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Actual controllers are the heart of listed companies¡¯ decision-making systems. Their conduct directly affects not just their own personal legal security, but also the steady development of the corporation. They serve as the helmsmen of corporate growth; but in cases of non-compliance, they are also the first to be held accountable.

With China enforcing a ¡°zero tolerance¡± enforcement policy in its capital markets, actual controllers face an unenviable share of criminal risk across four core functional areas: market value management; taxation; commercial bribery; and information disclosure.

Therefore, it is crucial that actual controllers are familiar with the forms and dangers of risk in various fields. By integrating compliance and risk prevention into every aspect of daily operations, adhering to legal boundaries and strictly implementing preventive measures, they can effectively avoid criminal risk, ensuring their own security in the office and safeguarding the development of the listed company.

This article outlines the specific forms of criminal risk and preventive measures in the above-mentioned areas, providing actual controllers with pragmatic and actionable compliance guidance.

Market value management

Actual controllers face multiple criminal risks in market value management. Manipulating the securities or futures markets is a frequent offence, often committed under the guise of market value management through illegal operations to inflate or deflate stock prices for arbitrage. The crimes of insider trading and leaking inside information involve trading or disclosing undisclosed material information.

Illegal or non-disclosure of important information involves instructing the company to falsify performance or conceal major issues to maintain stock prices or facilitate divestment. Additionally, misappropriating corporate funds for stock speculation may also constitute a crime.

Actual controllers may adopt the following preventive measures:

1. Define compliance boundaries by adhering to legal market value management and rejecting pseudo-market value management;
2. Strictly control accounts and trading by proactively filing securities accounts, prohibiting entrusted trading or concealed identities, and following divestment regulations;
3. Standardise information disclosure to prohibit false or selective disclosure and avoid collusion with outside parties to hype stock prices;
4. Standardise fund usage by strictly prohibiting misappropriation and ensuring usage follows board and shareholder approval; and
5. Establish routine self-inspections to conduct monthly risk assessments, ensure timely rectification and proactively report findings.

Taxation

Actual controllers face three core criminal risks in the field of taxation:

1. Falsely issuing special VAT invoices involving instructions to issue invoices without genuine underlying transactions for deduction or profit;
2. Tax evasion involving concealing income or inflating costs via off-the-book accounts or dual contracts, and failing to pay after pursuit, or re-offending after two penalties within five years; and
3. Cheating export tax rebates involving fabricating business or forging documents using the listed company¡¯s export qualifications to claim rebates.

Actual controllers should:

1. Strictly manage invoices by establishing a consistent ¡°contract, logistics, fund, invoice¡± procedure with dual-person review;
2. Standardise accounting by prohibiting off-the-book accounts, requiring third-party audits for major accounting treatments, and conducting regular tax risk self-inspections;
3. Strengthen tax audits by hiring independent tax firms annually and adjusting planning schemes based on latest policies;
4. Properly handle tax inspections by co-operating and paying back taxes, late fees and fines in timely fashion to prevent administrative violations from escalating into criminal charges; and
5. Regularise the tax management of related-party transactions by following the arm¡¯s length principle and retaining complete pricing evidence.

Commercial bribery

Actual controllers face three types of bribery risks in business dealings. In particular, arranging funds to bribe state functionaries for corporate benefit to seek illegitimate gains constitutes the crime of offering bribes by a unit.

Bribing state functionaries or executives and procurement personnel of partner enterprises with personal funds to seek illegitimate personal interests constitutes the crime of bribery or bribery of non-state functionaries.

Notably, indirect bribery via transfer of interests in the form of inflated ¡°consultancy¡± or ¡°service¡± fees, expensive gifts or luxury travel arrangements likewise constitutes a criminal offence.

Actual controllers are advised to:

1. Standardise business collaboration by ensuring full transparency in bidding, establishing qualified partner lists and conducting anti-bribery background checks;
2. Adjust sales incentives by reducing ¡°grey incentives¡± tied to single orders and shifting to auditable mechanisms like compliant pricing and rebate rules;
3. Strictly control expenditures by implementing triple review (financial, legal and business) for large outlays, without direct interference from the controller; and
4. Enhance personnel management and training by conducting regular anti-bribery compliance sessions and establishing anonymous whistleblowing mechanisms.

Information disclosure

Criminal risks in information disclosure are closely tied to the truthfulness, accuracy, completeness and timeliness of the information itself. Instructing the false disclosure of performance, or concealing major matters such as fund misappropriation or illegal guarantees, constitutes the crime of illegal disclosure or non-disclosure of important information.

Behaviour during an IPO or refinancing to conceal actual operations and fraudulently obtain issuance registration constitutes the crime of fraudulent issuance of securities. Engaging in or instructing others to engage in securities trading using material non-public information constitutes insider trading.

Actual controllers should:

1. Strictly ensure that information disclosure is truthful, accurate, complete and timely, avoiding any false or misleading disclosures;
2. Standardise disclosure procedures for major issues by defining standards and timelines, ensuring review before public release;
3. Establish a closed-loop review process involving business team submission, multi-departmental review and controller confirmation, with substantive audits and documented trails;
4. Strengthen prevention of financial fraud by regularising accounting, conducting periodic self-inspections and co-operating with third-party audits for timely rectification; and
5. Manage risk emergencies by proactively co-operating with investigations and engaging professional counsel to seek leniency.

Cai Zhenghua is the chief partner at Elite Law Firm. He can be contacted by phone at +86 135 2464 8729 and by email at caizhenghua@lxlawyers.com.cn