Understanding Chinese Abnormal Business Operations
What: A Chinese company receives an abnormal business operations status when it fails to report basic registration, operational, financial, or location information to the State Administration of Industry and Commerce (SAIC), Mainland China’s primary business registration agency.
Why: An abnormal business operations status may raise red flags about issues with Chinese company’s financial status, its management team, or its ability to deliver its goods and services to customers, clients, or business partners.
The phrase “abnormal business operations” remains important for any company conducting due diligence in preparation for entering into a relationship with a Chinese company. China’s primary registration bureau, the State Administration of Industry and Commerce (SAIC, soon to be merged with the State Administration for Market Regulation, or SAMR), applies the “abnormal” (企业经营异常) status to the registration records of a company it has determined is conducting atypical business activities, delinquent in its reporting duties, experiencing financial difficulties, or is poorly managed.
The term originated in 2014 when the SAIC published its Interim Procedures of Business Abnormal Operation Directory Management, serving as a catalyst for Chinese companies to remain current with their annual returns, registration status, and other reporting details.
Abnormal Business Operations: Types
The SAIC can issue an abnormal business operations status to a company for four primary reasons:
Failure to submit an annual return on time
Failure to disclose other information on time
Hiding facts or falsifying records
Failure to respond to contact requests or an inability to be reached
Failure to submit an annual return on time: As we’ve discussed in our coverage of the Chinese annual return, all Chinese companies are required to submit this report detailing its business performance to the government. Companies have until June 30 of the following fiscal year (January 1-December 31) to file their annual return. Failure to submit an annual return represents the most common reason a company will receive an abnormal business operations status.
Failure to disclose other information on time: In addition to their annual return, Chinese companies are required to disclose and report a wide variety of changes that can occur as part of normal business operations known as business registration changes. Changes in shareholders, transfers, registered capital contributions, address, and change of business scope all must be reported to the government. Failure to do so on time results in an abnormal business operations status.
Hiding facts or falsifying records: Companies that willingly and knowingly hide facts or falsify records also can receive an abnormal business operations status. The most common example would be if a company reports false information about its financial performance.
Failure to respond to contact requests or an inability to be reached: The SAIC routinely verifies that companies are operating from the location or locations from which they are officially registered with the SAIC. Should a company fail to respond to requests from the SAIC, or if the SAIC cannot reach a company after several attempts, these circumstances also can earn a company an abnormal business operations status.
Abnormal Business Operations: Consequences
As with all due diligence activities, understanding if a Chinese company has been placed in an abnormal business operations status remains paramount as part of your set of considerations about engaging in business with it. More than reputation damage, multiple or prolonged stays on the abnormal business operations list could indicate larger problems with their business. Basic reporting remains a foundational requirement for businesses of all types. A failure or inability to meet basic reporting requirements could indicate that the company is experiencing financial difficulties, has issues with its management structure, or is experiencing setbacks with its manufacturing processes or operations.
Abnormal Business Operations: Removal
A Chinese company can apply to the SAIC to be removed from the abnormal business operations category. The SAIC will review the request to ensure that the mitigating factors have been addressed and successfully resolved, and then will remove the designation. Note: even if a company has the abnormal business operations designation removed, it will still remain as part of its permanent record and is disclosed to the public.
Abnormal Business Operations: Identification
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