Archivo categoría International business fraud

Business fraud in China

1. Introduction
During the three decades from the PRC’s founding in 1949 to the implementation of the reform and opening up in 1978, China adopted a centralised planned economy, which was then considered as an essential of the fundamental principles of Marxism and socialism. Under the planned economy, China completed its changeover from a semi-feudal and semi-colonial country with a disintegrating economy to a socialist country with an independent and complete national economic system. The state directed and managed a large portion of the country’s economic output; the state set production goals, controlled prices, and allocated resources throughout most of the economy.
By 1978, nearly three-fourths of the country’s industrial production was produced by centrally controlled state-owned enterprises (‘SOEs’) according to centrally planned output targets. There were almost no private enterprises or foreign invested firms in China. Back then, not only did the Chinese government own most of the enterprises, it was directly involved in their management and these companies were ‘state-run enterprises’ both in name and actuality. The state’s function of social management and state asset ownership were utterly the same. Managers of SOEs had no role in deciding what to produce or what prices their products should be sold at. This mainly explains why the issue of internal fraud was almost non-existent during the early days of China’s economic reform.
In 1978, China’s ‘paramount leader’ Deng Xiaoping spearheaded a series of remarkable economic reforms, in a controlled, gradual and progressive way, in order to fuel economic growth and to raise living standards of the Chinese people in one of the poorest countries in the world at that time. The revamping and refinement of SOEs, known for their ‘plump size and slack performance’, had always been top of China’s agenda for economic reform. Poor economic performance of the SOEs had given rise to various problems that hampered the progress of economic reform in China. The government believed that the problems of SOEs stemmed from the lack of independence of SOE managers. To this end, a string of initiatives were subsequently designed and adopted to consolidate their property rights on the municipal government level and to enhance the efficiency of SOEs as well as to create a mixed-ownership structure. As a consequence of management decentralisation and the realisation of the separation of state and enterprise in the 1980s, the Chinese government slowly ceded autonomy to enterprises, and management independence at these enterprises improved markedly as they were separated from administrative government bodies. Simultaneously, in order to further stimulate the reform momentum, the Chinese government embarked on a wave of privatisation of SOEs in the name of its policy of ‘keeping the large and releasing the small’ and the ‘strategic realignment of the state-owned economy’. Due to the legitimisation of private ownership and market liberalisation, especially relaxation of the state industry’s monopoly, private enterprises have steadily become the engine of growth and a dynamic element of the nation’s economic expansion and hence, inseparable from China’s economic successes. At the same time, problems have emerged as a result of the inability of the legal system to keep up with the sudden and rapid acceleration of privatisation. The issue of internal fraud such as bribery and embezzlement by those involved in the privatisation process has, ever since then, slowly come to light.
By 2006, China had surpassed Britain to become the world’s fourth-largest economy and is due to overtake Germany as the third largest in 2008. This extraordinary economic performance has been propelled by changes in government economic policy that have progressively given greater latitude to market forces.
It is certainly no exaggeration to say that China is presently experiencing the greatest economic transformation in the history of mankind. The country is on the rise, no doubt, witnessed in the unprecedented economic growth, tremendous modernisation programmes and the rising standard of living. A well founded corporate governance system certainly plays a key role in these stunning economic reforms. Although continuously maturing, Chinese laws that regulate corporate governance of both Chinese and foreign-invested enterprises are still in many ways not up to par. On that count, it is vital to spur the development of the market economy through improving and refining the legal system. While the reform of SOEs and the emergence of private enterprises have added an entirely new dimension to the Chinese economy, corporate governance problems such as insider control of corporate affairs, highly concentrated ownership structure, weak protection of shareholders’ rights, and frequent insider dealing and self dealings have become increasingly prevalent in China.
Companies are often beset with serious fraud issues involving, in particular, misappropriation of company funds or assets, theft of confidential information, falsification and fabrication of financial data, diversion of business opportunities, and bribery or corruption. In fact, China is one of the countries where enterprises are worst hit by corporate fraud.
Over the last ten years, bank fraud cases within the country’s four giant state-owned banks in particular have attracted widespread attention. According to government reports, the China Banking Regulatory Commission (‘CBRC’) punished 799 staff members at the four biggest state banks in 2005 after finding they were involved in illegal or unauthorised loans amounting to US$73 billion. In June 2006, the China National Audit Office (‘CNAO’) detected RMB60.3 billion (US$8.4 billion) worth of financial crimes and bookkeeping irregularities at the Agricultural Bank of China. The investigation discovered 51 cases of fraud worth RMB8.7 billion (US$1.2 billion) involving 157 employees. In 2006, auditors found misconduct at Chinese banks involving about RMB860 billion (US$118 billion) and 177 bank managers were dismissed1. These cases have plainly underlined the deep institutional problems including a lack of internal control. As a result of these cases, the Chinese government has come under intense public pressure to revamp the Chinese corporate governance system.
For example, CNAO has been placing increasing emphasis on legal and regulatory compliance when conducting an audit. Due to the limitations imposed by the relevant laws and regulations, some of the irregularities committed by enterprises will be deemed non-compliant even though they are fairly acceptable and reasonable. The constant revision of laws and regulations and overhaul of the supervision mechanism have provided solutions to some of the intricate issues of financial impropriety of the past.
During the past 15 years, China has perpetually adopted various unprecedented measures to improve its corporate governance policies to brace domestic companies for vigorous competition from their foreign counterparts. However, in China, compliance is not always easy, and the value of the higher guidelines is not always apparent to companies’ local management when new practices are implemented. Corporate governance is almost unheard of and basic governance procedures sometimes remain a novelty to most local entrepreneurs, directors and managers. Therefore, bridging the gap between rhetoric and reality has become an indispensable task.

