A recent report by Ernst & Young highlights that regulation and compliance risk has risen to the number one business risk faced by global organisations in 2010. The rising importance of compliance for companies in China has already been seen by many law firms experiencing a significant increase in demand for compliance-related legal services.
“Regulatory and compliance work has become a new revenue generator for internationally-oriented law firms in China,” said John Huang, the founding and managing partner of Shanghai-based MWE China, which is in strategic alliance with US firm McDermott Will & Emery. “In previous years, our main source of business lied in advising foreign companies on market entry and expansion. But now an increasing proportion of the client instructions are for regulatory and compliance matters.”
Currently, compliance-related contributes about 40% of the firm’s total revenues. A host of multinational companies (MNCs), many of them have been operating in China for decades, instruct the firm for compliance guidance and training, conducting internal audits and investigations, establishing and implementing compliance programs. The growing client demand has also resulted in several new additions to MWE China’s partnership. Last March, nine lawyers were promoted to partnership and over half of them are experienced in regulatory compliance.
Leon Liu, one of the new partners, had served as a prosecutor in Jiangsu province before joining the firm. He sees the shift in focus on compliance is driven by the country’s evolving legal system which is bolstering its enforcement efforts. “A few years ago, the government’s focus was putting laws and regulations in place. Now, their priority is shifting to ensure that these laws and regulations are properly enforced. Going forward, companies need to be prepared for and adapt to the intensifying scrutiny by certain regulators on compliance,” he said.
For multinational and foreign companies to achieve complete compliance in China can be a major challenge, not least because of the tremendous amount of new laws, regulations, guidelines and interpretations by central and local governments. Apart from compliance in China, they are subject to laws of their home jurisdictions and some US laws that have long-reaching arm and sharp teeth – The Foreign Corrupt Practices Act (FCPA) being a prime example.
Baker & McKenzie, which has been advising MNCs on compliance issues for decades, has observed a trend that these companies increasingly require more sophisticated compliance policies and procedures in China. “Some issues are not necessarily new in China’s legal landscape. But the complexity of these issues, the enforcement level and the level of penalties are much higher than earlier years. So the number of clients who are putting a range of compliance issues at the forefront of the advice they seek is greater than before,” said Beatrice Schaffrath, a partner of Baker & McKenzie in Beijing.
One of the top areas of concerns to multinational companies nowadays is anti-corruption with FCPA motivating many of them to focus on this issue. “FCPA compliance in China is a particularly challenging task. Despite that fact that many multinational companies already have global compliance policies in place, they still find problems and/or disconnects in their operations in China. There is an increasing recognition that a company needs to have a clear understanding of the context in which they are operating and determining how it should apply these principles in the localised settings,” she said. “Taking into consideration local market practice and applicable local laws and regulations are critical when multinational companies are developing their compliance policies and programs and implementing them.”
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