Covid-19 business criminal law and other issues in China

Non-compliance with Chinese laws and regulations for the prevention and control of COVID-19 triggers liability risks for the involved companies and individuals. The following shows a selection of the key liability risks under the PRC Law on Prevention and Treatment of Infectious Diseases and the PRC Criminal Law in conjunction with COVID-19. Additional laws and regulations on the national and provincial level can trigger further corporate and personal liability risks in conjunction with COVID-19.

PRC Law on Prevention and Treatment of Infectious Diseases

Categorization of COVID-19 as Infectious Disease under Class B with Measures for Class A

The Chinese National Health Commission has clarified in its Announcement No. 1 [2020] on 20 January 2020 (“Announcement”), that COVID-19 shall be subject to the “Administration of Statutory Infectious Diseases”. The Announcement has categorised COVID-19 as an infectious disease under Class B as defined in the PRC Law on Prevention and Treatment of Infectious Diseases. The Announcement has clarified that the measures for the prevention and control of infectious diseases under Class A shall apply to COVID-19, which is important, given that under the legal requirements of Article 330 of the PRC Criminal Law, breaches of the PRC Law on Prevention and Treatment of Infectious Diseases, can trigger a significant criminal liability exposure for companies and individuals.

The PRC Law on Prevention and Treatment of Infectious Diseases provides inter alia a number of Class A restriction measures for the prevention and control of diseases, which includes COVID-19. Accordingly, once an infectious disease breaks out, the government at or above the county level shall take actions immediately, in order to control and manage the disease in accordance with its preliminary plans. The following shows a selection of emergency measures, subject to the decision by the government at the next higher level, which may be taken for the prevention and control of COVID-19.

• Restricting or suspending of fairs, cinemas and other events of mass gathering;
• Suspension of work, business and school classes;
• Closing or sealing off public drinking water sources and relevant objects, which have been contaminated with the pathogens of infectious diseases;
• Controlling or wiping out wild animals, domestic animals and fowls infected with epidemics; and
• Closing the places where the spread of infectious diseases may be caused.

Non-compliance with the PRC Law on Prevention and Treatment of Infectious Diseases can trigger criminal liability risks under the legal requirements of Article 330 of the PRC Criminal Law (detailed further below). Further, specific administrative liability risks under specific administrative rules can be triggered. Severe administrative liability risks include the revocation of permits up to the revocation of the business license of the company.

PRC Criminal Law

Companies and individuals may also face criminal liability risks in conjunction with COVID-19. Key criminal liability risks arise from the following provisions under the PRC Criminal Law.

• Offences against the prevention of infectious diseases (Article 330, PRC Criminal Law)
• Crime of illegal business operation (Article 225, PRC Criminal Law)
• Crime of manufacturing/selling fake/inferior products (Article 140, PRC Criminal Law)
• Crime of manufacturing/selling fake drugs (Article 141, PRC Criminal Law)
• Crime of manufacturing/selling inferior drugs (Article 142, PRC Criminal Law)
• Crime of manufacturing/selling medical devices, that does not meet the standards (Article 145, PRC Criminal Law)

Offences against the Prevention of Infectious Diseases (Article 330, PRC Criminal Law)

According to Article 330 of the PRC Criminal Law (in combination with the aforementioned Announcement, which clarified that the measures for the prevention and control of infectious diseases under Class A shall apply to COVID-19), companies and individuals, that do not comply with the PRC Law on Prevention and Treatment of Infectious Diseases in relation to COVID-19, may be held criminally liable under certain requirements.

• Individuals who breach the provisions of the PRC Law on Prevention and Treatment of Infectious Diseases, by (i) allowing or conspiring with infectious disease sufferers, infectious disease pathogen carriers and suspected sufferers to take up jobs that are prohibited by the provisions of the public health administrative departments; (ii) refusing to implement the prevention and control measures, which have been imposed by the sanitation and epidemic control organs and / or (iii) causing the spread or a serious danger of the spread of a Class A infectious disease, shall be sentenced to criminal detention or imprisonment of up to 7 years.
• Companies that do not comply with the above laws shall be sentenced to a fine and there is no cap on the amount of the fine. The individual of the company who is in direct charge of the company and other directly responsible individuals of the company who are directly involved in the case shall be punished according to the punishment for individual offenders (i.e. they shall be sentenced to criminal detention or imprisonment of up to 7 years).

