Interpreting Social Credit System in Eight Dimensions
Interpreting Social Credit System in Eight Dimensions 2 | 八个维度 解读社会信用体系 As 2020 is the last year of the five-year plan for the construction of a social credit system (SCS) under the Plan for Establishing a Social Credit System (2014– 2020) (the "Plan") issued by the State Council, 2019 has become a crucial year to achieve the goals of the Plan. Looking back, a series of policy documents and their consultation drafts that focus on top-level design and operational practices have been introduced intensively this year, proposing methodologies and roadmaps for social credit-based market monitoring modes and a governance model from multiple dimensions, such as collection and sharing of credit information, use of credit reports, joint rewards for compliance, joint sanctions on non-compliance, identification of sanctioned targets, management of joint sanction list, market and industry access prohibition, credit restoration mechanisms, credit information security and the protection of market players’ rights. In the meantime, the impact of the SCS as a new type of social governance tool for enterprises has gradually attracted a high level of attention.
3 | 八个维度 解读社会信用体系 What is SCS?
• A key component of the socialist • Credit records and databases from market economic system regulatory authorities, financial Infrastruc- institutions, credit information Nature • A key component of the social governance system tures services, etc. • Connection and data sharing among credit databases
• Improve the integrity awareness • Government integrity: mainly in and credit level of the whole society connection with the central and local governments and their staff Purposes • Lower transaction cost Components • Reform and optimize social • Business integrity: mainly in governance and market surveillance connection with companies and key in the context of changing responsible persons and individuals government functions • Social integrity: mainly in connection with companies and key • Compliance with laws, regulations responsible persons and individuals and rules Basic • Judicial credibility: mainly in • Performance with integrity connection with public security requirements (including commercial contracts, authorities, judicial administration employment contracts, and judicial enforcement and administrative contracts, etc.) practitioners
• Publicity of illegal acts and punitive measures Incentive • Joint sanctions mechanism • Joint rewards
4 | Interpreting Social Credit System in Eight Dimensions History of the SCS
Joint inter-ministerial sanction memorandum, Internet + monitoring implementation plan, 2014 — Present credit restoration management measures, measures for the management of the lists of distrusted subjects, regulations related to unified social credit code
Plan for Establishing a Social Credit System (2014–2020) and Rules on Handling Credit 2014 Investigation Complaints
Regulations on the Management of the Credit Information Industry, Administrative 2013 Measures for Credit Information Services
The Sixth Plenary Session of the Seventeenth Central Committee of the Party proposed 2011 to put integrity construction in a prominent position
Several Opinions on the Construction of a Social Credit System 2007 Established an inter-ministerial joint conference system led by the State Council for the construction of the social credit system
2003 Several Opinions on the Construction of a Social Credit System (Expired)
The State Council established the Special Working Group on Establishing an Enterprise and Individual Credit System led by the People's Bank of China 2002 The 16th National Congress of the Communist Party of China proposed to "improve the social credit system of the modern market economy"
The concept of making the social credit system a governance tool was proposed by the 1999 Institute of World Economics and Politics of the Chinese Academy of Social Sciences under its research project regarding establishment of a national credit management system
5 | Interpreting Social Credit System in Eight Dimensions High Risk Industries, Sectors and Persons
The central and local governments have issued a series of coordinated monitoring and joint sanction memorandums from 2014 to vigorously promote management targeting issues of distrust in key industries, key sectors and key market players.
• Transportation and • Petroleum and gas • Real estate Key Industries logistics • Power • Salt industry • Cultural market • Finance • Food and drugs • Housekeeping services • Insurance • Tourism • Electronic • Healthcare authentication services
• Government • Statistics • Foreign economic Key Sectors procurement • Intellectual property cooperation • Social insurance (patent) • Environmental • Entry-exit inspection • Safe production protection and quarantine • Management and use of • Serious wage defaults • Charitable donations government-related funds for migrant workers • Scientific research • Domestic trade • Violation of quality laws • Accounting circulation • Violation of tax laws • Customs
• Distrusted persons subject to enforcement Key Market Players • Listed companies
6 | Interpreting Social Credit System in Eight Dimensions Sanction Measures
China is striving to structure a large framework of sanctions on distrusted behavior based on market-oriented, industrial and social punishment measures, under which "one non-compliance will lead to restrictions everywhere". The government will establish a blacklist system and a market Administrative regulatory exit mechanism, promote credit monitoring by category in market restrictions and sanctions supervision and public services in terms of market access, qualification recognition, administrative examination, approval and policy support, establish a credit commitment system for administrative license applicants, and conduct credit reviews on the applicants.