2. Legal Framework
The laws that regulate corporate governance of companies are by no means satisfactory. Therefore, prevention is always better than cure since companies beleaguered by problems related to corporate governance or internal fraud may find inadequate legal remedies to redress their problems.

Company Law
The new PRC Company Law2 improves corporate governance by introducing fiduciary duties and minority shareholder protection. It allows companies to commence civil actions against directors or managers who breach the law or their obligations towards the company.
Article 148 of the Company Law imposes a fiduciary obligation on directors, supervisors and managers and provides that they shall observe the laws and company’s articles of association. In particular, they are not allowed to, among others, misappropriate the company’s funds, disclose the company’s secrets, or exploit their position to accept bribes or other illegal income. In addition, the law prohibits directors and managers from engaging in any competing business with the company (see articles 147, 148 and 149 of the Company Law).

Criminal Law
The PRC Criminal Law3 provides that the following actions by employees are crimes irrespective of the nature of the company:
• demanding or accepting bribes as a corporate employee (article 163);
• offering bribes to corporate employees (article 164);
• conversion of corporate funds or property (article 271); and
• misappropriation of corporate funds (article 272).
It must be noted that articles 163 and 164 were not part of the original Criminal Law that was first promulgated in 1979. They were subsequently incorporated by the Amendments to the Criminal Law adopted by the 5th Session of the 8th National People’s Congress on 14 March 1997 in view of the increasing number of corporate corruption cases.
Supplementary Provisions III of the Supreme People’s Court and the Supreme People’s Procuratorate on the Determination of Crime Names in the Enforcement of the Criminal Law of the People’s Republic of China, promulgated by the Supreme People’s Court and Supreme People’s Procuratorate on 5 November 2007, have further enlarged the scope of articles 163 and 164 by replacing ‘corporate employees’ with ‘non-state employees’.
The manager of a SOE will be criminally liable if he or she commits any of the following acts:
• illegal competition with the business of the manager’s own SOE (article 165);
• diversion of corporate opportunities for the benefit of friends or relatives (article 166);
• dereliction of official duties causing the SOE to incur loss or go bankrupt (articles 167 and 168); and
• sale of corporate assets at unjustifiably low prices in exchange for personal gain (article 169).

Anti-Money Laundering Law
The PRC Anti-Money Laundering Law, adopted at the 24th Meeting of the Standing Committee of the 10th National People’s Congress of the People’s Republic of China on 31 October 2006, is specially designed to fulfil China’s obligations under the United Nations Convention on Corruption and other conventions, and to maintain the security of China’s financial system in the wake of soaring serious crimes like smuggling, drug dealing and embezzlement. The definition of money laundering was broadened for the first time to include corruption and bribery, violating financial management regulations and financial fraud. Formerly, the law only singled out drug trafficking, terrorist crimes, organised crimes and smuggling as money laundering crimes. The Law requires financial and some non-financial institutions established in China to adopt anti-money laundering measures, such as ‘large value transaction and suspicious transaction’ reporting system, and to maintain records of clients.
Another important provision of the Law is that it strictly prohibits administrative and criminal justice departments from using information disclosed for anti-money laundering purposes for a fishing expedition for unconnected administrative actions or criminal proceedings. The People’s Bank of China is the main administrative body in charge of the anti-money laundering campaign.

