Compliance risk is an organisation’s exposure to legal penalties, financial forfeiture and material loss when it fails to act in accordance with industry laws and regulations, internal policies or prescribed best practices. A compliance management system ensures that internal policies are in accordance with laws and regulations and creates compliance criteria to help the enterprise achieve the maximum benefit at a minimum cost.
Large companies in China usually have a compliance and risk control audit department (or other name) to supervise and manage compliance with relevant laws and regulations. In contrast, many small local companies deem it unnecessary to establish such a department or merely integrate compliance affairs into a legal department.
On 4 May 2018, the Compliance Committee under the China Council for the Promotion of International Trade (CCPIT) was established in Beijing. On 1 July 2018, China National Standard GB/T35770-2017: Compliance Management System – Guidelines was released to guide enterprises in establishing, evaluating and improving a compliance management system for effective risk measurement and control. This reflects the growing importance of establishing a compliance management system to facilitate long-term business development, regardless of organisational size.
A business that achieves effective compliance management enjoys the advantage of greater credibility in international and domestic commercial tenders and procurements. It also has a good reputation among shareholders, different management levels, customers and employees. From a legal perspective, it would also have broader rights in investigation and evidence collection. For example, the company would be able to collect necessary information from an employee’s work email inbox as evidence in court as long as the law is not violated.
In addition, the China National Standard GB/T35770-2017: Compliance Management System – Guidelines states that a company demonstrating reasonable steps in its compliance management system to prevent violation of the law may reduce or even be exempted from its administrative, criminal or civil liabilities.
This article was written by SBA Stone Forest's Corporate Advisory team.
