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Financial frauds have been epidemic as the modern technologies developing. The number of financial cases has been increasing, expanding to extensive diversities of industries by the most unexpected mean. The following shows the most common financial fraud cases:

1. Internet fraud
   Internet fraud is a common way to perform financial fraud, meaning that one fraudulently collects funds by fabricating facts or concealing the truth. That can include fake or misleading information released by stock market manipulators, and the manipulators illegally seek gains by dumping their shares pumped-up by the misleading information. Another typical example is fake online auction. Purchased good may not be delivered to the buyer as perfect as the presented one, or maybe it does not exist at all.




2. Fraudulent funding
   Raising funds by fraud is collecting funds by means of fraud. Typical means are that one does not use the raised funds as he/she promised to use, and even flees with the funds or promises excessively high rates for return.




3. Insurance fraud
   Insurance fraud refers to acquiring insurance money by fabricating relevant information of the insurant or creating insured incidents with bad faith.




4. Contract fraud
   Purposed by illegal acquisition, obtaining properties of the other party by faking facts, concealing truths, using hidden traps and other means during the process of concluding and/or enforcing a contract. It also has a form of one party of a contract intentionally concealing the factual circumstances or revealing the fake circumstances that lure the other party to express wrong intentions and conclude the contract. This is one of the fraud techniques as well.

Image by Steve Buissinne from Pixabay

In China’s legal practice, in addition the fraud itself and the amount involved, an element to criminalizing financial fraud is the intent to illegal possession, such as raising funds while knowing he/she is not capable of returning it, transferring and concealing collected funds. The legal consequence is harsh once convicted. For example, one convicted of the financial fraud crime is subject to penalty as high as life imprisonment in cases where the amount concerned is especially huge or other severe circumstances according to Art. 192 of the Criminal Law of the P.R.C.

Generally speaking, when a fraudulent funding is determined, the court will decide on the penalty amount according to the severity of the fraudulent behaviours, ranging from the minimum 20,000 RMB (approx. 2,600 EUR) to the maximum 500,000 (approx. 64,000 EUR) or the confiscation of assets. Additionally, contract fraud is different from fraudulent funding, albeit the similarity that both incurs civil and criminal liabilities, the former is not under specific ranging of penalty in the law itself except the rates to aggregate the sentence time. However, when a contract fraud is penalized with criminal liability, the abovementioned penalty range is applicable.

Regarding the post-fraud remedies for victims, Chinese laws predominantly uses the principle of recovery and compensation, meaning that assets or properties not spent shall be recovered and parts spent shall be compensated. What has been obtained after the recovery and compensation process will be compensated to victims. Due to the increasing number of innovative financing models and their upgrades, Chinese law has yet offered certain economic remedies to the victims in financial markets, and the difficulty for victims to claim proper and sufficient compensation has grown bigger. Such matters should be regarded with extra attention and discretion when entering the Chinese financial market.

Global Connect Admin B.V. | Yichuan Qiu and Xuan Hao

Albeit the uncertainties along internationalization, The Netherlands and China are open to exchange of communication and goals, a mutual recognition of win-win cooperation, long-term orientation and common better-off has become the solution to many challenges ahead. On 27^th June, The Dutch Prime Minister Mark Rutte paid a working visit to China.

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The Chinese Premier Li Keqiang exchanged interests of cooperation in the fields of trade, investment, innovation, clean energy, agriculture and third-party markets. China is also prepared to synergize with The Netherlands on such developments by providing an open, transparent, and non-discriminatory business environment reciprocally.

China is the third biggest country which has remarkable businesses in The Netherlands that have brought high volume of economic benefits and around 614 employment positions in 2018. Brexit pushed The Netherlands to a prominent position for international business, especially in investment, financial assets, media, pharmaceuticals, life science, logistics and health sectors.

Clean energy has gained an increasing popularity in many countries. This is particularly important in China as the government is actively working on environmental solutions from the air quality improvement and forestation in general to municipal garbage recycling scheme and renewable energy in specific. Topics on land restoration, air engines, green energy vehicles, tidal energy, biomass, noise prevention are becoming some notable key sub-sectors. China itself has the leading position in investing in clean and renewable energy businesses. In another 5 years, China will be in an ultimate leading position in solar energy investments, which will exceed that of the US over 100%. Investments in related fields in China are also appreciated and even encouraged by levels of governmental agencies.

