Shaanxi Accelerated Energy Efficiency and Environment Improvement Financing Project (RRP PRC 48452)
INTEGRITY DUE DILIGENCE
1. Shaanxi Financial Holding Group (SFHG) is a provincial SOE wholly owned by the Shaanxi Provincial Government through its two departments: Shaanxi Provincial State-owned Assets Supervision and Administration Commission (Shaanxi SASAC), which holds 90.74% common shares of SFHG, and Shaanxi Finance Bureau (SFB), which holds the remaining 9.26%. Through its subsidiaries, SFHG is engaged in a wide range of financial businesses: financial guarantee, capital leasing, industrial investment, over the counter exchanges, emission reduction trading platform, and private equity investment. As of December 2015, it owns a diversified portfolio of 32 companies, 20 of which were set up by the group after its incorporation, and 13 of which are consolidated in the group company’s financial statements as per China’s generally accepted accounting principles. Shaanxi SASAC, as the authority for administrating provincial state owned assets and as the largest and controlling shareholder of SFHG, is responsible for overseeing SFHG’s operation to ensure it in compliance with national/provincial regulations and evaluating its performance.
2. As a large provincial state-owned enterprise (SOE) in financial service sector, and as result of recently enhanced efforts by the People’s Republic of China (PRC) government in the field of anti-corruption, SFHG is committed to achieving high standard of governance and integrity in the conduct of its business.
3. The PRC has set up a complete and increasingly strict system to ensure the integrity of SOEs. The central government has promulgated the Certain Rules relating to Professional Integrity of SOE Leaders since July 2009. The Certain Rules mainly have provisions in two aspects: integrity professional conduct codes, and implementation and monitoring framework. Main stipulations of the integrity professional conduct codes include:
(i) Leaders of SOEs shall not abuse their power and harm the equity right of state owned assets such as: a. Violate the decision-making principles and procedures to make significant operation decisions, significant management appointment, significant project arrangement, and large amount of fund usage; b. Violate rules to handle issues in relation to establishment of shareholding system, merge, restructuring, bankruptcy, asset appraisal, and property ownership trading etc.; c. Violate rules to invest, raise financing, guarantee, borrow and lend, entrust third party on wealth management, open letter of credit for other parties, purchase or sell commodities and services, and call for bids or submit a tender etc.; d. Instigate or order finance department staff to conduct activities in breach of national financial management disciplines, and enterprise’s financial management rules; e. Determine the salary compensation and social benefit like housing subsidy etc. of the same level management without prior approval by SASAC and the responsible personnel authority; and f. Without the agreement by the team meeting of top management, determine issues of donation and sponsoring.
(ii) Leaders of SOEs shall execute their duties diligently and honestly, and cannot use the powers of office to seek private gain while harming the enterprise’s interest, including: 2
a. Personally engaged in for-profit operating actions and paid intermediary service, or invest and hold equity shares of enterprises in the same industry as the SOE, of affiliated enterprises, and of enterprises having business relation with the SOE; b. Accept or ask for any material interest, during their incumbency or after leaving the office, provided by the SOE’s affiliated enterprises, enterprises having business relation with the SOE, or the management and service targeted counter parties; c. Buy at obvious lower price than the market or sell at obvious higher price than the market items such as apartments, automobiles etc. from applicants, and accept any valuable things from applicants in any other trading forms; d. Obtain investment return nominally from entrusted investment on securities, and futures etc. but without actual capital contribution, or obtain extra ordinarily high return not in proportion to the actual capital contribution; e. Use insider information, commercial secret, and intangible assets or resources such as corporate intellectual property rights, business channels etc. to seek interest for themselves, their spouse, children or special related persons during the process of initial public offer, or mergers and acquisitions by listed companies, restructuring, or tailed additional stock issue etc.; f. Hold a concurrent leadership post, without due approval, in subsidiaries invested by the SOE, or other enterprises, institutions, social organizations, and intermediaries; and g. Take forcible possession of or privately divide rebates, intermediary fee, commission, gifts occurred as result of the SOE’s business operation, and rewards granted by the governmental departments due to the SOE’s performance