Crime of Illegal Business Operation (Article 225 and 231, PRC Criminal Law)

Criminal liability risks may also arise in relation to illegal business operations in conjunction with COVID-19. Article 225 of the PRC Criminal Law provides that anyone who breaches the state stipulations and / or disrupts the market order, may be sentenced to criminal detention or imprisonment of up to 15 years (if the circumstances are very serious), and may in addition or exclusively be sentenced to a fine, which amount shall be more than double and less than five times of any income that was generated illegally. The involved property shall be confiscated. Further, Article 231 of the PRC Criminal Law states that, any company which commits the crime of illegal business operation shall be sentenced to a fine and there is no cap on the amount of the fine. The direct responsible person in charge of the company and other directly responsible persons from the company shall be punished in accordance with the punishment for individuals.

Article 6 of the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues concerning the Specific Application of Law in Handling of Criminal Cases of Obstructing the Prevention or Control of Unexpected Epidemics of Infectious Diseases and Other Disasters, dated 14 May 2003, further clarifies that, whoever has breached the provisions of the state on market operation and price management during the period of prevention or control of an unexpected epidemic of infectious disease or any other disaster, causes an increase in the price or seeks exorbitant profits, and thus seriously disrupts the market order, may be convicted for having committed the crime of illegal business operation (if the amount of the illegal gains is relatively large or if there are other serious circumstances).

Crimes of Manufacturing and Selling Fake or Inferior Products (Article 140, 141, 142 and 145, PRC Criminal Law)

Criminal liability exposure may also arise in relation to the manufacturing and sale of medical devices and drugs. Manufacturers and sellers of medical devices and drugs, which (i) produce and sell fake products, medical devices, or drugs, or (ii) violate the regulations concerning the market operation and price management, for example by driving up prices or profiteering, shall be held liable. The key regulations include Articles 140, 141, 142 and 145 of the PRC Criminal Law. Liability risks for companies include, for example, fines and the confiscation of property. There is no cap on the amount of the fine. Liability risks for individuals include, for example, detention and imprisonment. Additional liability risks could arise for individuals in very severe circumstances.

The previous section shows the personal criminal liability risks of the senior management and other company representatives in relation to misconduct in conjunction with COVID-19. Additional personal liability risks may arise under other Chinese laws and regulations. For example, the senior management can face personal compensation risks arising out of claims by the company, in circumstances where personal duties of senior management in conjunction with the prevention and control of COVID-19 (e.g. imposed hygiene standards and prohibition of work) have not been fulfilled.

Chinese authorities are prosecuting misconduct in relation to the measures of prevention and control of COVID-19. So far, most of the cases refer to misconduct against the prevention of infectious diseases by breaching the quarantine rules and illegal business operations by causing increases in the price of medical devices (e.g. face masks). Chinese authorities are also exercising strict inspections in order to control and maintain the quality standards of medical devices, which are produced in China. Further, local authorities have commenced to impose administrative penalties on misconduct in relation to COVID-19. The following shows as examples the judgement of a Chinese criminal court and the upcoming administrative penalty by the local Chinese market supervision administration in conjunction with recent misconduct in relation to COVID-19.

Judgement of the Criminal Court

A China-based company and its CEO have been found criminal liable for conducting an illegal business operation under the PRC Criminal Law. The business of the involved company is to sell labor protection materials. At the beginning of January 2020, the company purchased face masks for ordinary use at the price of RMB 5.125 per box (50 masks per box) and re-sold them at the price of RMB 7 per box. Following the developments of the outbreak of COVID-19, the company has further increased the prices within a specific time period in January 2020 from RMB 21 per box to RMB 198 per box. The company’s revenue in conjunction with the sale of high-priced face masks amounted to more than RMB 170,000, and the amount of illegal income amounted to more than RMB 160,000. In March 2020, the local criminal court held that the involved company and its CEO committed the criminal act of having conducted an illegal business operation. The company was sentenced to a fine of RMB 200,000 and its illegal income was confiscated. The CEO of this company was sentenced to 8 months imprisonment (without probation) and to a fine in the amount of RMB 180,000.