Code of Corporate Governance for Listed Companies (‘Code’)
The Code was released by the Chinese Securities Regulatory Commission (‘CSRC’) and former State Economic and Trade Commission [now known as State-owned Assets Supervision and Administration Commission (‘SASAC’)] in 2001. The Code was formulated to introduce sound corporate governance in listed companies by raising the standards of accounting procedures and information disclosure, setting up independent directors’ systems, and enhancing the supervision of corporate management. The CSRC is the main regulatory body for the securities market in China and hence, oversees the overall implementation of corporate governance policies.

Guidelines on Internal Audit for Banking Financial Institutions (‘Guidelines’)
The CBRC released the Guidelines in 2006 to strengthen internal controls and improve the internal audit system of banking institutions.

National Bureau of Corruption Prevention (‘Bureau’)
The Bureau was officially launched in September 2007 to enhance international cooperation in the fight against corruption and to fulfil responsibilities set out in the United Nations Convention against Corruption. This is another move by China to show its relentless commitment to eradicate corruption. The launch coincided with Chinese media spotlights on bribery allegation involving foreign multinational corporations in China including Siemes and Carrefour4.
The United Nations Convention against Corruption was adopted in 2003. China was one of the convention’s sponsor nations.

3. Managing the Internal Investigation
Internal investigations are undeniably one of the most effective ways to keep watch for corporate fraud in view of, more often than not, the high level of sensitivity of the subject matter of such investigations. That said, it is important to point out at the outset that ‘corporate internal investigation’ is a relatively new concept in the Chinese legal system as compared with the Anglo-American model although internal investigations commenced by regulatory authorities or law enforcement authorities against companies are unexceptional in China. In respect of internal investigations conducted by companies themselves, China does not have any statutes or regulations directly governing the conduct of an internal investigation. Therefore, it is important to bear in mind the terms of any individual contract between an employee and his or her employer, and to refer to any relevant company guidelines and employee handbooks when determining the scope of an investigation.
An internal investigation may be instigated due to allegations or credible suspicions of wrongdoing, malpractice or ethical lapses by an employee. These allegations may come to the attention of the company through various means, for example, through whistleblowers, the results of internal audits or even media reports. Internal investigations may also be sparked by pending lawsuits.
In this chapter, it is our intention to analyse the different aspects of ‘corporate internal investigation’ and to introduce the various areas of Chinese law that Counsel needs to be aware of when conducting an internal investigation in China.
Companies in China can by and large be divided into four major categories according to their business nature: (1) SOEs; (2) FIEs; (3) public companies; and (4) private companies. The reasons for conducting an internal investigation will vary from company to company. Most of the rules, guidelines and procedures in relation to internal investigation as discussed below will apply with equal force to all of these enterprises (save for SOEs due to their dynamic nature and strong connections with local governments) unless otherwise specifically stated.

3.1 Who should conduct the investigation?
There is no hard and fast rule as to who should conduct the investigation in a particular circumstance. The answer very much depends on the underlying cause of the investigation and the people involved. Commonly used investigators in China include personnel, internal security personnel, general or in-house counsel, and independent third-party investigators.
More often than not, the best investigation is conducted by internal personnel from the head office together with local legal and financial support. A company’s internal personnel will be more familiar with the company’s business operations, the company’s internal guidelines and the company’s employees, and hence, be able to keep disruption of the ongoing business to a minimum. In addition, management and the person being investigated may feel more at ease with having their own colleagues investigate potential wrongdoing. Having said that, there may be exceptional situations that call for the retention of outside counsel in view of the unusual and blazing publicity of the investigation where objectivity is a primary concern.
It must be noted that with regard to SOEs, the investigation will be conducted by SASAC and CNAO.

