Successful Internal Investigations in China Start With Clear, Compliant Employee Policies

However, in China, if a company has not done its homework with its employment-related policies, it may find its hands tied when it comes to internal investigations or protecting its interests in labor disputes.

Violet Ho, Senior Managing Director, Kroll, a division of Duff & Phelps and Dr. Isabelle Wan, leader of the IP and Employment Law practices with TransAsia Lawyers, have written a white paper discussing issues that they have encountered across numerous cases and the strategies employers can take to better position themselves in the event of employee-related fraud in China. This article presents highlights from that paper.

Lay a Strong Foundation With Detailed Employee Record-keeping

In our experience, we have found organizations operating in China with woefully inadequate HR record-keeping. Take something as basic as an employee’s name. Chinese employees who work for multinational corporations often use an English name for communicating with colleagues and clients. And yet, this is usually the only name on file in employment records. This makes it extraordinarily difficult to conduct an investigation when a person’s true identity isn’t known.

So, the first step must be to create employee registration records that capture detailed identifying information, to include legal names, aliases, ID numbers, addresses, contact information, etc., including data for family members.

Because there is currently no comprehensive body of laws in China setting out a detailed, uniform set of rules on the collection, processing and use of personal information, employers are advised to outline in their employee handbooks or in a separate letter (which must be signed by each employee personally and retained by employers) that employees agree to:

• disclose their personal data to the employers
• authorize their employers to use and retain such personal data within a specific permitted scope of use agreed upon by both parties. Such purpose could extend to investigation for employee misconduct

Produce and Distribute a Comprehensive Employee Handbook

The importance of a properly drafted, comprehensive and legally compliant employee handbook cannot be overstated when operating in China, where it is normal for both employers and employees to grapple with their rights and obligations in an employment relationship.

Consider this actual case: A general manager was dismissed for withdrawing a large sum of money from his employer’s bank account. Before leaving, he took with him the company’s official seal and all corporate documents. He then proceeded to forge an employment contract, adding more benefits for himself (totaling more than $1.6 million), and then initiated a labor dispute arbitration case against the company for wrongful dismissal, claiming the benefits under his forged contract. As the company’s handbook was unclear on the reimbursement policies, cash withdrawal process, authorization procedures, proper use and management of the company’s official seal, and contract signing procedures—as well as the corresponding punishment—the company was unable to rely on them to terminate the fraudster for his misconduct and misappropriation of company property.

When creating an employee handbook for use in China, Employers should keep in mind the following:

• There is a difference between an employment contract and an employee handbook. For example, since non-compete agreements are post-contractual obligations, they must be stipulated in the employment contract or in an independent non-compete agreement, not in an employee handbook
• The handbook must be prepared in Chinese (indeed, all employment-related documents should be in Chinese) and publicized to employees. If there are any discrepancies between the English and Chinese language versions of an employment document, the Chinese language version will always prevail under the law
• Likewise, companies operating in China need to customize their policies to ensure compliance with not only PRC national law, but also with local rules and judicial practices. Companies should work with experienced local counsel to review all forms and policies and ensure that potential conflicts do not exist that could impact enforcement
• The handbook must be distributed to employees in a hardcopy version, and the company must ensure that an acknowledgement of receipt is executed by each employee in person
• The handbook must set out in detail the internal rules and policies of the company. Failure to include relevant content or conversely, the inclusion of invalid or illegal content in the handbook will put the employer at the losing end of any labor dispute case
• The handbook must also include specific provisions relating to the discipline of employees and the punishment corresponding to each type of misconduct. The employee handbook is a key document in labor disputes because it can prove that the employee had notice of the consequences of his/her misconduct, and that the severity of the punishment was explicitly proportionate to the violation

To aid in potential internal investigations, two critical policies should feature prominently in the employee handbook: Information Technology (IT) policy and a Social Media policy:

• The IT policy should clearly state that employees agree (i) they will have no expectations of privacy when using the company’s IT resources and communication systems; and (ii) the company has the right to monitor the use of its IT resources and communication systems—including any activity on personal email accounts accessed on company computers—to ensure compliance with the policy
• Many Chinese routinely use Twitter and its Chinese counterpart, Weibo, to conduct personal business. Companies should impose a specific social media policy spelling out what employees cannot share about the company’s business operations on their social media accounts and outline disciplinary actions if violated

Current events make this a good time to review employee data access policies

On March 15, 2015, the evolution of data privacy protection in China reached a milestone as the “Measures for Punishments Against Infringements on Consumer Rights and Interests” went into effect. These Measures provide criteria for the first time as to what constitutes personal information under Chinese law.

While the Measures do not provide specific guidance for employers, now is a good time for companies to evaluate where they stand in regards to employee data access policies. However, the approach must be considered and measured, and applied on an even keel. Otherwise, employees might raise accusations of discrimination if they perceive to be targeted. Alternately, too narrow a focus could tip off people that something is amiss. A better strategy is to make it a company-wide exercise that involves the entire employee population.

Learn more about fraud statistics and trends in Kroll’s annual Global Fraud Report.