• Combine monitoring under the principle of ‘two random selections, one public release’ with Examples: credit ratings, whereby market players with general credit risk will be inspected under regular coverage and frequency, and those with high risks of non-compliance will be subject to strict monitoring and sanctions with appropriately higher coverage and frequency • Administrative sanctions such as placing restrictions on stock offering, bidding and tendering, application for government-funded projects and entitlements to tax incentives • Ban from market and industry access for a certain period of time and also life-long market expulsion in sectors directly related to food and drugs, ecological environment, engineering quality, safe production, old-age and child care, urban safety, and other sectors that are directly related to the safety of people's lives and property • No grants of financial aid, no procurement of services, an important reference for canceling or lowering the rating of social organizations, automatic interception, automatic prompting and automatic statistics in the registration process to prevent legal representatives and persons- in-charge of heavily distrusted enterprises from being registered as legal representatives and persons-in-charge of other enterprises
Develop an evaluation index system and evaluation method for Market sanctions and credit benchmarks and improve credit records and disclosure restrictions systems for distrusted persons so that they will be subject to restraints and restrictions in market transactions.
• Market sanctions such as limited access to credit facilities and a ban on travel by air or high speed train Examples: • Restrain those on the lists of distrusted persons from participating in bidding for any construction projects for which a bid invitation is required by law
Develop industry self-discipline rules through industry Industrial restraints and associations, which will procure their members to comply with those rules. Any non-compliant institutions or individual members sanctions will be subject to intra-industry criticism, public blaming and other sanctions based on the seriousness of their violation. The Medicine and Health Credit Network jointly established by 21 industry associations has in place a "credit publicity" unit to publicize administrative penalties, a "red and black lists" unit Examples: to publicize the red list, blacklist and close watch list determined by the associations, and a "process to determine the 'list of false and illegal advertisements in medical and pharmaceutical related areas' " to explain the process of listing
Social restraints and sanctions Improve the public supervision mechanism.
More transparent determinations of non-compliance and publicity of the lists; enhanced cross- Examples: regional penetration, and mutual monitoring in upstream, downstream and ecosystems.
7 | Interpreting Social Credit System in Eight Dimensions Incentive Measures to Reward for Compliance
Reputation reward • Establish a good example of integrity • Promotion to society through credit websites or media
Public administration • Green channel, that being the "green channel" provided by tax authorities or designated specialized personnel to help with tax-related matters • Acceptance in the absence of non-material filing documents. For example, when applying for administrative licenses to which the credit commitment system is applied, if some of the application materials are not complete but the applicant signs a written commitment to provide the missing materials within the prescribed period, the government authority should accept the application in order to accelerate the progress • Reduce the frequency of daily monitoring
Public service • Give priority in government-funded projects and preferential policies for investment solicitation • Give priority support and facilitation to honest individuals in sectors such as education, employment, entrepreneurship, and social security • Award honest market players credit points in public-resource related trading activities • In direct power transactions, under the same conditions priority will be given to enterprises with AA credit rating in inspection and quarantine
Market transaction • Encourage relevant authorities and entities to develop trustworthy incentive products such as "Shui Yi Dai", "Xin Yi Dai" and "Xin Yi Zhai" • Guide financial institutions and commercial sales organizations to give preferential and convenient services to trusted market players
8 | Interpreting Social Credit System in Eight Dimensions Determination of Red List and Blacklist
The State will maintain joint reward lists and joint Heavily distrusted companies (also referred sanction lists (also referred to as the "red list" and to as the targets subject to joint sanctions or "blacklist" system), and, by relying on the national credit blacklisted companies): information sharing platform and through big data Meaning the companies that have been included analysis, transfer the persons that have been included in the lists of serious non-compliant distrusted in the close watch lists in more than three different key companies by the administrations of market areas to the "big data warning list", and issue an early regulation, the cyberspace administration and other warning to the public through the website CreditChina. regulatory authorities. The specific rating criteria gov.cn., so as to improve the linkage mechanism for will be determined by the regulatory or competent rewarding compliance and sanctioning non-compliance. authorities. Generally speaking, if a company is Companies under abnormal operation: subject to criminal penalties or serious administrative penalties such as revocation of business license and Meaning (1) the companies that fail to publicize their closure of websites, or is subject to