3.2 Retrieval of documents
In any internal investigation, the investigative and decision-making process relating to allegations of staff misconduct strive to achieve three main equally important objectives:
(i) investigative thoroughness; (ii) transparency of process; and (iii) protection of the rights of all parties concerned. Therefore, while a timely and thorough process of investigation is critical in any internal fraud detection, special attention is required in the course of collecting evidence to prevent any possible invasion of the privacy of the person being investigated or violation of law, so as to ensure the admissibility of the evidence so collected in court in any subsequent litigation. In addition, further steps need to be taken to make certain that the employer’s confidential information revealed during the investigation is not subject to any form of involuntary disclosure.

3.2.1 Hard copy documents
More often than not, the employer may find it necessary to conduct searches of an employee’s desk or work area to look for hard evidence throughout an investigation.
In this regard, the employer is entitled to search an employee’s desk and collect the employee’s work for investigation purposes since any materials created by the employee during the course of his or her employment will rightfully be considered the company’s property so long as this is expressly prescribed by any individual contract between the employer and employee.
Further, in criminal proceedings, the employer’s right to conduct an investigation in its office area of a potential crime dates back to 1982, when the Notice of the Decision that the Evidence Obtained in Investigation by the Security Departments of Government Departments, Enterprises and Organization is Admissible in Criminal Litigation was jointly issued by the Supreme People’s Court, the Supreme People’s Procuratorate and the Ministry of Public Security. The Notice makes it clear that the security department of any government departments, organisations or enterprises may, under the guidance of the public security authority, conduct on-spot investigation, inquiry on witnesses, interrogation on ‘defendants’ or tracing of assets in accordance with laws, and that the evidence lawfully obtained during the process may be admitted in the later criminal litigation provided that the evidence has been submitted by such security department to a competent public security authority and procuratorate for examination and approval. While the technical procedure specified in this Notice may no longer apply in view of the new Criminal Procedure Law, the right to conduct internal investigations shall remain unless and until the Notice is abolished.
In exercising its right to search, the employer is facing the risk of infringing the employee’s right to privacy or reputation, thereby exposing the company to legal responsibilities and also resulting in the evidence obtained being ruled inadmissible in court at a subsequent legal proceeding due to the unlawfulness of the search.
With regard to hard copy private correspondence, article 40 of the Constitutional Law of the PRC and article 4 of the Postal Law of the PRC provide that a citizen’s freedom and privacy of correspondence must not be violated. No organisation or individual is allowed to infringe upon such freedom for any reasons.
Article 68 of the Several Rules of the Supreme Court in relation to Civil Litigation Evidence (‘Supreme Court Rules on Civil Litigation Evidence’) provides that any evidence that is obtained against the lawful rights or interests of others or in violation of law will not be admitted in court.
For that reason, the employer must be careful during an investigation not to intrude upon the employee’s private domain when collecting evidence, or disclose or use any private information obtained from them for any illegal purposes. The employer may take certain pre-emptive measures such as preparing internal guidelines or management directives, or installing a system for employee handbooks that provide the rules for employer searches, or rules that define what amounts to personal objects or private information or areas to which the employer has unlimited access, in order to give the employee a reasonable expectation of privacy and to reduce the risk of invasion of privacy.
It is interesting to note that in China, the people’s courts have the power to collect evidence during a trial from any individual or corporation if such evidence cannot be obtained by the relevant parties or their legal counsel due to some realistic reasons or if such evidence is considered necessary for adjudicating the case by the people’s courts.
Article 17 of the Supreme Court Rules on Civil Litigation Evidence provides that any party or its counsel to a lawsuit may apply to court for collection of evidence if such evidence relates to commercial secrets or personal privacy, or is evidence that the party or its counsel was unable to obtain themselves for subjective reasons. Therefore, an employer may, if litigation ensues from an investigation, apply to the court for collection of evidence that is believed to have been unreasonably withheld by the employee. The court may grant the order if it is satisfied that the employee is concealing any evidence that is necessary for a fair disposal of the case, even though the evidence may contain or relate to private information.
In criminal litigation, articles 43 and 45 of the Criminal Procedure Law of the PRC provide that, among others, judges, investigators and public security organs have the right to collect various kinds of evidence that can prove the criminal suspect’s or defendant’s guilt or innocence and the gravity of his crime.

