China: COVID-19: Managing compliance risks arising from charitable or donation activities

Read bilingual publication (Chinese and English)

Overview of donation requirements in China

Companies seeking to support the fight against COVID-19 through charitable or donation activities in China need to have a good understanding of their rights and obligations. We have listed some of the key points in relation to the applicable legal and regulatory landscape below:

1. PRC law allows donations to be made voluntarily but prohibits any profit-making activity conducted in the name of donations. Donations should be distinguished from requisitions, such as where a company is ordered to sell products (e.g. masks, PPEs, ventilators) exclusively to the local government or compulsorily provide the products for free.
2. Under PRC Charity Law, donation obligations cannot be withdrawn at will.  Once a company enters into an agreement or makes a public statement promising to donate, the donor is obligated to fulfill this commitment.
3. Chinese state-owned enterprises (SOEs) have to follow a stringent review and approval process according to regulations issued by the State-owned Assets Supervision and Administration Commission (SASAC). This includes:

• Setting budgeting parameters in advance, taking into account the SOE’s business size, profitability, debt burden, cash flow and other relevant financial capability.
• Review and approval of recurring and ad hoc donations by headquarters on a transaction-by-transaction basis. 
• Filing of donation payments by SOEs with SASAC.

4. PRC Charity Law prohibits companies from raising funds by means of solicitation of donations from the public. Only charitable institutions with public fundraising qualifications are allowed to raise money by means of solicitation of donations from publically available channels.
5. If a company plans to donate money to an overseas entity, it is worth noting that a representative office of a foreign foundation is not allowed to accept donations in China. Donors will need to arrange for a foreign exchange account and transfer the money to foreign charity institutions through the account after satisfying any other banking approval processes.

Other compliance risks

Companies should also be mindful of compliance risks associated with the particular industry and identity of donation recipients.

1. For healthcare companies, to mitigate potential compliance risks, donations should only be made directly to hospitals or other medical institutions at entity level. Internal departments or individuals such as employees of hospitals and institutions are prohibited from personally accepting donations.
2. At the same time, donors should conduct proper due diligence to ascertain the legitimacy of donation recipients and the subsequent use of the donations. In China, a donor has the legitimate right to monitor the use of the donations. Poor due diligence practices and lack of monitoring could lead to problems on the legitimacy and use of any donation.

Meanwhile, risk issues can arise in relation to the product quality of donations. Donors should ensure that donated items comply with local and destination product quality requirements and standards. Specifically:

1. Medical companies that plan to donate their own products must comply with product safety, effectiveness and quality under the PRC Product Quality Law.
2. Companies that intend to donate medicines or medical devices purchased or collected from outside of China should ensure that these items comply with the quality certifications and shelf-life requirements under PRC law. 
3. Companies making donations overseas should pay attention to the product standards of the destination country or region. Recently, Chinese government authorities issued a notice requiring exporters to acknowledge that they have obtained domestic product certificates for the medical supplies exported to overseas countries, including confirmation that such medical supplies have met the quality requirements of the importing country. We are seeing an increasing number of disputes arising from product standard issues in different jurisdictions. In such cases, donors suffer not only economic losses but can face adverse reputational impact and potential product liability suits.

Actions to consider

Effective compliance controls can safeguard the whole process of donation activity and ensure that it operates in an efficient way. Below are some practical tips for compliance risk controls in relation to donation activities.

1. Engage legal and compliance team members in the process, from decision making to supervision of the donations being made. The legal and compliance team should closely review the latest national, local and international (if applicable) legislative developments, assist with making decisions (e.g. whether to donate, what to donate, and who to donate to) and be proactive in alerting senior management of any underlying compliance and regulatory risks.
2. Proper documentation:

• The donor should mandate written approvals from different functions within the donor company, e.g. legal, finance, compliance and public relations prior to making the donation.  
• The donor should document every phase of the donation including internal discussions, approval process, delivery or payment, and ensure that documents generated from a donation, e.g. contracts, receipts, bank statements and meeting minutes, are retained.
• Under PRC law, a written contract is mandatory when making donations to healthcare institutions. We recommend, where possible, that parties enter into written contracts for all donation activities. Such a contract should contain appropriate compliance language as well as supervision rights for the donor to be satisfied that the donation is used for the agreed purpose.
• For accounting books and records, donations should be recorded accurately and completely for tax and compliance purposes. 

3. Ensure donation activities are separate from obtaining or retaining business - this is a critical element to mitigating any anti-bribery risk. Significant liability under PRC laws or extraterritorial laws such as the US FCPA or UK Bribery Act may result if a donation is used for the purpose of a bribe. Keeping the part of the business function making the donation separate from the sales or business development function, as well as ensuring the recipient has properly recorded the donation, is important to mitigate this risk.
4. Closely monitor donations when they are treated as part of the company's routine payments. Companies should implement strong internal controls to identify whether improper payments are being made under the guise of donations.
5. Due diligence and supervision of recipients:

• Donors should identify and conduct proper due diligence on the recipient to ensure that the donations are received by the right entity, and used for the agreed purpose.
• In China, a donor has the legitimate right to monitor the use of the donations. Specifically, PRC law gives donors the right to review the recipient's annual audit report and financial statements. Donors should seek advice on how to manage such rights.

6. As more companies are making donations overseas due to the escalation of the outbreak, these donors should pay close attention to product quality requirements and standards provided by both China and the destination country or jurisdiction.

Companies regard making donations to support the fight against the COVID-19 crisis as part of their corporate social responsibility. Credible compliance risk control mechanisms play an important role in safeguarding the ethical standard of this valuable contribution. Effective and efficient measures will not only secure the compliant operations of the company but will ensure that the contributions ultimately reach those in actual need.

Baker & McKenzie FenXun (FTZ) Joint Operation Office is a joint operation between Baker & McKenzie LLP, an Illinois limited liability partnership, and FenXun Partners, a Chinese law firm. The Joint Operation has been approved by the Shanghai Justice Bureau. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.
北京市奋迅律师事务所和贝克•麦坚时国际律师事务所（自贸试验区）联营办公室是由美国伊利诺伊州有限合伙贝克•麦坚时国际律师事务所与中国的奋迅律师事务所共同设立的。联营已获得上海市司法局核准。按照专业服务组织的通用术语，“合伙人”一词指上述律师事务所的合伙人或同等人员。同样，“办事处”一词指任何上述律师事务所的办事处。