The National Supervision Commission - China’s newest solution to low level corruption. What will change and how should you adapt?

February 2, 2018 Alec Cheung

Here are some common Chinese phrases. Nothing is impossible. Rules are dead, but people are alive. We have the connections. All of these phrases share one same characteristic: A general disapproval of following rules. The Chinese people pride themselves in the fact that they are flexible to change, and their success are not boxed in by the obstacles of “dead rules.”

While it sounds incredibly liberating, this characteristic of Chinese society is a festering problem, and the Chinese Government knows it – consequences of this mindset had led to higher corruption rates, fraud rates, as well as an inability to follow simple guidelines. For the past five years, the Communist Party of China (CPC) cracked down hard on its corrupt officials; as of 2018, millions of Communist Party cadres had been disciplined, imprisoned, or even executed on corruption or embezzlement charges.

Charging forth with the momentum and drive against corruption that it had been building since 2013, the CPC recently introduced its latest instrument against corruption: The National Supervision Commission (NSC).

While previous anti-graft campaigns had been incredibly well received among the general public and successful to an extent, it fell short in a significant way: It only targeted CPC Officials. Corruption runs deep through all facets of Chinese society, and by simply targeting Party Officials, China had failed to root out commonplace non-compliant behaviours that exist among its average citizens.

The NSC plans to tackle this exact issue: As of its latest draft, local supervision branches under the new commission would be set up across all administrative regions of China. More importantly, it will now monitor not just CPC Officials, but every single person under the Government’s payroll. This stretches as wide as doctors in local hospitals to primary school administrators.

Independence from external influence will also take special importance in the NSC. The law’s latest draft specified that the Supervision Commission of the People’s Republic of China will be the highest supervision body in the country. The law further spells out that the NSC and its local counterparts, as well as their members, answer only to the people’s congresses and the standing committees of its respective regions. This is a signal from the CPC that the attempt is serious.

Lastly, all governmental employees can now be subject to a detention process called liuzhi, seen as a replacement of the secretive interrogation process shuanggui which used to only be applied to CPC cadres. Under liuzhi, any individual under the government’s employment could be detained and interrogated under the suspicion of corruption.

The NSC’s possible impacts on China:

The new, hard-hitting NSC is China’s most comprehensive corruption prevention law to date. Its effective implementation means that standard Chinese practices, such as hospital suppliers treating doctors out for drinks or giving them gifts as a means of client retention, will come under a level of scrutiny never seen before. By trying to remove the Chinese cultural norm of non-compliant behaviour, it also means that scores of people will get caught under the supervision of the NSC.

The implementation of the NSC also signals a more serious move towards a society ruled by law. Along with the introduction of the NSC, China also recently ordered top state-owned entities to implement their own compliance policies, which would then be monitored by the relevant authorities. Hopefully in time, repeating reforms will introduce a new norm into the Country: One with fewer unspoken rules, and one that will hold compliance to a higher standard.

How Should companies in China adapt to these new changes?

Here are some key suggestions to brace China’s newly implemented NSC:

Revise your China compliance policies. Changes will need to be applied to your specific compliance policies in China. For an example, while Chinese compliance programmes might be more lenient in spending on gifts, travel and entertainment (GTE) for clients, the NSC will seek to target local governmental employees who request GTE as a form of bribery. Furthermore, since regulations had become stronger under the NSC, implementation of more rigid compliance policies will now be easier on your Chinese counterparts.

Formulate a reporting system. Whistleblowing was, and continues to be the most effective method of detecting compliance violations. According to statistics by the Association of Certified Fraud Examiners, reporting accounted for 40% of fraud detections in 2016, followed meagrely by auditing in the second place at around 15%. In order to increase chances of detecting non-compliant behaviour among your employees before the NSC does, a strong whistleblowing system is recommended.

Highly customise your compliance training. Oftentimes, compliance or regulatory breaches occur in China simply because the individual or entity committing them are not educated enough on the rules. This is largely due to how procedural training had become: It frequently serves as part of an administrative process that employees are required to complete. For truly effective education on compliance, your training needs to be interactive: Training content should be specifically designed for your employee’s role, as well as more engaging than reading texts off of their computer screens.

Consider getting your company certified. Best practice is the best defence against non-compliant behaviour. By passing various certifications, including compliance standards such as ISO 37001 and ISO 19600, you will not only reduce the chances of non-compliant behaviour by your employees, having the certification might also take some of the heat from NSC’s monitoring off your back.

More stringent due diligence processes. As the Chinese government ups their game on monitoring compliance breaching companies and personnel, so should your company. While surface level due diligence would only identify compliance breaches from the media and official government sources, more in-depth screening, which can include discreet interviews with those close to your subject, can reveal a wealth of under-the-table dealings, such as who the subject is close with, and possible compliance breaches not yet discovered by authorities: Information that is dearly needed under NSC’s monitoring.

Monitor your third parties regularly. In China, sometimes it is unavoidable for you to miss regulatory or compliance breaching activities by your third parties. As we anticipate the NSC to uncover more low-level compliance breaches than ever before, the chances of your non-compliant third parties getting caught also increases. As such, it is important to more closely monitor those third parties and at times, make decisions accordingly when your third parties get the authority’s attention for breaking rules.

To find out more about our products and services, please visit www.redflaggroup.com. If you have any enquiries, please contact info@redflaggroup.com.

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