a large number of scattered dots.
However, many of the skills and abilities essential to succeed in a Chinese government investigation are not foreign to U.S. litigators. The challenge lies in adapting to a different way of thinking—a tall task for those without actual experience working and living in China.
Different Levels of Government Investigations
It is axiomatic everywhere that a criminal investigation is much worse for the subject than an administrative one; this is particularly true in China. Not only does a criminal indictment signal the potential for criminal liabilities, but essentially guarantees that the ultimate outcome of the investigation will be unfavorable to everyone charged. In China, authorities are loath to issue a criminal indictment unless they are certain of obtaining a criminal conviction at trial. Therefore, Chinese authorities often use an administrative investigation as a fishing expedition for evidence that can be used in a potential criminal investigation down the road. According to China’s Rules on Transfer of Allegedly Criminal Cases by Administrative Agencies, administrative agencies usually (but not always) defer decisions to their criminal colleagues when there are parallel administrative and criminal investigations into the same subject matter.
An administrative enforcement agency does not typically get a criminal enforcement agency involved unless there is already strong evidence of criminal wrongdoing. Authorities would never risk public embarrassment in a high-profile case.
While the involvement of a criminal enforcement agency does not necessarily spell the end for the investigation target, a criminal indictment likely does. Discovery is stacked in the authorities’ favor. The period of time from the issuance of a formal indictment in China to the rendering of a verdict rarely is more than a month, but criminal enforcement agencies (the local public security agencies or the State Public Security Bureau) usually have up to six months from the start of an investigation to decide whether to bring any criminal charges. Furthermore, government authorities, regardless of whether they are pursuing an administrative investigation or a criminal investigation, are not required to disclose in advance all evidence to be presented at a trial, even on the eve of trial.
Given these practices, the criminal conviction rate following trial in China exceeds 98 percent. With the odds so hopelessly stacked against defendants, it is best to avoid the prospect of a criminal trial all together. In the context of a Chinese criminal investigation, prevention is definitely better than cure.
The Role of Experts
It is widely accepted in U.S. litigation that outcomes often depend largely on the quality of a party’s experts. Trials can boil down to a battle of experts—respected and personable experts who exude an air of competence and impartiality are viewed by jurors with less suspicion than lawyers. The same is true for experts in government investigations in China, but in somewhat different ways.
While experts in U.S. litigation usually may only testify to non-legal matters outside the grasp of lay persons, such restrictions do not exist for experts in Chinese government investigations. Experts cannot only attempt to clarify the meaning of ambiguous laws and regulations at issue, but also advocate to judges for favorable interpretations. Such expert opinions carry much weight with judges and the general public.
Choosing the right experts and maximizing their effectiveness can be a tricky affair. First, choosing the right expert in the right field with the right focus is critical. As in U.S. litigation, Chinese authorities are unlikely to pay much attention to an expert whose expertise is not focused on the specific laws relevant to the investigation. Perhaps counterintuitively, it is often better to retain respected experts who are not the most prominent authorities in their field, because high-profile experts are often unwilling to take an approach that differs from the approach taken by the government. Experts who do not enjoy the same prominence are more likely to argue vigorously on a client’s behalf.
Second, it is imperative for lawyers to establish good rapport with experts. Experts usually make appointments within very busy schedules; if at all possible, it is best to work with their schedules. That includes identifying and retaining experts as soon as you suspect their services might be needed, promptly giving the experts the information they need to render their opinions, addressing schedules several months in advance and accommodating experts’ schedules when conflicts arise.
Third, it is especially important to retain experts early, because their role typically is not solely to testify at trial, but to spread their opinions by publishing articles in appropriate media (newspapers, magazines, academic journals and other places) and giving talks to the appropriate audiences. It often takes months for their work to have the desired impact.
Fourth, it is wise to carefully identify for experts what information is confidential and privileged. China generally does not recognize an equivalent of the U.S. work product doctrine that protects from disclosure certain materials prepared in anticipation of litigation. If an expert discloses certain information, intentionally or unintentionally, there likely will be no way to get such information back under wraps. Consequently, it might be sensible to only disclose to experts information they absolutely need. Strict confidentiality agreements are strongly recommended to help prevent experts from intentionally disclosing confidential information.
Fact Gathering and Dealing with Disgruntled Employees
Obtaining the cooperation of company employees who have the information counsel needs in a government investigation is difficult in any matter, but particularly difficult in China where, in practice, employees’ communications are unlikely to be shielded from disclosure. While China’s authorities have compulsory powers backed by the threat of obstruction of official investigations, the company’s counsel only has authority delegated by the company’s top management (often overseas and far away from China), which might not be enough in a time of crisis. When certain employees already hold a grudge against the company, collecting all the facts and data can be a daunting challenge.
A comprehensive internal data collection effort is necessary at the very beginning of any Chinese government investigation. Experienced lawyers have developed skills for getting necessary information. Instead of making a blanket request to all potentially relevant employees to turn over all relevant information, as might occur in the United States, requests to a smaller group of trusted employees who are likely to be loyal to the company might be a more effective starting point. Well-run companies will have employment contracts and labor agreements that explicitly require the disclosure of company information.
Instead of collecting information under the lawyers’ names, it can sometimes be more effective to direct company IT professionals and managers to lead the collection efforts, reducing alarm among the employees. At times, disgruntled employees demand payment in exchange for information, but the company absolutely cannot violate the law and give in to such demands. Companies should be vigilant about communicating with authorities during investigations, possibly including disclosing adverse information before the information gets to authorities from other sources.
Many western lawyers coming to China for the first time will often find the differences in language, culture and legal systems make China as impenetrable as the Forbidden City. But with China’s GDP on par with the total GDP output of the Middle East, Latin America, the Caribbean and Africa combined, working in China is not a matter of “if” for multinational companies. With its economy slowing in the midst of a difficult transition period, Chinese authorities have placed unprecedented emphasis on corporate compliance. Trusted local counsel having in-depth knowledge of Chinese government investigations as well as western litigation experience can help multinational companies avoid bungling even small or routine investigations and creating greater risks.
Article author: Ping An is foreign counsel for MWE China Law Offices in Shanghai, where he focuses his practice on corporate compliance and government investigation issues.