A report in 2018 showed that the Chinese clean energy market has sustained stably. The International Energy Agency considers China’s transition to cleaner energy very positive with potentials. The governmental subsidies are gradually withdrawn as the sector grows rapidly. Hence a shortage and some urgent need of investment capital will surface. The main market trends of clean energy and clean tech industries are M&A, PPP mode, third-party operations, and digitization with big data. Amongst others, the third-party operation sounds the most feasible and the easiest for many foreign undertakings or investors. Additionally, foreign companies interested in merger and acquisition on clean energy are more appreciated in China when financing capacity is attached.

Would you be interested in investing in China’s emerging industries and want to have a professional financial manager by your side, please feel free to leave us a message or have a call with us.

Global Connect Admin B.V. | Xuan Hao

The Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan) identified 15 actions to address BEPS in a comprehensive manner. In October 2015, the G20 Finance Ministers endorsed the BEPS package including the report on Action 5: Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance. The Report is one of the four BEPS minimum standards, which are followed by all members of the Inclusive Framework on BEPS. Each of the four BEPS minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level playing field. There are two aspects to the Action 5 minimum standard: a process for reviewing preferential tax regimes to ensure they are not harmful, and a transparency framework that applies to tax rulings.

©Image by Heidi kiss from Pixabay

The Cayman Islands is a member of the OECD Inclusive Framework on BEPS and it has enacted the Economic Substance Law in response to requirements for geographically mobile activities to have economic substance developed under BEPS Action 5, consistent with the European Union timeframe to have such requirements in place on 1st January 2019. Recently on 3rd May 2019, the Economic Substance Guidance v2.0 has been approved.

The latest Economic Substance Guidance clarifies and amends certain definitions in order to comply with the requirements of the OECD Forum on Harmful Tax Practices (‘FHTP’) and the EU Scoping Paper. For example, it clarifies that the definition of ‘relevant income’ means that it [in relation to an entity, means that all that entity’s gross income from its relevant activities and recorded in its books and records under applicable accounting standards.]

Other clarified terms under the Cayman law include:

Cayman Islands core income generating activities

Consolidated Financial Statements

Constituent Entity

Domestic company

Fund management business

Group

High risk intellectual property business

Investment fund

Pleasure vessel/pleasure yacht

Shipping businesses

Territorial waters

For the original legal text, please visit http://www.gov.ky/portal/pls/portal/docs/1/12788483.PDF

Global Connect Admin B.V. | Yichuan Qiu

According to the update on 5^th June 2019 on the  Chinese Central Bank website, the State Council has approved the expansion of pilot area under the Renminbi Qualified Foreign Institutional Investors scheme into the Netherlands, with a defined quota of 50 billion RMB (approx. 6.5 billion euros). As it deepens the cooperation on finance between China and the Netherlands, the channels for foreign investors to allocate RMB-oriented assets have been widened. The RQFII also serves the function of elevating the level of open market in China, which contributes to bilateral trade and investment. News on 12^th June reported Robeco, a leading international Dutch firm specialized in assets management is proactively looking into additional possibilities to invest in the Chinese capital market, centered around its Shanghai office.

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RQFII is the abbreviation for RMB Qualified Foreign Institutional Investors. The RQFII policy was established in 2011. Prior to this, the QFII policy was announced as early as in 2002, which can be recognized as Qualified Foreign Institutional Investors. The QFII scheme was introduced as a certification system explicitly for foreign institutional investors to enter and invest in the Chinese capital market. The addition of RQFII scheme contributed to internationalization of RMB. For many foreign institutional investors, being certified under either of the two schemes will give them access to invest in Chinese domestic security market, conditioned with a defined investment quota. RMB is the quote currency if a foreign investor operates under the RQFII scheme.

What is worth of the attention is the proposed convergence of the RQFII and QFII schemes at the beginning of 2019. Insofar, many foreign firms have already been certified under the RQFII directly or indirectly via their Hong Kong subsidiaries. Some early birds in Europe include Ashmore Investment Management and BlackRock Advisors from the UK, BNP Paribas Asset Management in France and Swiss Reinsurance Company in Switzerland. This proposed merger will offer foreign investors two major remarkable benefits: simplified procedures with shortened waiting time in application, and a lowered threshold on capital to become qualified. China is progressively opening up its capital markets to more foreign investors in both US dollars and in Chinese RMB. If this convergence initiative is to be approved, the Chinese capital market will become more attractive to global investors. Some known propositions are: quantitative requirements to be annulled, but institution types and compliance conditions are to be reserved. Simplified application procedures and shortened waiting time are suggested. The scope of investment is also proposed to be enlarged after the convergence, which means more opportunities for many investors optimizing their global assets.