administrative annual reports within the time limit stipulated in the Interim penalties repeatedly within certain period of time, Regulations on Enterprise Information Disclosure or fail to or has failed to duly perform its obligations before disclose the relevant corporate information within the period deadlines, or has caused serious adverse effects on ordered by the competent administration of commerce and the society, it will be rated as a heavily distrusted industry; (2) the information publicized by the companies company, and will be disclosed to the public via conceals the truth and is fraudulent. Those companies will the National Enterprise Credit Information Publicity be publicized to the public through the corporate credit System, the CreditChina website and other websites. information publicity system, reminding them to fulfill their Upon expiry of five years, the company may apply publicity obligations. If they fail to perform their publicity for removal (in case of being included in the list of obligation within three years, they will be included in the companies under abnormal operation) or be removed lists of heavily distrusted companies; and if they have by the regulatory authorities by ex officio. performed their publicity obligation, the administration of commerce and industry at or above the county level will Determination of a joint sanction target shall meet the remove them from the lists of abnormal operations. following requirements:
Companies under close watch: Rating criteria: Meaning lists of companies that have committed In principle, unified criteria will be applied nationwide, serious distrustful behavior in the key sectors or have which will be formulated by the member entities of the committed minor distrustful behavior repeatedly but inter-ministerial joint meeting of the social credit system have not met the blacklisting criteria determined construction or other competent industry authorities. by the competent or regulatory authorities. The information of those companies will be published on Information Sources: the national credit information sharing platform and 1. Public credit information (such as administrative released to the public on a selective basis. If those law enforcement information); companies under close watch commit any serious 2. Market credit information (such as failure to honor distrustful behavior, they will be promptly transferred an agreement); to the blacklists according to the blacklisting criteria. 3. Complaints and reporting information (such as Companies under the big data warning lists: consumer complaints); Meaning companies that have been included in the close 4. Information from Internet (such as e-commerce watch lists in more than three different key sectors, and platform transaction information) and third parties are subject to early warning to the public through the (such as credit information services). website CreditChina.gov.cn. If those companies commit any serious distrustful behavior within the stipulated period, they will be promptly transferred to the blacklists according to the blacklisting criteria.
9 | Interpreting Social Credit System in Eight Dimensions Rating Process
Joint sanction targets Joint reward targets
Rating authorities to form a preliminary list Rating authorities to form a preliminary list
Notice or announcement, if required Cross-checking with the red list of various sectors on the national credit information sharing platform, if a person on the blacklist has been included in the red list before, remove them from the relevant red list Rating authorities to verify if there is any objection
Publicize the screened preliminary list
Cross-checking with the red list of various sectors on the national credit information sharing platform, if a person on the blacklist has been included in the red list before, remove If there is no objection, the red list is them from the relevant red list confirmed; if there is any objection, rating authorities to verify
Finalize and publicize the blacklist
10 | Interpreting Social Credit System in Eight Dimensions Credit Restoration
Corporate credit restoration refers to the mechanism restoration of distrusted behavior. Restoration of for restoring the credit of a company injured by negative credit entry means modification or removal minor or unintentional distrusted behavior, under of the negative credit entry by the rating authority at which if the company has completely corrected its the request of the distrusted person or by ex officio distrusted behavior and performed its legal liability, pursuant to a specific procedure, so that the negative accepted credit education, proactively made credit credit entry may describe and reflect the distrusted commitments and performed the relevant social behavior more accurately. Restoration of distrusted responsibility, it can be removed from the blacklist behavior means that the distrusted persons proactively and released from the joint sanctions, and removed correct their distrusted behavior within a specified from the publicized distrusted companies, to restore period and improve their policies and procedures to and improve its credit rating. The credit entry, effectively prevent any further non-compliance, which is however, will be duly kept in accordance with laws the essence of credit restoration. and regulations. The authorities confirming negative credit information Credit restoration can be interpreted in both a broad accept and confirm the application for credit and narrow sense. In a broad sense, it includes restoration under the principle of "who confirms, who restoration of both distrusted behavior and negative restores", but the restoration mechanism may vary by credit entry, and in a narrow sense, it only refers to industry, region and sector. For the detailed process, please visit the website CreditChina.gov.cn.
