CHINA Law and Practice Contributed by: Chen Ma, Michelle Gon, Xinjie Li and John Fitzpatrick, Han Kun Law Offices
Directors face significant personal liability risks if a company is found to have facilitated money launder - ing due to gross negligence or a lack of internal over - sight. Regulators can impose substantial personal fines on responsible directors and, in cases involving criminal intent or severe systemic failure, individuals may face market entry bans or criminal prosecution. Consequently, boards are advised to appoint a dedi - cated compliance officer and conduct regular AML training and audits to mitigate these legal and repu - tational risks. 6. Audit, Risk and Internal Controls 6.1 External Auditors Under the PRC Company Law, companies are gener - ally required to appoint a certified public accounting firm to conduct an annual audit of their financial state - ments. The relationship between the company and its external auditor is primarily governed by the terms of the engagement letter and mandatory independence standards issued by the PRC Ministry of Finance. For listed companies, the appointment, reappointment or dismissal of external auditors must be proposed by the audit committee and approved by the sharehold - ers’ meeting to ensure objectivity and prevent man - agement interference. To maintain audit quality, regulations often require the rotation of lead audit partners every five years for publicly traded companies. Furthermore, auditors are prohibited from providing certain non-audit services, such as internal book-keeping or management con - sulting, which could create a conflict of interest. The board of directors is responsible for ensuring that the auditor has access to all necessary financial records and that the audit process is conducted in accordance with Chinese Auditing Standards. 6.2 Risk Management and Internal Controls Geopolitical risk has become a critical focus for regu - lators in China, particularly for companies engaged in cross-border trade or high-tech industries. These risks are typically monitored at the board level, often within a dedicated risk management committee or the audit committee, where directors assess the impact of international relations on supply chains and market
access. Boards are expected to incorporate geopoliti - cal scenarios into their long-term strategic planning to ensure corporate resilience against external political shocks. Regarding international sanctions, Chinese regulators expect boards to maintain high-level oversight of com - pliance frameworks to avoid being secondary targets of foreign sanctions, while complying with domestic anti-foreign sanction laws. The board is responsible for ensuring that the company’s internal control sys - tems include screening mechanisms for transactions involving sanctioned entities or jurisdictions. Senior management is typically tasked with the day-to-day execution of these controls, while the board receives periodic reports on the company’s exposure and the effectiveness of its mitigation strategies. In China, ESG requirements have transitioned from voluntary initiatives to a more structured regulatory framework, particularly for state-owned enterprises (SOEs) and listed companies. While there is no single ESG law, requirements are embedded across various regulations, including the PRC Company Law, which encourages companies to consider social and envi - ronmental impacts. For listed companies, the Code of Corporate Governance and specific guidelines from the CSRC mandate the disclosure of environmental protection efforts and social responsibility activities. The burden of ESG compliance is increasingly sig - nificant for companies operating in heavy-pollution industries, where environmental disclosure is manda - tory. For other sectors, regulators follow a “comply or explain” approach, encouraging transparency regard - ing carbon emissions, energy consumption and labour practices. These requirements aim to align corporate behaviour with national strategic goals, such as the Dual Carbon targets (peaking carbon emissions by 2030 and achieving carbon neutrality by 2060). 7. Environmental, Social and Governance 7.1 ESG Requirements
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