Proposed additional investments (non-exhaustive list):

1. Stocks on the National SME stock transfer system (New OTC (Over the Counter) market);
2. Repurchase of bonds;
3. Private investment funds;
4. Financial futures;
5. Commodity futures;
6. Options.

Specific categories are still subject to approval of supervisory agencies prior to announcement.

Global Connect Admin B.V. | Xuan Hao

During the 13^th National People’s Congress in late April 2019, the Standing Committee has decided in their 10^th Meeting on new amendments to modify the current Trademark Law. There are 6 amendments on provisions in the Trademark Law, which will come into force on 1^st November 2019. Specific implementation measures and supporting regulations will be issued as soon as possible by the National Intellectual Property Bureau.

The most arresting change is the emphasis on the inhibition and punishment of bad faith trademark registrations and stocking trademark registrations for profitable sales. Article 4.1 has been changed to favour the approval of the trademark whose legal owner is the actual business undertaker. Trademark applications filed not based on grounds of actual usage with bad faith will be rejected. Article 19.3 now offers a stricter control on trademark application agents who should submit trademark applications on behalf of clients after 1^st Nov. 2019 under the condition that the clients’ intentions have been made aware of.  It is very straightforward in its purpose of inhibiting intentionally stocking a large number of trademarks for profitable sales.

Photo by Leon Liu on Unsplash

Article 68.4 is a newly born rule regarding the punishment not only on trademark registration with bad faith, but also on trademark litigation with bad faith. The modified Article 63.1 offers potentially higher amount of damages to be compensated to the trademark owners who suffer from trademark right infringement. The highest amount of damages will soon reach 5 million RMB (approx. 625,000 euro), which exceeds the previous 3 million RMB (approx. 375.000 euro) ceiling on damages.

These changes in the Trademark Law progressively supports the rightful legal stance of trademark owners and users. However, some critical observations are made by legal professionals. For instance, the new Article 63.1 will raise the maximum amount of damages compensable to the trademark holder. The reality has however shown that a case can rarely be decided with over a million RMB of compensation to the plaintiff in the past. If no other measure or regulation is in place to ensure that the future judgments will substantially bring in higher amount of damages to the plaintiff, this new amendment will not actually help too much. Another opinion regarding the actual use of a trademark to mitigate numbers of registration in bad faith shows concerns on the criteria and determination of the term “use”. Because other jurisdictions in which “use” has been a determinant in good faith trademark registration have already encountered difficulties on clarity in practice. Hence, many are looking forward to the upcoming implementation measures to fully gain more faith in Chinese Trademark Law.

Global Connect Admin B.V. | Xuan Hao

China is playing an increasingly important role on the world stage. It has grown into the second-largest economy in the world and a major player in the field of technology. The Ministry of Foreign Affairs of The Netherlands released a publication in this month May 2019 where it demonstrates the Dutch foreign policies towards China.

In the publication, it recognizes that China is one of the key trading and investment partners to The Netherlands. China’s rapidly-growing market and investments offer Dutch companies and institutions many opportunities, and the Dutch government can open its door in that regard. However, this publication reckons that China “is not a market economy […] founded on the rule of law”, therefore the Dutch government wishes to address unfair trading practices and strive for more balance and more reciprocity in its trade relations with China. When it comes to certain key technologies and critical raw materials, as the publication states, The Netherlands does not want to be dependent on China.

©Photo by Ian on Unsplash

This publication expresses its concerns regarding China’s military defence expenditure which is lower than that of the United States but nevertheless is almost equal to that of the EU Member States collectively. It states that China’s pursuit of its strategic goals could impact Dutch national security, but the risks posed by China will be manageable.

These concerns remind us of the previous event where KPN, a huge Dutch telecommunication company declared in last month that it intended to co-operate with Chinese company Huawei for the 5G construction in the Netherlands. This has incurred some criticisms from the western countries including the United States, being particularly concerned with the national security. Under the pressure, KPN has reassured that the work for critical core of 5G construction  would be co-operated with other western companies.

Although not specifically mentioned, the publication released by the Dutch Ministry of Foreign Affairs seems to target the recent challenges and opportunities brought by the Chinese company Huawei who recently has received a great deal of economic sanction from the United States. Compared to the US approach, The Netherlands is more looking for a fair balance to come to a win-win solution.

For the publication original, please visit:

https://www.government.nl/documents/policy-notes/2019/05/15/china-strategy-the-netherlands–china-a-new-balance

Yichuan Qiu and Xuan Hao | Global Connect Admin B.V.

