How China law interprets ‘misappropriation’ of funds
Analysts shed light on an issue close to the heart of many S-chip investors
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Analysts shed light on an issue close to the heart of many S-chip investors
By LYNETTE KHOO
07 March 2011
Alleged mishandling of funds at some China-linked companies of late have cast a spotlight on how embezzlement is defined under Chinese laws. That’s giving rise to concerns on how company funds should be safeguarded in China.
But lawyers note that there are ways to pursue errant officers through civil proceedings while internal controls in companies should serve as a line of defence against mishandling of funds.
Last week, Singapore-listed CDW Holding said its auditors discovered ‘unusual’ bank transfers between a Chinese subsidiary and an unrelated party last year.
Yet, the China lawyer commissioned by the board opined that the transfers made by various senior executives of the subsidiary did not constitute a criminal offence as all monies transferred had been fully repaid.
This draws attention to Article 272 of China’s criminal law, which provides the benchmarks to determine the offence.
Unlike the Singapore penal code that requires proof of dishonesty and self-use or benefit, the China law suggests that if the funds misappropriated are not ‘large’ and are returned within three months, that is not considered criminal.
Some market watchers point out that this could be a loophole for unauthorised funds transfers to take place in a business culture where inter-company loans are common practice even though they are prohibited by the law.
But legal practitioners of the Chinese law note that even though funds transfers do not constitute a criminal offence, there is no stopping companies from taking civil action against errant officers.
Josephine Koh, who heads the China practice at Rodyk & Davidson, notes that much would depend on the facts of the case and whether the amount misappropriated is determined to be ‘large’ by the courts.
In the case of Singapore firm Tat Hong, it has started civil proceedings in China to remove a general manager at a Chinese joint venture firm, who has allegedly mishandled funds.
But at Sino-Environment, an S-chip under judicial management, its former chairman was cleared of misappropriation allegations last year. The Fuzhou police dropped the case, apparently because some $14 million of cash in question was restituted.
Wu Yanjuan, senior foreign counsel at Loo & Partners LLP, notes that each company should have a proper policy to safeguard funds in China.
This includes ensuring that the company seal and the finance stamp are kept with two different persons, keeping good record of each cash transaction, and conducting internal audit.
The company and finance seals plus an authorised signature are required in China for any funds transfer.
‘Trust needs to be given but certain controls need to be there as well,’ said Joel Leong, chief financial officer of S-chip company Changjiang Fertilizer.
Besides relying on external auditors to review the cash and bank balances three times a year, Changjiang engages internal auditors BDO and the group’s finance team in China undertakes monthly bank reconciliations. The company and finance seals are held by two different persons.
Mr Leong reckoned that even when it comes to joint venture companies, ‘it is good practice to have our own people as one of the signatories’.
For China-based abalone producer Oceanus Group, the company has maintained its funds in Singapore since its listing here, and remits money to China only on a need-to basis, its chairman Ng Cher Yew told BT.
Cash reviews on all bank accounts are carried out every month, and bank reconciliations are conducted by its Singapore finance team at least once a month. These procedures are further complemented by internal and external audit.
Dr Ng said he has seen undesirable cases in China where a company’s legal representative holds both the company seal and the finance seal, even though the law requires the seals to be kept with two different individuals.
Fresh accounting woes at China Hongxing and Hongwei Technologies - where auditors cited irregularities - have again left investors feeling jittery over the cash management of China-based companies.
But Ms Koh felt that such risks and difficulties aren’t bigger in China than elsewhere. The risk of a crooked officer fabricating seals or using it fraudulently ‘is the same challenge as having an officer who is bold enough to forge signatures’, she said.
Concurring, Ms Wu pointed out that ‘the lack of sufficient internal control policy or strict implementation of the policy is the main concern’.