Exemption from Criminal Prosecution in China through Monitoring of Compliance Actions


The Chinese regulator is in process to develop a mechanism, which shall exempt corporate and individual offenders under certain requirements from criminal prosecution. Key requirement shall be that the offender has successfully implemented a compliance plan under the supervision of a third-party monitor, which has been appointed by the Third-Party Mechanism Committee as requested by the competent Chinese People’s Procuratorate.

The regulatory developments have commenced already in March 2020, when the Supreme People’s Procuratorate (“SPP”) has worked out the “Application Mechanism for Relative Non-Prosecution on Corporate Crimes” (in Chinese: 企业犯罪相对不起诉适用机制) in four pilot provinces and provincial cities, which include Shanghai, Jiangsu, Shandong and Guangdong. One year later, in April 2021, the SPP has issued the “Working Plan on the Reform Pilot of Corporate Compliance”. The first batch of typical cases were issued by the SPP on 3 June 2021, alongside with the “Guiding Opinions on Establishing a Mechanism for Third-Party Supervision and Evaluation of the Compliance of Enterprises Involved in Cases (for Trial Implementation)” (“Guiding Opinions”), which specifies the third-party supervision and evaluation mechanism (“Third-Party Mechanism”) for the promotion of the corporate compliance non-prosecution system reform pilots. Most recently, on 8 December 2021, the SPP has issued the second batch of typical cases named the Typical Cases of Corporate Compliance (Second Batch) (in Chinese: 《企业合规典型案例(第二批)》) following the SPP’s decision in March 2021 to expand the pilot program to 10 pilot provinces and provincial cities, which include Beijing, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Hunan and Guangdong.

Applicability and Exclusion of the Third-Party Mechanism

The Guiding Opinions provide under which requirements the Third-Party Mechanism is applicable. According to Article 4 of the Guiding Opinions, the Third-Party Mechanism is only applicable, if certain requirements have been fulfilled, which include the following:

  • The company and/or individual has pleaded guilty to its crime and accept the punishment;
  • The company is capable to maintain its normal production and operation activities, it undertakes to establish or improve its enterprise compliance system; and
  • The company voluntarily accepts the Third-Party Mechanism. According to Article 5 of the Guiding Opinions, the Third-Party Mechanism is excluded in any of the following scenarios:
  • The company is set up by individuals for the purpose of carrying out illegal and criminal activities;
  • The company is set up with the main activity to commit crimes;
  • Personnel of the company commit crimes in the name of the company;
  • The company is suspected of committing crimes that harm the national security or comprise terrorist activities; or
  • Other circumstances to which the pilot program on enterprise compliance and the third-party mechanism do not apply.

Application for the Third-Party Mechanism

The application for the Third-Party Mechanism requires the approval by the competent People’s Procuratorate. The Third-Party Mechanism may be applied for by either the competent People’s Procuratorate (and consented by the offender) or the involved offender applies and the competent People’s Procuratorate approves such application. The discipline inspection and supervision organs may address recommendations to the competent People’s Procuratorate, which the competent People’s Procuratorate may take into consideration.

Compliance Plan, Compliance Examination Period and Compliance Examination Report

Once the competent People’s Procuratorate has approved the application of the Third-Party Mechanism, the competent People’s Procuratorate shall request the local Third-Party Mechanism Committee to appoint the Third-Party Organization, which is composed by a number of compliance experts form different industry sectors. The members of the Third-Party Organization shall request the company to submit and improve a compliance plan within a prescribed deadline (“Compliance Examination Period”). During the Compliance Examination Period, on a regular or irregular basis, the members of the Third-Party Organization are entitled to examine and evaluate the execution of the compliance plan by the company. The Third-Party Organization may request the company involved to submit reports in writing on a regular basis on the implementation of its compliance plan and keep the competent People's Procuratorate informed in this regard.

Upon the expiration of the Compliance Examination Period, the Third-Party Organization shall comprehensively examine, evaluate and assess the implementation of the compliance plan of the company, and provide a written compliance examination report (“Compliance Examination Report”). The Compliance Examination Report shall be submitted to the Third-Party Mechanism Committee, which has appointed the members of the Third-Party Organization and to the competent People's Procuratorate.

