China: A Plausible Administrative Effort To Constrain The Discretionary Power: A Quick Peek Of The State Council's Guidelines On Regulating Administrative Fines

On February 28, 2024, the State Council of China held a press conference to release and officially interpret the newly issued Guidelines on Further Regulating and Supervising the Formulation and Enforcement of Administrative Fines (the "Guidelines"). The Guidelines are the first of their kind issued by the State Council to address the discretionary power exercised in the formulation and enforcement of administrative fines. Prior to the issuance of the Guidelines, the State Council abolished and adjusted 33 types of administrative fines in November last year. The Guidelines are seen as a direct response to the problems identified in the aforementioned process.

Overview of the Administrative Fines Mechanism

According to the Law on Administrative Punishments as amended in 2021 (the "2021 Punishments Law"), the administrative fines can be imposed by both the central governmental agencies and the local governmental agencies, but are subject to different limitations under different legal basis:

In general, the administrative fines imposed by the law and the administrative regulations do not provide many details for enforcement. Agency rules and the local regulations and rules usually do not fill such a gap. Such a fact makes the discretion of the grassroots enforcement agency decisive in determining the administrative fines for specific cases. Inconsistency in professionalism and sophistication of different local enforcement agencies causes inconsistent determination of administrative fines on the same or similar cases in the same and different regions. The amount of the administrative fines has become a wild guess for the businesses when dealing with the enforcement situations and, most of the time, the businesses were at the mercy of the enforcement agencies.

The Guidelines

The Guidelines are the first independent administrative attempt made by the State Council to eliminate the inconsistency in enforcing administrative fines, and to improve the transparency and predictability of enforcing administrative fines. As a solution to the problem, the Guidelines focus on scientific formulation, standard enforcement practice and effective supervision in administrative fine enforcement.

Scientific Formulation

• When the law and the administrative regulations do not provide for administrative fines as a punishment measure for a particular violation, the administrative rules or the local legislative or administrative documents should not add administrative fines as a punishment measure.
• When a lower-level legislative or administrative regulation or rules provides for enforcement details to implement the general provision in the law or the superior legislative or administrative regulations or rules:
• • Enforcement details must be applicable to only the exact violation defined by the superior legislative or administrative regulations and rules, and must be within the amount specified therein;
  • Administrative fines should not be used as a punishment measure if other alternative punitive measures are sufficient, or the administrative fines cannot effectively prevent or deter the violation;
  • In setting the amount of the administrative fines,
  • • There must be a specific amount or methods of calculation;
    • Except for violations against critical issues, such as the safety of people's life and health or financial security, the upper end of the range for the administrative fines must not exceed 10 times of the lower end;
    • The amount set for violations of a similar nature in different areas must be comparable;
  • Existing administrative fines must be reviewed every five years for abolition or adjustment in full accordance with the requirements of the 2021 Punishments Law;
  • When the State Council decides to abolish a certain type of administrative fine provided for in certain administrative regulations and rules, such a decision must be implemented immediately from the date of the decision; when the State Council decides to amend the existing provisions on administrative fines in the administrative regulations and rules, the relevant government agencies must amend the relevant regulations and rules to reflect such amendments within 60 days from the date of the decision, which period may be extended to not more than 90 days in all circumstances.