3.2.2 Electronic documents
Nowadays, communications are largely conducted in electronic form, such as email, online instant messaging, word processing files, etc. To ensure a more effective and thorough investigation, it is inevitable that the employer may have to conduct electronic discovery to monitor and review an employee’s emails and/or other electronic documents sent or received through the employer’s computer system to assist with investigation.
The following laws and regulations, in addition to the constitutional concerns in the hard copy context (see section 2.2.1 above), among others, bear some relevance to employer monitoring and interception of an employee’s electronic communications:
• article 4 of the Decision of the Standing Committee of the National People’s Congress on Safeguarding the Safety of the Internet (‘Decision’) provides that, for the purpose of protecting the lawful rights of individuals, legal persons and other organisations, any person who unlawfully intercepts, alters or deletes an email or other data of others and thereby infringes their freedom of communication will be criminally liable in accordance with the Criminal Law if such conduct constitutes a crime;
• article 6 of the Decision further stipulates that any person who infringes the lawful rights and interests of others by use of the internet, may be subject to an administrative penalty (if such conduct does not constitute a crime), and/or civil responsibility; and
• article 252 of the Criminal Law of the PRC also provides that any person who conceals, destroys or unlawfully reviews the correspondence of others will be subject to detention or a sentence for a term of one year or less, if such conduct infringes upon a person’s right to freedom of communication and that the degree of infringement is severe.
In view of the above legislation, it is important for the employer to be aware that it may face the spectre of legal liability for an unjustified or unlawful monitoring or interception of an employee’s electronic communications, whether it is accessed through the internet or not.
In practice, in order to ensure that the investigation is properly conducted, it is wise and prudent for an investigator to consult any internal directives or employee handbooks of the company, or take account of the terms of any individual contract between an employee and the employer, or even seek advice from outside counsel, to see if there is any internal guideline or regulation prescribing, among others, that: (1) no personal correspondence, electronic data or documents may be delivered, transmitted or saved through office computer, internal network or other electronic device of network designated for business use; (2) electronic monitoring is in place throughout the business computer system; or (3) interception of emails or other electronic documents may take place. Provisions of such nature set down by the employer, if they have been properly communicated to the employee, or consented to and accepted by the employee in writing as a condition of employment, can be used to justify the employer’s real-time monitoring and interception of the employee’s electronic documents sent or received through the employer’s internet system, and greatly reduce the exposure of the employer to legal liability in consequence. In the absence of such provisions, an employer may run the risk of violating an employee’s privacy, and hence make it difficult for evidence obtained through employer monitoring to be admitted in court.
Article 17 of the Supreme People’s Court Rules on Civil Litigation Evidence and articles 43 and 45 of the Criminal Procedure Law of the PRC shall apply mutatis mutandis to electronic documents.

3.3 Obtaining oral evidence from employees
There is no specific law or regulation in China to address the issue of whether an employer is entitled to interview its employees on suspicion of internal fraud. Nonetheless, an employer’s right to conduct such interviews can be provided by unequivocal internal guidelines adopted by the company, or policies clearly stipulated in employee handbooks, or explicit terms of any individual agreement between an employee and the company. Having said that, oral evidence such as witness statements are accorded less weight by court or authorities when weighed against documentary evidence. Please note that, in the current Chinese legal system, documentary evidence stands in chief, it is not required to be introduced by witnesses.

