China Steps Up Economic Crime Fight
China notched a major milestone in its fight against economic crime last week when it levied a record fine against a rogue securities brokerage and significantly raised the maximum penalty for trademark infringement. Both cases showed that Beijing is determined to significantly raise the penalties that companies and their employees face for economic crimes like trademark theft and insider trading.
Chinese lawmakers and regulators should be commended for these moves, which raise penalties to levels that will start to deter perpetrators from committing economic crimes. But these moves should only be a first step en route to a broader overhaul of a Chinese legal system where maximum fines for many economic crimes are often set so low to have little or no deterrent effect.
Everbright Securities has been in the headlines for much of the last two weeks, after it flooded the Shanghai Stock Exchange with erroneous orders on August 16 that briefly caused the benchmark index to rise more than 5 percent in a matter of minutes.
Late last week the China Securities Regulatory Commission (CSRC) responded by fining Everbright a record 523 million yuan, or about $85 million. (English article) Even though the incident was an accident caused by a design flaw in Everbright’s trading system, the CSRC also confiscated another 87 million yuan that the brokerage earned in profits through illegal hedge trades during the confusion.
In a separate development late last week, China’s legislature amended the country’s trademark law to sharply boost the maximum penalty for violations. That move saw the maximum fine level raised to 3 million yuan for trademark infringements, a six-fold increase over the previous upper limit. (English article)
These new higher penalties could make companies think twice about committing economic crimes, especially smaller firms that are often guilty of such transgressions. Many fines in the past were so small that they had little or no deterrent effect, the result of an old system where such crimes were rare since everything was owned by the state.
In one typical case earlier this year, Internet giant Tencent (HKEx: 700) won a victory in court when a judge ruled in its favor in case that saw its popular QQ instant messaging service thrown into chaos due to the illegal actions of security software maker Qihoo 360 (NYSE: QIHU). But the victory was mostly moral, since Qihoo was only fined 5 million yuan – a pittance for a company that earned nearly $50 million in profits last year. (previous post)
Qihoo’s actions fall into a broader range of economic crimes such as illegal use of other companies’ property and theft of trade secrets that are all too common in China as it moves from its old system of state-owned enterprises to a more market-driven economy of privately funded companies. Such crimes are common partly because perpetrators know they will only face minor penalties if caught.
To create more orderly markets and protect innovative companies that play by the rules, Beijing should move quickly to continue reforming its legal system beyond just stock trading and trademark infringement to allow more serious punishment for a wider range of economic crimes.
Bottom line: China’s raising of penalties against inside stock traders and copyright violators needs to be followed with broader reform of punishments for economic criminals.
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