After having received the compliance materials, which include the compliance plan, the regular reports and Compliance Examination Report, the competent People's Procuratorate will make the decision whether or not, or to which extent criminal prosecution will be exempt from the company.

The competent People’s Procuratorate may put forward procuratorial suggestions to the company involved, if it has assessed that the company has unsound systems for the prevention of crimes and hidden risks of crimes exist, which need to be eliminated promptly. If the People's Procuratorate has the view that there is any other violation of laws or regulations by the company or its personnel, it shall provide the relevant information to the competent authority, public security organ or discipline inspection and supervision organ, and these organs shall proceed in accordance with the law.

Supervision of the Third-Party Organization

In addition to the mandatory provisions that the Third-Party Organization shall comply with, the Guiding Opinions provide obligations on the members of the Third-Party Organization. The members of the Third-Party Organization shall comply with all applicable laws and regulations, fulfill the confidentiality obligations, shall not take advantage of their performance of duties to ask or accept bribes or illegally encroaching on the property of the company or individuals involved in a case, and shall not take advantage of their performance of duties to interfere with the normal production and operation activities of the involved company.

If the members of the Third-Party Organization are personnel of other intermediary organizations, they shall not undertake any business in which they may have an interest during their performance of duties, and for one year after the completion of their performance, their intermediary organizations and them shall not undertake business from the companies or individuals involved, or from any other entity or personnel with an interest in the case. During the operation of the relevant Third-Party Mechanism, if the company or individual involved has the view that the Third-Party Organization or any member has been involved in misconducts or violated the law, such company or individual can report to the Third-Party Mechanism Committee which has appointed the members of the Third-Party Organization, or file complaints or accusations to the competent People’s Procuratorate.

Top 5 Considerations

Although the regulatory development of the exemption from criminal prosecution is still in process and additional regulatory steps will likely follow, some of the key considerations from the perspective of companies doing business in China may be already identified.

First: No Copy-Paste

Companies doing business in China shall not regard the new Guiding Opinions as “copy-paste” tool from other jurisdictions. Other jurisdictions indeed provide to a certain extent the monitoring of compliance actions and compliance plans as part of the exemption or lowering of prosecution. That applies to a certain extent to the US Foreign Corrupt Practices Act, which provides that companies shall under certain requirements retain an independent monitor as part of a negotiated resolution with the US regulator. It is important to understand the regulatory development and local practice of the Third-Party Mechanism in China. That applies also to the question how competent People’s Procuratorates will assess in practice the circumstances for approving or rejecting the application of the Third-Party Mechanism.

Second: Anticipating Different Scenarios

Corporates or executives, which intend to apply for the Third-party Mechanism, need to anticipate all potential scenarios, which could arise, ranging from the “best-case” to the “worst-case” scenario. That applies also to additional costs, which could be triggered due to the supervision of the compliance plan and other supervision activities under the Third-Party Mechanism.

Third: Reputation Management

Offenders, which intend to opt for the Third-Party Mechanism need to establish a very solid reputation management, in order to manage (in compliance with all applicable laws) any additional allegations, which could arise on social media platforms during the operation of the Third-Party Mechanism. Additional allegations may have a negative impact on the outcome of the Third-Party Mechanism and could trigger also a reputational crisis.

Fourth: Keep the Business

Being subject of the Third-Party Mechanism shall not impact the operation of the company. In contrary, the company must be capable to maintain its normal production and operation activities, as condition in order to remain qualified under the Third-Party Mechanism.

Fifth: Corporate Social Credit System

Further, it will be important to assess the impact of the exemption of prosecution from the company on its compliance status from the perspective of China’s Corporate Social Credit System (“CSCS”). Specifically, it will be important to assess whether in the individual case the exemption of criminal liability will not trigger the blacklisting (which leads to negative regulatory impacts on the company) under CSCS. This is also important from the perspective of existing redlistings (which lead to positive regulatory impacts on the company) of the company, given that redlistings shall be removed once blacklistings have been recorded.