(iii) Leaders of SOEs shall properly execute the management right and prevent the occurrence of activities infringing public interest and SOE interest, and should not allow the following acts to happen: a. Their spouse, children and other special related persons invest and hold stock shares in the SOE affiliated enterprises and the enterprises having business relation with the SOE; b. Entrust, contract or lease to their spouse, children, or other special related persons to operate the state-owned assets under the SOE; c. Use their powers of office to provide convenience for the private business operation of their spouse, children, and special related persons; d. Use their powers of office to mutually provide convenience for the private business operations of the other leader’s spouse, children, and special related persons; e. Enterprises invested or operated by their spouse, children, and special related persons reach commercial deals with the SOE or the SOE invested subsidiaries that may result in infringement of public interest and the SOE’s interest; f. Do not dodge the post or withdraw from official business in cases where the dodge should take place as per the challenge system; and g. Within three years after leaving the post or retirement, take important positions in, or make equity investment in private enterprises, foreign 3
invested enterprises, and intermediaries that have business relation with the SOE, or be engaged in brokering the related business with the SOE in the above mentioned enterprises (iv) Leaders of SOEs shall execute their office in a diligent and thrifty way, and make post-related expenditures as per the related rules, and cannot have the following behaviors: a. Make expenditures exceeding the budget filed to SASAC; b. List expenditures not for the work as post-related expenditures; c. Make post-related expenditures in places operated by special related persons; d. Do not abide by the rules to publish the post-related expenditures; e. Use SOE funds for tourism or disguised tourism; f. Purchase or replace sedan, use business charter airplane, decorate office, and add high-end office equipment during the period when the SOE encounters non-policy resulted loss or salary payment of employees is in arears; g. Use credit card and signed bill for post-related expenditures and cannot provide original vouchers and situation explanation; h. Conduct other luxury consumptions (v) Leaders of SOEs shall improve the style of work and pay attention to self- discipline, and cannot have the following acts: a. Conduct fraudulent activities to gain reputation, post, professional title, treatment and other interest; b. Hold wedding or funeral ceremony in large scale, causing bad influence or taking the chance to accumulate wealth by unfair means; c. Tacitly consent to, or connive their spouse, children and surrounding staff to utilize their powers of office and position to conduct actions that may cause bad influence; d. Spend enterprise funds for entertainment activities irrelevant to the work; e. Rent hotel rooms for a long term on the condition that ordinary office and residence are available; f. Infringe employee’s lawful interest by ignoring employee’s due demand; and g. Be engaged in actions contrary to social morals (vi) Main provisions of the implementation and monitoring framework in the Certain Rules include: (vii) the party committee secretary, board chairman, and general manager of a SOE are the major responsible persons for implementing the Certain Rules and should include the regulation’s implementation progress as an important content in the bench-marking inspection of the democratic life meeting, and in the annual duty and integrity reporting meeting to accept the related monitoring and democratic appraisal; (viii) SOEs should clearly specify their decision- making principles and procedures, and report significant operational decisions, significant management appointments, significant project investments, and large amount fund usage to SASAC within the stipulated period, and report the issues in relation to employee’s vital interest to the conference of workers and staff; (ix) SOEs should improve the enterprise’s democratic management system pillar supported by the employees’ representative conference, make public the significant affairs of the enterprise, and report the institutional arrangement to SASAC for record; 4
(x) SOEs should establish and improve their regulation on managerial post-related spending and report it to the SASAC for acceptance and post the actual situation of position-related spending to the employees; (xi) Leaders of SOEs should annually report to SASAC the situations regarding part- time work in other entities, investment and stock shareholding, overseas deposits and procurement of real estate, the employment and emigration of their spouse and children, and publish the related information within certain scope; (xii) SASAC and personnel administrative department shall improve the salary compensation system applicable to leaders of SOEs with consideration of the actual situation, and standardize and improve the incentive and restraint mechanism; (xiii) Discipline inspection and supervision organs, organization and personnel departments, and SASAC shall conduct regular education and supervision on leaders of SOEs; (xiv) SASAC and audit department shall implement various sorts of audit supervision, strictly execute the incumbency economic responsibility audit and off-duty economic responsibility audit; findings of the audits shall be channeled to relevant discipline inspection and supervision organs; (xv) Discipline inspection and supervision organs, organization and personnel departments, and discipline inspection and supervision division of SASAC shall supervise and inspect the leaders of SOEs under their administration in terms of performing the Rules; (xvi) Allegations of integrity violations from whistleblowers shall be timely proceeded and investigated by the responsible organs, and punishment decisions or punishment advices shall be made on the basis of the investigation result; (xvii) If leaders of SOEs retaliate against whistleblowers, the responsible persons shall be punished accordingly.
