While people around the world (including those of us in China) continue to grapple with the COVID-19 pandemic, the Chinese Social Credit System (CSCS, or SCS) continues on its path to implementation. Now more than ever, people around the world value authoritative, objective analyses of their social, legal, and business environments. We wish to take this opportunity to clarify some of the misperceptions that surround the SCS, laying out what legal implications this system will have and what corporations should do to best ensure a positive social credit score for themselves and their employees.
One particularly common misperception relates to how one company’s credit score can affect the credit scores of its business partners. Some sources have speculated that social credit scores may be able to spread from an individual to an entity and then to yet another individual. In reality, if credit scores were able to pass repeatedly from one party to another, companies completely unassociated with the original offending entity would be unfairly impacted. This would ultimately undermine the effectiveness of the entire credit system. It is more likely that an individual’s misconduct would impact an employer’s rating only if the misconduct was directly related to the employee’s role within the company.
Chinese authorities have laid out the measures they may take against corporations and individuals who engage in illicit business practices or illegal activity and are consequently assigned low credit scores. For corporations, some of the more extreme measures include being barred from engaging in various business opportunities, such as setting up new stores, acquiring local businesses, or expanding their existing business into new markets. Companies in certain industries (food and beverage, for example) with severe violations (selling defective food products that resulted in personal injury) may have their business license revoked, effectively making it impossible to operate. While this is an extreme example, the key takeaway is that the SCS provides the government with a broad range of tools – ranging from the relatively minor to the severe – in order to encourage compliance.
There are certain measures companies can and should take now to prepare themselves for the continued implementation and enforcement of the SCS. One of the most important things to do now is understand which local regulatory bodies are responsible for SCS oversight and understand the local rating and evaluation mechanisms, including the local reward and sanction mechanisms. Although many companies already have an in-depth understanding of their compliance requirements, there can be substantial consequences of non-compliance (including publicised enforcement) in connection with antitrust, anti-bribery, data protection, tax and other major compliance fields.
– Paul Tan, Partner,
– Steve Curnan, Senior Manager,
Forensic Services, PwC China
– Steve Kou, Partner,
Commercial Dispute Resolution
– Annie Xue, Senior Manager,
Rui Bai Law Firm
Editorial Note: This is a summary of the article “China’s Social Credit System: What You Need to Know” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in August 2020.