Standard Enforcement Practice

• Without good reason, enforcement agencies should not (1) impose the administrative fines at the upper end of the statutory range, (2) lower the applicability threshold for the administrative fines, and (3) expand the scope of the violations that is subject to the administrative fines. In addition, the enforcement agencies are prohibited from (1) collecting administrative fines for their own or local interests, and (2) imposing administrative fines for violations that are beyond the statute of limitations for administrative punishments;
• Enforcement agencies are encouraged to establish lists of violations (1) for which administrative fines may be waived or reduced, (2) for which administrative fines may be reduced, (3) for which administrative fines may be set at the lower or the higher end of the statutory range;
• Enforcement agencies in nearby areas are encouraged to establish standard criteria for determining the administrative fines for the same or similar violations;
• Enforcement agencies that impose administrative fines are also responsible for corrective education to prevent future violations. Where applicable, the enforcement agencies should consider collection over an extended period of time period or in installments;
• Regarding electronic surveillance devices for enforcement purpose,
• • All local governments at the township level and above must identify and remove all electronic surveillance devices for enforcement purposes that are unlawful, unauthorized, and unnecessary and report the status to their respective superior governments. They should also report all newly installed devices to their superior governments on annual basis; and
  • When installing such devices, the governments must (1) conduct a legal and technical review to ensure that the surveillance location, interval distance and number of the devices are reasonable and necessary for enforcement, (2) conspicuously display the devices, and (3) provide advance public notice of the installation. It is prohibited to install such devices solely for the purpose of increasing administrative fines without a reasonable need for enforcement. Superior governments must conduct audits to review devices that collect an unusually high volume of violations or result in an unusually high amount of administrative fines.

Effective Supervision

• Enforcement agencies should ensure that the purpose of the administrative fines is achieved, which is to deter and prevent violations. Enforcement agencies and officials who impose administrative fines without corrective efforts should be held accountable and disciplined;
• Administrative fines should be collected in a timely manner and deposited into the national treasury; and
• Superior administrative agencies and the judicial agencies should enhance the annual reporting and auditing requirements to timely identify and correct improper punishment of administrative fines.

Trends in Enforcement

(1) Relaxing Punishments for Some Types of Violations.

The 2021 Punishments Law provides that the enforcement agencies may choose not to impose administrative penalty on entities or individuals who commit violation for the first time, but timely correct the violation with no or only minor harmful consequences. The 2021 Punishments Law also provides that entities and individuals who can prove that they have no intention to commit the violation may be exempted from administrative penalties unless otherwise provided in other laws and regulations.

For example, the Regulation on the Supervision and Administration of Medical Devices provides that the sellers and users of the medical device who have fulfilled the statutory duties in purchasing and inspecting the medical devices may be exempted from administrative penalties.

Since 2021, local authorities have published their respective exemption lists for minor violations. At the end of 2023, the Administration of Market Regulation of Shanghai consolidated all the previous lists of violations that may be subject to reduced penalties or exemptions and issued an implementation rule.

The trend is expected to continue under the Guidelines.

(2) Escalated Punishments for Some Other Types of Violations

According to the 2021 Punishments Law, where an illegal act is not discovered within two (2) years after its commission (in case of a continuing violation, the time period begins to run from the last act), the regulatory authority will not impose an administrative penalty. However, such a statute limitation will be extended to five (5) years if the violation is related to people's health or financial security and has caused harmful consequences.

The message from the press conference for the Guidelines indicates that people should expect that the law enforcement activities in the field of labor safety, health and well-being, and product quality are expected to be more intensive in the future.

Takeaways for Businesses

1. The Guidelines represent a good intention to bring transparency and predictability to the enforcement practice of administrative fines. As it is the first of its kinds issued by the State Council, companies should closely monitor its implementation to understand its actual effect and practical limitations, if any.
2. Although the Guidelines aim to create an optimistic expectation about the enforcement of administrative fines, it also emphasizes that (1) administrative fines should be paid on time, (2) administrative responsibilities should be enforced at the individual level, and (3) administrative fines for certain types of violations will be increased rather than relaxed. Therefore, companies may want to have a rigorous mechanism in place to monitor high-risk businesses, the timely payment of the administrative fines and the protection of potentially responsible executives.
3. As a general recommendation, all companies may wish to review their existing compliance SOPs (1) to enable the ability to effectively communicate the potential new defenses available under the Guidelines when dealing with actual enforcement, (2) to maintain proper records of the evidence for those potential new defenses to support the aforesaid communication, (3) to strengthen processes in businesses that may qualify for exemption or reduced administrative fines, and, most importantly, (4) to involve capable legal counsels at the outset of an administrative investigation case so as to allow for overall planning at an earlier stage to take advantage of all the available defenses under the Guidelines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.