INTEGRITY DUE DILIGENCE 1. Shaanxi Financial Holding Group

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INTEGRITY DUE DILIGENCE 1. Shaanxi Financial Holding Group 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
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