4. Because this regulation was jointly issued in name of the General Office of the Communist Party of China (CPC) Central Committee and General Office of the State Council, it has the highest administrative authority in application. As per the regulation’s authorization and requirement, Shaanxi Province formulated Implementation Measures for Certain Rules relating to Professional Integrity of SOE Leaders in Shaanxi in November 2009.
5. It contains 4 chapters, 39 articles and 61 clauses and highlights two main contents: conduct codes, procedures and penalties, and implementation and supervision. The implementation measures explicitly require that SOE leaders shall appropriately execute their rights and powers, specifies the penalties on misconducts in violation of the Certain Rules, and designates the monitoring entity and investigation procedures for the province.
6. In 2009, the central government enacted the CPC circuit inspection work regulation (trial) and in 2015 the circuit inspection work regulation was revised. The revised regulation requires that all central SOEs shall be subject to circuit inspection to ensure the implementation of party’s discipline including integrity requirements. In the central level, central circuit inspection team and office of central circuit inspection work leading group have been established. All 31 province-level governments have established their province-level circuit inspection team and circuit inspection work leading group respectively. Following the central governmental regulation, provinces including Shaanxi also formulated their rules to carry out discipline inspections on key provincial SOEs.
7. As of June 2016, the board of directors of SFHG consists of three members: Mr. Quan 5
Yongsheng (chairman), Mr. Li Zhendong (also SFHG General Manager), and Mr. Liu Shengyuan, and the leaders of SFHG are disclosed in the following table:
1 Quan, Yongsheng Male Party committee secretary, Chairman of the Board 2 Li Zhendong Male Deputy Secretary of party committee, General Manager 3 Zhang Naicheng Male Party committee member, Vice General Manager 4 Sun Jinghui Male Party committee member, Discipline committee secretary 5 Liu Shengyuan Male Group board director, Re-guarantee company’s party committee secretary, Chairman of the Board 6 Li Yunfei Male Party committee member, Vice General Manager 7 Liu Kefeng Male Group party committee member, Shaanxi Small and Medium-Size Enterprise Financing Guaranty Company party committee secretary, Managing Director and General Manager 8 Mu Shiwen Male Group Chief Accountant, Vice General Manager of Equity Right Exchange Center 9 Lu Shan Male Deputy Secretary of party committee 10 Zhang Weiming Male Deputy Secretary of party committee, Vice General Manager 11 Tang Hongjun Male Legal counselor of the group and Audit and Law Department General Manager 12 Qiao Wei Male Assistant to group general manager, Managing Director and General Manager of Investment Fund Management Company 13 Shi Chen Female Assistant to General Manager and Kinkaidai Chairman of Board 14 Luo Guilian Male Assistant to group general manager 15 Zhang Lei Female Assistant to group general manager 16 Fu Huan Male Assistant to group general manager
8. A Lexis check on the above mentioned names conducted in August 2016 does not find any lawsuit against them, and recognizes that they do not encounter any integrity related allegations.
9. Because SFHG is a large provincial SOE and its leaders are mostly CPC member, SFHG is governed by the Certain Rules and the provincial implementation measures and is effectively subject to the provincial circuit inspection. Shaanxi SASAC will make the SFHG leaders sign an integrity commitment before they take office. It regularly supervises the compliance of SFHG with national and provincial regulations and regularly convenes SFHG leaders to report on their personal situations and integrity issues. If there is any suspect or allegation of integrity violations involving SFHG leaders or SFHG activities, Shaanxi SASAC will organize, in coordination with other related governmental organs such as provincial discipline inspection and supervision department and organization department, integrity investigations on possible corruption, fraudulence, coercive practice, collusive practice, abuse, conflict of interest, obstructive practice, violations of legal sanctions, and retaliation against whistleblowers etc. From the website of Shaanxi SASAC, we did not find any record of investigations on SFHG and SFHG leaders with regards to integrity, or any record of punishment against the misconduct of SFHG leaders.
