Overview of key risks in China for investors and companies dong business in China. Describing internal control plans for China operations.

1. Implementing an Internal Control
Plan for your Chinese Operations
Iohann LE FRAPPER Olivier MARC
Assistant General Counsel Partner
Alcatel Euro China Capital
C5 Conference – China Trade – London 18/09/2006

2. Why ICP in China matters ?
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China very important to your company as :
Source of products and/or
Market for products
Therefore, local operation
But cultural differences :
Fast evolving regulatory environment
“Public officials”
Outsider/insider view.
Consequently :
Risk of fraud
Risk of image (inside/outside)
Risk of investment

3. What are the main and usual risks in China?
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•HR risk: staff turnover, leak of confidential information, conflict of
interests
•IP risk: product counterfeiting, theft or infringement of IPRs
•Financial & tax risks: credit-risk, unstable tax schemes
•Market & business risks: short product life cycle, low margin, unstructured
competition, dumping practices.
•Relationship risk: dealings with public officials (Communist Party,
administration’s staff, state-owned enterprise’s employees),
intermediaries and advisers

4. What are the main and usual risks in China?
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•Legal risks:
- fast changing environment,
- uneven enforcement of regulations
•Image risk:
- sustainable development,
- corporate social responsibility

5. Identify and customize ICP elements
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Address culture (corporate and other) issues :
Blend “Local” with “Foreign” view point and standards.
Understand environment :
Advice: - internal (quality management)
- external (legal, security, etc …)
Communist Party and various administrations
Various authority levels: central, provincial, municipality, city, etc.
Background checks (not one-off!)
Security of data
Family/friendship ties (and pressures/loyalties)
Business gifts

6. Identify and customize ICP elements (continued)
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Use ICP tools on an on-going basis
Training : do ; don’t (and why !)
Policies/processes: clear and consistent application
Assessment: individual/team/unit
Conflict of interests identified
Audits: regularity and follow-up on-site
Whistle blowing (and investigations)

7. Sample of Chop
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8. Page 8
Are you the ship’s captain ?
•Company’s seal : the chop(s)
•Joint Ventures
•Who are the key officers ?
•Legal representative :
•Confidentiality (discrete use of information)

9. CONCLUSION
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China is a big country !
Check (and check again !)

10. Contact Details
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Iohann Le Frapper Olivier Marc
Assistant General Counsel Partner
Alcatel Euro China Capital
54, rue La Boetie 3, avenue de l’Opéra
75008 Paris – France 75001 Paris – France
Tel: +33 (0)1 40 76 49 36 Tel: +33 (0)1 42 30 15 12
Fax: +33 (0)1 40 76 14 35 Fax: +33 (0) 42 30 15 13
GSM : +33 (0)6 30 34 43 34 olivier.marc@eurochina-capital.com
iohann.le_frapper@alcatel.com