China criminal law

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.