Upcoming Administrative Penalty by the Market Supervision Administration

The local market supervision administration has identified at the end of January 2020 that a supermarket, which is operated by a foreign-invested company, raised very significantly the sales price of some products, although the procurement costs for these products did not increase to the same extent. The price of lettuce and cabbage was increased by 692% and 405% respectively. It has been reported that the local market supervision administration claims that this pricing breaches the PRC Price Law. Consequently, the local market supervision administration has issued the Administrative Penalty Hearing Notice to the foreign supermarket operator and intends to impose an administrative penalty in the amount of RMB 2 million.

The Chinese regulator has issued a number of rules regarding the operation and resumption of business during the time of pandemic. The State Council has issued rules on the national level, and the local governments have issued rules on the regional levels. The specific measures for the prevention and control of COVID-19 are different from the measures, which have been taken during the outbreak of SARS, although the laws and some of the guidelines for the prevention and control of infectious diseases were launched during SARS and have further developed in the meantime.

The following includes examples of the most recent rules, which have been issued by the State Council:

The State Council issued on 14 February 2020 the Guidelines for Hygiene Protection in Shopping Malls and Supermarkets during the COVID-19 Epidemic, which provide the health protection requirements for shopping malls (commercial complexes) and supermarkets during the epidemic of COVID-19 in terms of operation management, environmental hygiene, cleaning and disinfection, personal health protection, and different functional areas of shopping malls. The person in charge is the first person responsible for epidemic prevention and control. These guidelines require, among other things:

1. internal sanitation and rectification to be carried out for the business site, strengthening of indoor air circulation, garbage removal, and ensuring the cleanliness of the environment in all areas;
2. strengthening the cleaning and disinfection of tableware, object surfaces, trash cans, and sanitary ware;
3. the carrying out of personal health protection work by wearing masks, maintaining a safe distance, paying attention to hand hygiene and other measures;
4. emphasizing the key protection requirements of key position staff, such as counter sales personnel, cashiers, receivers, purchasers, cleaning staff, security guards, and other measures. For different functional areas of shopping malls, specific measures such as temporary closure, suspension of group activities, control of the number of staffs, shortening of business hours, and promotion of remote services are proposed to prevent the spread of COVID-19, and protect the health of consumers and practitioners to the greatest extent safety.

Further, the State Council has issued on 21 February 2020 the Notice on Guidelines for Prevention and Control Measures for Enterprises and Institutions Resuming Business and Production and on 7 April 2020 the Notice on the Prevention and Control Measures for Resumption of Business and Production in Different Risk Areas Nationwide, which provide guidance for the resumption of business and production. The local governments shall provide more detailed requirements for the resumption of business and production based on these notices.

Civil liability risks of the company in relation to COVID-19 can arise for example from the PRC Emergency Response Law and the PRC Law on Prevention and Treatment of Infectious Diseases. According to the PRC Emergency Response Law and the PRC Law on Prevention and Treatment of Infectious Diseases, the company has the following key obligations in relation to COVID-19:

• Timely reporting;
• Cooperating with the investigation, prevention, control, supervision and inspection of the health administrative department;
• Establishing and improving the management system and emergency plan;
• Strictly following the implementation of the prevention and control measures issued by the State Council and local governments; and
• Cooperating with material allotment and temporary expropriation.

Non-compliance with the PRC Law on Prevention and Treatment of Infectious Diseases and PRC Emergency Response Law, specifically with the abovementioned obligations, triggers for the company the risk of facing civil claims.

According to Article 67 of the PRC Law on Prevention and Treatment of Infectious Diseases, the company may face civil liability if the company (i) refused to accept prevention and control measures such as investigation, inspection, sample collection, and isolation treatment of infectious diseases by disease prevention and control institutions or medical institutions, or did not provide relevant information truthfully; or (ii) discriminate against patients with infectious diseases, carriers of pathogens and patients with suspected infectious diseases; or (iii) did not strictly disinfected under the guidance of the disease prevention and control agency or according to the hygienic requirements; or (iv) did not report to the nearby disease prevention and control institution or medical institution when there is an infectious disease patient or suspected infectious disease patient, and caused the spread and/or prevalence of infectious diseases and caused personal injury/ financial loss of others.

According to Article 77 of the PRC Emergency Response Law, the company may face civil liability if the company disobeys the decisions, orders issued by the local people's government, or fails to cooperate with the measures taken by the laws and regulations, and caused unexpected incidents and/or expand hazards and caused personal injury / financial loss of others.