11 | Interpreting Social Credit System in Eight Dimensions Our Suggestion
We suggest that, with the gradual improvement 4. Renovate and improve conventional compliance and increasing sway of the SCS, companies should programs or systems in connection with the prepare for the following: exposure to social credit risks. Conventional compliance programs or systems only take publicity 1. A deeper understanding of the SCS, the competent of administrative penalty as one of the reputational regulators, the rating and evaluation mechanism, sanctions, and have failed to pay sufficient attention the joint reward and sanction mechanism and to the intensity of joint sanctions, restrictions on the major publicity websites. Although many market access, and constraints on access to public companies have already developed in-depth resources and services. Therefore, as the SCS is understanding of the compliance requirements, becoming more and more mature, companies should the consequences of non-compliance and the take full consideration of social credit risks in various enforcement publicity in connection with antitrust, fields such as policy formulation, risk identification, anti-bribery, data protection, tax and other major compliance review, risk response, accountability, compliance fields, while the social credit system is assessment and evaluation, and compliance training. a new social governance system tool based on the inter-departmental and inter-regional collaborative 5. Establish a self-interest protection mechanism monitoring and social co-governance, and relying under the SCS. The SCS supported by modern on the modern means of "Internet + monitoring", science and technology is an upgraded version they should designate specialized personnel or of the conventional credit system, which is rather engage an external counsel as soon as possible unfamiliar to many companies. Besides, as it is to understand the governance logics and judge its still developing, during which rating authorities implications on the companies. may be involved in all industries (including industry regulators and industry associations), sectors and 2. Conduct an overall investigation of corporate social regions (including central, provincial, municipal, and credit risk. Companies should comprehensively county levels), it is inevitable that there may be policy consider whether they are subject to high risks and inconsistency, inaccurate information, inconsistent whether they operate in high-risk industries and criteria etc. Therefore, we suggest that companies sectors, so as to have a complete understanding of should understand and utilize the credit information corporate exposure to social credit risks. complaint system and credit restoration system to request the information providers and collectors 3. Leverage resources to conduct credit risk promptly correct or remove any incorrect information, assessment on key management, investors, or restore any restorable credit within the regulatory partners, and targets of investment/investment frameworks in a timely manner. solicitation, and establish a third-party credit risk monitoring and management system that is compatible with corporate credit risk preferences, and understand and resist possible credit risk from third parties.
12 | Interpreting Social Credit System in Eight Dimensions Authors
PwC Rui Bai Law Firm*
Ramesh Moosa Annie Xue Partner of Forensic Consulting Regulatory Compliance Senior Manager PwC China +86 (10) 8540 4602 +86 (21) 2323 8688 [email protected] [email protected]
Jessie Wang Tiang & Partners** Director of Forensic Consulting PwC China +86 (10) 6533 7997 Martyn Huckerby [email protected] Head of Competition Law, Asia-Pacific Registered Foreign Lawyer +852 2833 4918 [email protected]
* Rui Bai Law Firm is an independent law firm and a member of the PwC global network of firms. **Tiang & Partners is an independent Hong Kong law firm. It is associated with PwC Legal International Pte Ltd (a licensed Foreign Law Practice) in Singapore. Neither Tiang & Partners nor PwC Legal International Pte Ltd has any control over, or acts as an agent of, or assumes any liability for the acts or omissions of, the other.
Contact with our specialists from other service lines to learn more relevant information:
Cimi Leung Bo Yu Risk Assurance Markets & Growth Leader Tax Partner PwC Mainland China and Hong Kong PwC China +86 (20) 3819 2997 +86 (10) 6533 3206 [email protected] [email protected]
Mege Wang Risk Assurance Partner PwC China +86 (10) 6533 5227 [email protected]
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