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HOME > Publications > Professional Articles > Industrial and commercial administrative penalties in Shanghai

Industrial and commercial administrative penalties in Shanghai

Author: Quan Kaiming & Zang Yi 2021-09-162497

The position of corporate compliance officer was officially included in China’s National Occupational Classification Dictionary in March 2021, showing how authorities are now focusing on this role.

Compliance management is not only the foundation of corporate good governance and healthy development, but also the key to enhancing competitive power. Compliance is a major part of a company, from its establishment to its daily operations.

But where corporate non-compliance is relatively likely to occur, governments are often inconsistent in their opinions and priorities.

Based on statistical analysis of more than 100,000 administrative penalty decisions issued by the Shanghai Administration for Market Regulation in 2019 and 2020, this article summarises several trends of administrative law enforcement in order to provide a useful reference tool for companies, clarify regulatory emphasis and help mitigate compliance risks.

Common non-compliance issues

Taking Shanghai as an example, administrative penalties in 2019 and 2020 remained concentrated in the areas of advertising, product quality, trademarks and prices. In spite of the impact of the pandemic in 2020, the overall number of administrative penalties in these fields increase.

Unlawful advertising penalties dipped. Penalties for unlawful advertising had been rising rapidly since 2016, but declined for the first time in 2020, dropping by 10.33% from 4,387 cases in 2019 to 3,934 cases in 2020. This was mainly due to the government exempting minor violations as part of policies to support pandemic-stricken companies, particularly small and medium-sized enterprises.

The Shanghai municipal government and the district governments issued exemption lists for minor violations, prominently in advertising. Many illegal advertisements were spared from penalties on the grounds that the circumstances were not serious. However, strict penalties were imposed for false advertising involving the covid-19 pandemic, especially those using it as a marketing gimmick.

Advertising has consistently counted among the most common administrative violations in recent years. In 2020, although the number of administrative penalties decreased, the Shanghai Administration for Market Regulation, while dedicated to preventing and controlling the pandemic, monitored a total of 2.8 million advertisements, issued 6,461 notices of monitoring, investigated and dealt with 5,674 cases of illegal advertisements, and imposed fines amounting to RMB87.88 million (USD13.6 million).

When it comes to compliance in advertising, companies should consider seeking the services of professional agencies in order to minimize such risks.

Significant increase in unlawful pricing. The number of pricing violations increased significantly from 600 in 2019 to 885 in 2020, up by 47.5%, having also been growing since 2016. Governments have always attached great importance to pricing violations. With the aggressive growth of e-commerce platforms and live streaming sales featuring online celebrities, the issue of unlawful pricing became more prominent than ever. There has been a surge of penalties for companies that set a “fictitious original price”, “price comparison with other stores/platforms” and “price fraud”.

On 25 April 2021, the Beijing Administration for Market Regulation issued administrative penalties in the form of warnings and the maximum fine of RMB500,000 to TAL Education Group and several other off-campus educational institutions. Such institutions launched online promotional campaigns claiming “original price RMB799, promotional price RMB20”. But the truth was that no transaction had ever taken place at the proclaimed original price, which constituted illegal pricing and false marketing. False gimmicks, fictitious original prices, price fraud, price dumping, price discrimination, collusion to manipulate market prices and all such illegalities must be avoided. Companies should uphold good market pricing order and operate in strict compliance.

Clean-up of companies dormant for six months. In 2020, market regulators cleaned up a large number of companies and sole proprietorships that had not been operating for more than six months. Therefore, the year witnessed an explosion in the number of business licences revoked due to the company fitting the descriptions of article 36 of the Sole Proprietorship Enterprise Law or article 211.1 of the Company Law (which relate to a sole proprietorship or company that “without justifiable reasons, fails to commence business within six months following its establishment, or, after commencing business, voluntarily suspends business for more than six months”).

In Shanghai, the number of licences revoked due to the company having not operated for six months increased from 1,087 in 2019 to 26,683 in 2020. The number of licences revoked due to the sole proprietorship having not operated for six months increased from 59 in 2019 to 869 in 2020.

The chain reaction exposed companies to serious risks when reviewing suppliers. When dealing with suppliers and receiving deductible invoices from them, companies had to be mindful to not only check their business licences, but also make inquiries on the National Enterprise Credit Information Publicity System, so as to avoid dealing with any company recently de-licensed.

Information-based regulation, post-pandemic

The pandemic greatly sped up the application of big data and Internet-based technologies. With systemic improvements of market regulation, law enforcement advanced cast a net of big data to entrap any irregularity. For advertising regulation, the platform monitoring online advertising activities adopted cutting-edge big data technology, DPS, ADS and BASE, as well as an intelligent semantic analysis system. It subsequently added automatic analysis of advertisement content, which is expected to make vast savings in manpower and improve regulatory efficiency.

In the post-pandemic era of information-based regulation, it is imperative for companies to construct and implement an all-round corporate compliance system. Sound compliance must be implemented in every aspect of corporate operation, including but not limited to taxation, risk control in internal corporate governance and risk control in corporate IP protection.