Beijing Stiffens Resolve to Tackle Economic Crime
Two recent cases show that China is finally getting serious about punishment for economic crimes, a crucial step needed to clean up the nation’s often unruly business environment. The stricter punishments in both cases could mark the end of an era where such crimes faced little or no consequences, the result of lax guidelines from a socialist era when everything was state-owned. To create a more orderly environment that will allow its business community to truly thrive over the long term, Beijing will need to keep up the momentum in this recent drive by extending stiffer penalties to lawsuits in business disputes, and also by allowing more suits against big state-run companies.
The first move in the new get-tough policy came just before the May Day holiday, when law enforcement officials abruptly closed down at least five popular websites that facilitated sharing of pirated movies and TV shows. (English article) Significantly, the crackdown on World Intellectual Property Day included the detention of the top executive and employees from at least one of the companies, hinting that some or all of those could face future criminal charges and jail time. Such a move would mark a relatively rare divergence from previous crackdowns that typically saw pirating factories and websites sometimes closed, only to allow their executives go free to set up similar operations elsewhere.
The second major move occurred just last week when the Supreme People’s Court in Beijing said that companies and their executives who violated food safety laws would face stiffer punishment, including more jail time. (English article) Under the new guidelines, people who violate food safety laws could now be eligible for the death penalty in the most severe cases, compared with previous jail terms that typically ranged from three to 10 years.
Each of these latest moves was inspired by heavy pressure on Beijing to clean up problematic areas that have become hotbeds for illegal business activity. The piracy crackdown comes after years of pressure from western governments for China to stamp out rampant piracy that costs movie, TV show and music makers billions of dollars in lost revenue each year. The food safety crackdown comes after an explosion in cases over the last five years, which has led to a huge public outcry for stronger measures to clean up the problem.
If it really wants to create a better and more sustainable business environment, Beijing needs to keep up its new momentum and act in two other areas where there is less outside pressure but harsher measures are greatly needed.
One of those involves lawsuits in business disputes, where penalties for guilty parties are typically so low to have little or no deterrent effect. That reality was on display in late April, when Internet giant Tencent (HKEx: 700) won a lawsuit stemming from a case where it experienced major business disruptions due to the actions of software security firm Qihoo (NYSE: QIHU). But in that case, Tencent got only a meager 5 million yuan ($800,000) in damages, even though it had requested 125 million yuan. (previous post)
Beijing also needs to allow more lawsuits against big state-owned firms, a group it has typically protected due to its close ties to the government. That reality was also on display last month when a group of Chinese fishermen who suffered losses due to an oil spill at a site owned by state giant CNOOC (HKEx: 883; NYSE: CEO) were forced to file suit in the United States because no Chinese court probably would have taken the case. (previous post)
While the pressure for reform in penalties for these kinds of business disputes is less than with food safety and piracy, Beijing needs to show equal resolve to take stiffer measures in both areas to create a healthy, sustainable business environment over the long term.
Bottom line: Beijing needs to continue the reform of its penalties for economic crimes, following stiffer punishments for piracy and food safety cases.
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