China Law Blog

By:Steve Dickinson

We recently posted about the need to be careful in China since there are business activities the Chinese government considers criminal that are not typically seen as such in the United States or in Europe.  A reader posted a comment asking us to give some examples as it "would be monumentally inconvenient" if he were to be charged with a crime the next time he goes to China.  I agree, so here goes.    

Foreign business people operating in China need to be aware of the potential for a business dispute to develop into a criminal law matter. In the U.S. and in Europe, it is quite uncommon for a dispute between two business people to become subject to criminal law enforcement. This is not true in China. As the Chinese economy has developed rapidly over the past 20 years, there has been a lot of room for fraud and abuse. For the most part in the West, dealing with this kind of activity is left to private actions in civil courts.

China has been 'criminalized' in ways that can be quite surprising to a Western business person. 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. This is in keeping with China's history of using law as a public matter by an authoritarian state. A great deal of business behavior in China

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 any jurisdiction. However, a whole host of crimes is applied 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 can often be applied in areas that are surprising to a Western business person. For example, criminal fraud is very hard to prove in the United States.  It is exactly the opposite in China.

Here are some examples of the ways Western business people can find themselves in China's criminal system:

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.

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 his fee, but refuses to refund the deposit. This normal business dispute may be transformed into the crime of contract fraud.

A Chinese company insists on a guarantee of payment from a foreign seller through deposit of promissory notes issued by a foreign party. When the Chinese party attempts to collect on the notes it cannot do so due to 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.

The offended Chinese business person is also much more likely to pursue a criminal complaint than his Western counterpart. This is particularly true outside of the major cities, where the private court system is less developed. 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 more comfortable in handing out criminal sanctions than they are in deciding the merits of private commercial activity, and plaintiffs are more comfortable in the role of beseeching the police, the prosecutors, and the courts for justice instead of pursuing justice on their own. Second, there is an economic incentive. If the state pursues the claim, the offended person or company saves on the expense of hiring a lawyer. Third, as part of the criminal action, the state will seek to force the defendant to pay redress to the offended party. In China, the state is much more likely to obtain assets from the defendant for payment of redress than is a private plaintiff.

Bottom Line: This can be a very dangerous area for foreign business persons in China. If you are involved in a business dispute in China, you must immediately consider the risk it will be transformed into a criminal matter. If the other side in a business dispute threatens criminal sanctions against you, you should take this seriously. Do not ignore such threats. They can be quite real. You should immediately seek advice from knowledgeable legal counsel. Though it is not likely that a purely commercial matter will become the subject of a criminal case, local prosecutors can be quite enthusiastic about these matters. You need to make sure you are completely prepared to deal with the issues. Moreover, 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.