Corporate Governance Code in a country usually is a non-binding soft law, but it is still very important to every entrepreneur and investor because it entails the emphasis of business values in a country and business certainty that follows. This short article will briefly introduce some highlights of the corporate governance codes in China, Germany, and Netherlands.

China

China started with its contemporary corporate governance code as of 2001 and recently upgraded it in July 2018 in convergence to international standards due to more market accessibility presented to global investors. The newest governance code provides for encouragement of board diversity and establishment of Environment, Social and Governance requirements (ESG). The code also emphasized the importance and promotion of audit committee functions. Cash dividends distribution to shareholders is encouraged. Last but not least, a ‘Chinese Characteristic’ is in place in form of required establishment of a Party organization in companies to ensure political adherence.

Encouraging board diversity is designed to partly overcome the shortcoming of the uncertain independency of board members. Because the older version revealed a risk of lacking independent board majority. The ESG is set to promote green and society-friendly companies, which can be interpreted as going closer to the triple P bottom line: People, Planet, Profit. The main components of the ESG are requirements on information disclosure, evaluation and rate, and investment guidance. Enhancement on audit committee functions is one of the solutions to prevent and to fight against financial fraud. More cash dividends distribution to shareholders is highly recommended than other forms of dividends payment such as stocks. This move is to go further with shareholder protection, especially smaller shareholders, as the older version has shown insufficient protection on minority shareholders. Implementing the required Party organization within a company looks unique in the Chinese corporate governance code because no other codes have such a special government involvement.

Germany

Nowadays, many Chinese businessmen speak English. The knowledge on German corporate governance should not be underestimated because corporate governance in German looks quite different from the English-based disciplines. Having the distinction and some key points in one’s knowledge will help to predict business certainty. The current code is the 2017 version, and some notable updates and key points are presented below.

In the past years, German companies had a big deviation on the board structure suggested by the governance code which recommended two-tier structure consisted of a supervisory board and a management board. The compliance rate to this recommendation was barely 58% after the code introduced in 2002 with difficulties on supervisory board composition and management board compensation. In general, Germany adopts the principle of ‘comply or explain’ whereas reasonably explainable deviations are acceptable. But the current compliance on board structure suggestion reached 94% by the end of 2017. This change reflects a custom that many listed German companies are family-owned without the necessity of having two boards and the value that people take it very seriously about compliance even for soft laws. This current two-tier board structure is nowadays more common than English countries in which one board is still popular.

Another distinction is the role of employees in decision-making. Labour or employee representatives in German companies are a part of the decision-making process. Feedback or requests are sent to the boards by the representatives to voice for the employees. At present, work councils representing the rights of employees are introduced in companies. Employees are able to nominate a member or two of the supervisory board to safeguard their rights and conditions.

Netherlands

For Chinese businesses that have already been established in Germany, expanding into the Netherlands looks convenient and easy. What could be helpful is some notes on the corporate governance in the Netherlands, in particular in contrast with the German version. Apart from that, Dutch governance code also has its originality.

The Dutch corporate governance code is not a hard law but with some significant influences for listed companies in the Netherlands. Netherlands adopts the same principle of ‘comply or explain’ in conformity to the requirements contained in the code as Germany does. The two-tier board structure in Dutch public companies is quite common because the origin of two-tier board was dated back in 17^th centuries in the Netherlands itself. Even in smaller companies, a (quasi-) two-tier board structure is observed. The latest Dutch corporate governance code was updated in 2018. There is a notable shift of emphasis onto the long-term value creation of a listed company and stronger risk management. For instance, the long-term value creation should be realized by vesting more responsibility and involvement of the supervisory board in company remuneration policy. Such changes according to the new code should also be properly disclosed in their annual reports.

Importance of Corporate Governance Code

Why is the corporate governance code important to everyone? The first reason is that a governance code helps with the organization and management of a company, which will greatly contribute to the operations and development of a business. The second reason is to improve on the weakest link in a process, which is the human factors. The third reason is to bring up the level of trust of the public and foreign investors and trustworthiness of the company information. In other words, prevention of fraud is part of the purpose to develop a governance code national-wide and suggest listed company to adhere to it. The fourth reason is the reflection of national customs, cultures and values in the governance code that enables global investors to glimpse into the business atmosphere of a country in general. It is worthy of attention that the corporate governance code in a country often is applicable to listed companies only. Hence any plan to interact or join a private business in the above countries is suggested to follow local cultural values and industrial regulations.

Global Connect Admin | Xuan Hao