3.4 Privilege
As evidence obtained or documents produced during an internal investigation may contain an employer’s confidential information, it is important that the employer is fully informed of the legal protection against the disclosure of such information as well as the risk associated with it. Generally, subject to certain limitations, such confidential information can be protected by the so-called ‘attorney-client legal privilege’ and/or ‘work-product doctrine’, which are commonly applied throughout many jurisdictions in the world. Nevertheless, such concepts have not been officially recognised by Chinese law although academic debate over the issue has been widely engaged. Under the current Chinese legal system and pursuant to PRC Rules of Evidence (2001), parties to a dispute are generally required to prove their case, namely each party has to adduce evidence to prove the necessary facts of their case and the other party has no duty under law to offer any evidence which is detrimental to its own case, nor any communications between a party and its attorney. As a result, the attorney-client privilege is not necessary and hence, not recognised in China.
While the safe harbour for an employer’s (in its client capacity) confidential information normally provided by attorney-client legal privilege and/or work-product doctrine is presently lacking in China, employers in China may rely on a parallel though not equivalent source of protection, namely lawyers’ confidentiality obligation (applied to both in-house and external lawyers), under which lawyers are required by law to keep secret their clients’ privacy and confidential commercial information they come to know or acquire in their capacity as a legal adviser (see article 33 of the Lawyers’ Law of the PRC and articles 8 and 39 of the Code on Professional Ethics and Practice Discipline of Lawyers).
The types of information that are under the protection of lawyers’ confidentiality obligation are set out in various laws and regulations. However, an employer should be advised that the extent of such protection is not at all clear-cut as the scope of confidential information is not clearly defined by law and the obligation can be waived in certain circumstances.
References to other areas of law may nevertheless throw some light on what amounts to ‘confidential commercial information’. For example, article 154 of the Opinion of the Supreme People’s Court on Several Issues concerning Application of the Civil Procedure Law of the PRC defines such information as a technical secret, commercial information or industrial information which the party is not willing to disclose such as manufacturing skill and technique, ingredients, trade contacts and distribution channels, etc. A more definite test is laid down in China’s Anti-Unfair Competition Law, which defines ‘confidential commercial information’ as information that satisfies the following conditions: (1) technical information or business information; (2) unknown to the public; (3) which can bring the owner economic benefits; (4) has practical use; and (5) of which the owner has taken measures to keep confidential.
It is important to point out that there are a few restrictions imposed by law on the application of the lawyers’ confidentiality obligation. These exceptions can particularly be seen in criminal practice. For example, articles 38, 45, 84 and 109 of the Criminal Procedure Law of the PRC provide that a defence attorney must not assist a suspect or defendant to conceal, destroy or forge any evidence nor commit any act that may disrupt the work of the justice authority. Further, an entity or individual is required to disclose or report any information obtained to the public security authority, the public prosecutor or the court upon discovery of any criminal activities. For the purpose of carrying out their official duties, an investigator in a criminal case may also search any places and objects where criminal evidence may be hidden. Similar requirements are also set out in article 35 of the Lawyers’ Law of the PRC.
In civil proceedings, under the Civil Procedure Law of the PRC, if one party actually has knowledge that the other party is in possession of some material evidence, it can file a motion to request the court to compel the other party to produce such evidence, even if the evidence is in the custody of its attorney. The party making the request is required to inform the court of the particulars of the evidence being sought, the reasons why it is relevant to the case and why it was unable to locate such evidence. The court has discretion to grant such motion. However, in practice, even if the court makes an order compelling a party to produce evidence, the party against whom the application is made can basically deny the possession of such evidence. Also, to date, PRC law has not imposed any obligation on an attorney to assist in the production of evidence sought by a court in a civil dispute. Therefore, even though an attorney is aware of the existence of the evidence being sought by the court, he or she has not duty to disclose it.
It can be seen from the above that a lawyer’s obligation to keep secret a client’s confidential information and his/her right against mandatory disclosure is vaguely regulated by Chinese law. In practice, it is common or even mandatory for a party such as the employer concerned (or its counsel) to disclose information to law enforcement authorities if criminal matters are involved. In civil or commercial proceedings, public interest or interest of a collective or an institution takes priority over an individual’s privacy.

4. Disclosure from Third Parties
An investigator may wish to obtain evidence from a third party to assist with the investigation. Again, if criminal matters are involved, an investigation against a third party for the purpose of obtaining information will not usually be an issue. However, there are very few channels available to an investigator to actually compel a third party to disclose information in the absence of a pending civil legal proceeding.

5. Preservation of Assets and Documents
For the effective pursuit of a wrongdoer accused of internal fraud, the investigator or the company may need to take appropriate measures to prevent assets and/or documents in the possession of the wrongdoer from disappearing or dissipating. Under Chinese law, parties may apply to court for an evidence (including documents) preservation order and/or an assets preservation order during a trial, or before the filing of a lawsuit in specific cases.

5.1 Preservation of evidence
5.1.1 Order for preservation of evidence during trial
Typically, following the filing of a legal action, parties to the case may apply to the court for an evidence preservation order. In this regard, the relevant legal provisions are as follows:
• Article 74 of the Civil Procedure Law provides that where there is a likelihood that evidence may be destroyed, lost or become difficult to obtain later on, the parties to a proceeding may apply to the court for the evidence to be preserved. The court may also take measures to preserve such evidence on its own initiative; and
• Article 23 of the Several Rules of the Supreme Court in relation to Civil Litigation Evidence provides, inter alia, that parties who apply to the court for a preservation order in accordance with article 74 of the Civil Procedure Law are required to make such application before the seventh day prior to the end of the discovery period. The court may request the party who applied for such order to provide sufficient security for the preservation measure.

