China's Social Credit System: Violations & Credit Restoration

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1 Shedding Light on China’s Social Credit System: Violation Categories and Recovery Strategies.

Shedding Light on China’s Social Credit System: Violation Categories and Recovery Strategies.

The China social credit system has raised concerns among foreign enterprises regarding compliance and managing situations that could result in bad social credit. In response to calls for greater clarity and transparency regarding the system’s workings, the State Administration for Market Regulation (SAMR) recently published two new documents outlining the administration of the China social credit system for companies. These documents provide clarification on the types of violations and dishonest behavior that can lead to a company being blacklisted and offer guidance on restoring bad social credit.

This article is based upon the article “Updates to China’s Social Credit System: Violations and Restoring Bad Credit“ by Arendse Huld originally happeared on china-briefing.com, Dezan Shira & Associates

New Documents from SAMR

SAMR released two documents related to the management of the China social credit system. The first is the “Administrative Measures for Market Regulation of the Seriously Illegal and Dishonest Entities List” (referred to as the “measures for violations”). The second is an announcement on the “Administrative Measures for Market Regulation of Credit Restoration” (referred to as the “credit restoration measures”). These documents were released on July 30 and August 1, respectively.

Trial Implementation Measures

In January 2023, SAMR introduced another set of trial implementation measures called the “Measures for the Administration of Restoration of Credit Information after Correction of Untrustworthy Behaviors” (referred to as the “credit information restoration measures”). These measures outline the procedures for companies to restore their bad credit after taking corrective actions. The credit information restoration measures came into effect on May 1, 2023.

Scope and Punishments

The release of these measures follows amendments to the social credit system’s scope and punishments. The objective of the new measures is to provide clarity on the violations that can lead to a company being included on the “Seriously Illegal and Dishonest Entities List” (referred to as the “seriously dishonest” entities list). This list serves as a blacklist that penalizes companies for legal infringements and fraudulent behavior that have harmful consequences for society or markets.

Punishments for Blacklisted Companies

Companies included on the seriously dishonest entities list face various penalties, including fines, restrictions on market access, fiscal fund limitations, loss of preferential policies, increased regulatory inspections, and disqualification from streamlined bureaucratic procedures. Crucially, these companies are publicly named and shamed through the National Enterprise Credit Information Publicity System, making their violations visible to potential partners and consumers.

Effective Dates

The measures for violations will take effect on September 1, 2021, replacing the Interim Measures for the Administration of the List of Seriously Illegal and Dishonest Enterprises released in December 2015.

Recourse for Violations

The measures for violations provide an overview of the actions companies can take to dispute their inclusion on the seriously dishonest entities list or to be removed from the list after a certain period.

Credit Restoration Measures

The credit restoration measures provide more details on the procedures for restoring a company’s social credit and for removal from both the seriously dishonest entities list and the “list of enterprises with abnormal operations.”

Types of Violations Leading to Bad Social Credit

The measures for violations outline the infractions that result in bad credit and inclusion on the seriously dishonest entities list. Companies can be added to the list if they receive a “relatively severe” punishment from market regulation authorities for violating laws or administrative regulations. Such punishments may include heavy fines, downgrading of qualification levels, revocation of permits or licenses, restrictions on production or business activities, and other severe penalties specified by laws and regulations.

Additional Violations

The measures for violations focus on behavior deemed “illegal or dishonest” in specific industries such as food production, pharmaceuticals, medical devices, and special equipment. Violations include engaging in food production without licenses, using non-food grade materials in food production, manufacturing or selling counterfeit drugs, and producing and selling unregistered medical devices, among others.

Determining Malicious Violations

Market regulation authorities assess various factors to determine whether a company’s behavior constitutes a malicious violation. These factors include subjective intent, frequency and duration of the violation, punishment severity, value of goods involved, impact on health and well-being, asset damage, and societal impact. If a company can prove that a violation was not intentional, it will not be included on the list.

Transparency in Listing Process

The process for adding a company to the seriously dishonest entities list is now more transparent. The measures stipulate that relevant authorities must inform the company of the reasons and basis for the penalty, as well as the company’s rights. Authorities are also obliged to inform the company of the conditions for removal from the list and the available relief measures.

