Criminal Law And Business In China: Too Often the Twain do Meet

China FCPA

In the United States and Europe, it is uncommon for a dispute between two business people to become subject to criminal law enforcement. This is not true in China. In doing business in China, you need to be aware of two things: the scope of economic crime there is far broader than you probably expect and the Chinese party with whom you are conducting business is far more likely to pursue a criminal complaint than you would expect.

China has developed an elaborate set of laws concerning ‘economic crimes’ that parallels its civil law system. The area of economic crime is quite extensive. My Chinese textbook on economic crime is over 1500 pages long and it describes 105 separate crimes, divided into eight categories. Dealing with economic crimes has become an increasingly large portion of the workload of the average Chinese court. Many of these crimes are garden variety crimes, such as smuggling or passing bad checks, that would be considered a crime in most countries. However, a whole host of crimes applies to areas most Western business people would think would be dealt with by private litigation. For example, one general area of crime is “Disturbing the Market Order.” Another is called “Damaging the Management Order of a Company or Enterprise.” Crimes in these categories can be very broadly described and are often applied in areas that are surprising to a Western business person. For example, criminal fraud is very hard to prove in the United States. That is not the case in China.

Here are some examples of ways Western businesspeople can and do find themselves caught up in China’s criminal law system:

1. There is a sale of product. The Chinese party complains that the product is defective. The foreign seller insists the product meets standards and it is the buyer’s own processing that caused the problem. This normal business dispute may be transformed into the crime of sale of defective products.

2. A Chinese company pays a substantial deposit to a foreign service provider to develop a sophisticated market access program for the United States. There is a dispute over the quality of the service provided by the foreign provider. The foreign provider does not collect the remainder of its fee, but it refuses to refund the Chinese company’s deposit. This normal business dispute may be transformed into the crime of contract fraud.

3. A Chinese company insists on a guarantee of payment from a foreign seller through the deposit of promissory notes issued by a foreign party. When the Chinese party attempts to collect on the notes, it cannot do so because of a banking regulation or some other technical matter. The foreign seller does not make alternative arrangements for payment. This normal business dispute may be transformed into the crime of financial fraud.

An offended Chinese business person is also much more likely to pursue a criminal complaint than its Western counterpart. There are a number of reasons for this. First, there is the longstanding tradition in China that law is basically a criminal matter. Many Chinese judges are still more comfortable handing out criminal sanctions than deciding on the merits of private commercial dispute.  Second, many Chinese businesspeople are more comfortable beseeching the police, the prosecutors, and/or the courts for justice than pursuing justice on their own. Third, there is an economic incentive. If the State pursues the claim, the offended person or company saves on the expense of having to hire and pay for its own lawyer. Fourth, as part of the criminal action, the State will seek to force the foreign defendant to pay redress to the offended party and it has a lot of power (like prison or not letting the person leave China) to accomplish this. In China, the State is more likely than a private party to be able to obtain assets from a defendant, especially a foreign one.

Bottom Line: If you are involved in a business dispute in China, you should immediately consider the risk it will be transformed into a criminal matter. If the other side in your business dispute threatens criminal sanctions against you, you should take this very seriously. You need to be completely sure that what you consider to be an entirely innocent commercial dispute is not in fact a potential crime under the wide application of economic crime applied in China. Above all else, if you think you might be subject to criminal claims in China, do not go there and, if already there, leave as soon as you can.

7 responses to “Criminal Law And Business In China: Too Often the Twain do Meet”

  1. There is a lot of good information here.
    I know several people who are interested in doing business in China.
    They/I need to know these fine points to avoid potential catastrophe.
    Thanks for sharing so freely.

  2. We agree that the likelihood of an American being prosecuted for bad quality product is slim and getting slimmer. However, for an American, even the possibility of being subjected to a criminal complaint for something like this has to be unexpected and quite scary.

  3. I am truly very surprised to read this post. As a Chinese attorney. I do not have problems with other statements here. I have not researched intensively on criminal acts in the business world in the context of American jurisdiction and therefore may not be in a position to make judgment on these comparative statements. But quality dispute turned out criminal prosecution — that was a joke. It’s very likely that miserable Chinese man tends to resort to criminal complaint more often than their American peers because they lack proper understanding of law. But that does not lead to criminal prosecution. What is likely happen in this instance is that the police will just tell that person to go to a civil court!

  4. Just as the second commentator, I’m also surprised 🙂 I always believe that things we haven’t experienced, we don’t understand. Steve might have more cases out of my experience, I guess?

  5. Again, I agree it is not likely a foreigner will be charged with a business crime in one of China’s more sophisticated business cities, but I have less confidence in saying this of some of the less sophisticated regions. At the same time, this is not purely hypothetical either, as Steve recently wrapped up work with Chinese criminal lawyers to help an American get his sentence reduced in a case that might very well not have warranted criminal charges in the United States. You can read more about Steve’s criminal work in China at http://www.washingtonceo.com.
    Dan

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