5.1.2 Order for preservation of evidence before trial
China does not have any statute that empowers the people’s courts to grant an evidence preservation order before trial in civil proceedings. In practice, it is widely understood that such order will only be granted in intellectual property disputes and maritime disputes. Therefore, before the filing of a legal action, a preservation order will unlikely be granted by the court unless the potential dispute is in connection with intellectual property rights or maritime issues.

5.2 Preservation of assets
As to asset preservation, parties may apply to court for such an order after the filing of a legal action. In addition, unlike preservation of evidence, pre-litigation asset preservation orders are generally available in China.
The following provisions identify the requirements for the application of an asset preservation order, both before and after the filing of litigation:
• Article 92 of the Civil Procedure Law provides, inter alia, that if it becomes impossible or difficult to execute a judgment because of the act of a party or for other reasons, the court may, upon application by the other party, make a property preservation order. If the court decides to make such an order, it then has the right to request the applicant to provide security; failure to do so may result in the court rejecting the application. The court may, if necessary, adopt property preservation measures on its own initiative in the absence of an application by the relevant party.
• Article 93 of the Civil Procedure Law provides, inter alia, that any interested party whose lawful rights and interests may suffer irreparable harm if no preservation order is made immediately due to some urgent circumstances may, before filing the lawsuit, apply to court for a property preservation order. The applicant is required to provide security; failure to do so may result in the court rejecting the application. Further, if the applicant fails to bring an action within 15 days after the court adopts the preservation measures, the court has the right to revoke the order.
• Article 95 of the Civil Procedure Law provides that if the person against whom the application is made provides security, the court is entitled to revoke the order.
In practice, Chinese courts have been cautious in recent years in granting court orders to freeze assets so as to avoid such orders being abused by one party against the other party. Therefore, the procedure to apply for a property preservation order from court is not always straightforward. Nevertheless, when an employer commences a civil proceeding against its employees for fraud and if the matter involved is serious enough to constitute a criminal action, an urgent application for a quick action from law enforcement authorities to freeze assets such as bank accounts becomes more simple and direct.

6. Civil Proceedings
Being a victim of internal fraud, the company may want to commence civil proceedings to claim for damages, either against the wrongdoer or any third parties who have knowingly assisted in the wrongdoing, or knowingly received trust property or proceeds of wrongdoing. The relevant legal remedies can be found in the following provisions:
• according to article 149 of the Company Law of the PRC, article 117 of the Civil Code and article 34 of the new Property Law of the PRC, the company may go after the wrongdoer or any third parties to recover its assets and/or proceeds accrued in a wrongful sale of property, diversion of business opportunity, misappropriation of funds, unlawful disclosure of trade secrets, etc; and
• according to articles 21 and 150 of the Company Law of the PRC, article 117 of the Civil Code and article 37 of the new Property Law of the PRC, the wrongdoer is liable to pay compensation or damages to the company.
In practice, it is quite common to see civil claims attached to a criminal proceeding. Once the suspect is proved guilty, civil compensation is a natural and logical remedy of such criminal proceeding. Even where no criminal proceeding is commenced, if breach of law can be proven, the same result will follow.

7. Conclusion
With the rapid development of the Chinese economy and the sustained evolvement of Chinese law at a breakneck pace, inconsistency between statutes and regulations and discrepancy between law and local practice are a common phenomenon in China. Given that many important pieces of legislation relating to the topic are relatively new to the public as they were only promulgated in the past two or three years, how such legislation will step up the development of corporate governance and how they will be implemented in China remain to be seen. Nonetheless, largely due to the relaxation of media control and the existence of the internet, transparency in many aspects of Chinese society has seen remarkable improvement in recent years, which, to a certain extent, helps prevent the occurrence of internal fraud. Also, as a result of the development of a more efficient and structured internal control, including the computerisation of company data by many Chinese companies, unlike in the past, we have seen a significant drop in the number of reports on financial scandals in very recent years. Be that as it may, having a good compliance programme and a solid internal investigation policy in place is pivotal in China to protect the interests and safeguard the success of the company as well as to preserve the company’s ethical business structure and reputation. Counsel must be in every way mindful of the delicate issues involved in internal investigations of employee misconduct or misfeasance when conducting a comprehensive and effective investigation in China.

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