Administrative Measures for Blacklisted Companies

When a company is added to the seriously dishonest entities list, it faces heightened administrative measures. These include designation as a “key supervisory target,” increased inspections, disqualification from the notification commitment system, and disqualification from government reward schemes and honorary titles.

Restoring Social Credit

The measures for violations address concerns about restoring a company’s image as an honest market entity. These measures detail term limitations for the seriously dishonest entities list and the steps companies can take for removal or disputing their inclusion on the list.

Early Removal and Removal Criteria

Companies can apply for early removal from either the seriously dishonest entities list or the list of enterprises with abnormal operations after one year from the date of listing. To be eligible for early removal, a company must have fulfilled administrative obligations, eliminated harmful consequences, and not received other serious punishments.

Procedures for Removal

To be removed from the list of enterprises with abnormal operations, a company must submit and publicize its missing annual report, fulfill information disclosure obligations, correct falsified or obscured public information, and update its registered address or means of contact.

Removal from the seriously dishonest entities list occurs after three years from the initial listing. At that point, the company’s position on the list is no longer publicized, and relevant measures are lifted. However, if other restrictions were imposed for a longer period, the company cannot resume normal operations until those restrictions are lifted.

Application for Removal

Companies wishing to apply for early removal must submit an application form, a letter of commitment, materials proving fulfillment of obligations or correction of illegal activities, and any other materials required by SAMR. Authorities must inform the company of the application’s acceptance within two business days and make a decision within 15 business days. If the application is rejected, the company will be provided with a reason for refusal.

Reconsideration and Lawsuits

Companies unsatisfied with decisions regarding their inclusion or removal from the seriously dishonest entities list can apply for reconsideration or file a lawsuit.

Restoring Credit Information

SAMR released the credit information restoration measures to address concerns about restoring credit information after rectifying behaviors that led to punishment under the social credit system. These measures provide procedures and conditions for companies to restore their credit information, including removal from the seriously dishonest entities list, cessation of administrative punishment information publication, and restoration of other information about dishonest behavior.

Publication of Credit Information

Under the social credit system, companies may have information about violations or “untrustworthy” behavior published on public platforms. This visibility can harm a company’s business interests. The credit information restoration measures clarify that companies have the right to restore credit information if they meet relevant conditions and outline specific procedures for doing so.

Removal from the Seriously Dishonest Entities List

To be removed from the seriously dishonest entities list, companies must apply to the institution responsible for identifying their dishonest behavior. The Credit China website must stop publishing information on the list within three working days of receiving the removal list.

Removal of Administrative Penalty Information

Companies can apply to have information on administrative penalties removed after the minimum publication period has expired. The information is automatically removed after the maximum publication period has elapsed. If a company successfully challenges an administrative penalty, the credit publication platform must remove the information and report the result of the challenge.

Appeals and Early Termination

Companies can appeal to the National Public Credit Information Center if they believe the information on administrative penalties published on credit platforms is incorrect. The center will verify the appeal and update the information if the conditions are met. Companies can also apply for early termination of administrative penalty publication by meeting certain requirements and submitting an application to the center.

Standardizing the System

The measures for violations and the credit restoration measures aim to standardize a system that has faced criticism for its fragmented and unpredictable nature. Although local market regulation departments still manage the lists, decisions must be reported to higher-level departments for oversight. The release of additional guidance for interpreting and implementing the measures further aids in standardization.

Importance of Compliance

Compliance with laws, regulations, fair market practices, and local standards is crucial for companies to maintain good social credit. The Chinese government’s commitment to the social credit system despite concerns indicates a diminishing tolerance for violations. Foreign companies must understand the latest rules and regulations in their respective industries and prioritize compliance to safeguard their business interests.

Topics: China social credit system violations and consequences,Corporate blacklist in China: understanding the implications,How to restore bad credit under China’s social credit system, Compliance strategies for managing China’s social credit system, Navigating the complexities of China’s corporate blacklisting process

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China Briefing

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at [email protected].

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