10. Each year, SFHG shall contract a certified public accountant (CPA) firm accredited by the provincial SASAC to carry out external audit on its stand-alone (parent-company) and consolidated financial statements and each of its subsidiary is also obliged to hire a SASAC 6 recognized CPA firm as coordinated by the headquarters’ audit and legal department to audit their financial statements. In the last four years, the external auditors have all provided unqualified opinion on SFHG’s financial statements, indicating that the SASAC accepted the financial management system is properly utilized and accounting is consistent with the national generally accepted accounting principles. Within SFHG, the board of supervisors is responsible for supervising the company’s operation on behalf of investors, namely SASAC. The supervisors regularly check the accounting records of SFHG and its key subsidiaries and attend important meetings to make sure that important decisions of SFHG comply with the enterprise’s rules and legal regulations. Beyond this, as per the relevant regulation, the provincial audit office will conduct economic responsibility audit annually when the SOE leaders are incumbent or at the time before the SOE leaders will leave the SOE to ensure that integrity misconduct of SOE leaders will be investigated on a regular basis.
11. Since August 2016, the CPC Shaanxi Provincial Committee has started to send a discipline circuit inspection team to SFHG to investigate the implementation of a broad scope of discipline issues including integrity. The circuit inspection this time concludes that major leaders of SFHG have not been found to have any misconduct with regards to integrity issue.
12. Also in August 2016, SFHG established the office of discipline inspection and supervision within the Party and Mass Works Department. This office is led by the Secretary of Committee for Discipline Inspection in the headquarters of SFHG and is responsible for supporting circuit discipline inspection on SFHG as arranged by higher level government, organizing circuit inspection in SFHG’s subsidiaries, receiving integrity related complaints involving SFHG staff and leaders of SFHG subsidiaries and initiating integrity investigation etc. This setup will enhance the integrity safeguard system of SFHG and ensure that SFHG and all subsidiaries within its umbrella will meet high level integrity standards as required by the government and the enterprise.
13. From the perspective of business operation, which is the main source of integrity problems, the specific responsibility of protecting subsidiaries from integrity risk is divided in the finance department, human resources department and audit and legal department of SFHG. As per SFHG’s financial management system, the headquarters finance department is entitled to, along with other responsibilities, review subsidiary’s annual operation budget and monitor the budget’s implementation, and conduct financial inspections on a regular basis to make sure that subsidiary’s financial system is in good operation and is in line with the headquarters’ rules. The audit and legal department of SFHG is responsible for reviewing contracts to be signed with third party and for ensuring the contract’s legal compliance, and is also responsible for organizing external audit for the group company and subsidiaries, and carrying out special audit for incumbency economic responsibility and off-duty economic responsibility of subsidiary’s leaders. The human resources department of SFHG is responsible for organizing integrity related trainings for the headquarters’ and subsidiaries’ employees. The subsidiary’s operational departments hold the first responsibility to ensure integrity.
14. According to the Credit Report of SFHG developed by China Lianhe Credit Rating Co., Ltd. in October 2016, all loans borrowed by SFHG are classified as normal, which means that the loan repayment is in line with the loan agreement. And as of 22 September 2016, SFHG is not included in the list of convicted debtors disclosed by the Supreme Court website. There is no public record indicating that SFHG and its consolidated subsidiaries are condemned by government for non-compliance with legal regulations.
15. To sum up, as a large provincial SOE dedicated in financial service, SFHG is under a 7 comprehensive and effective legal environment and subject to strict supervision and inspection to safeguard its integrity. The integrity risk of SFHG is low on a system basis and even if some of its leaders do have significant integrity misconduct, it is regularly anticipated that the misconduct can be eventually found out through the strict anti-corruption system more and more enhanced by the government in recent years.