Supreme People's Procuratorate: Adhere to the main theme of "strictness" and emphasize the prosecution of securities fraud throughout the entire chain.

On August 16, the Supreme People's Procuratorate issued the "Answer to Questions Regarding Handling Cases of Financial Falsification Crimes." The "Answer" adheres to a zero-tolerance requirement, maintains a strict tone, emphasizes the prosecution of listed companies, controlling shareholders, actual controllers, directors, supervisors, senior management personnel, intermediaries providing false certification documents for financial falsification, and other individuals and entities cooperating in financial falsification crimes. It clarifies the standards for determining "particularly severe circumstances" and fully utilizes the deterrent effect of increasing statutory penalties under the Eleventh Amendment to the Criminal Law. It also specifies that in cases where individuals commit fraudulently issuing securities crimes and later commit violations or non-disclosure of important information during the continuous operation phase, as well as those who bribe financial regulatory authorities or personnel for fraudulently issuing securities and also commit bribery crimes, multiple offenses will be punished accordingly. The "Answer" emphasizes the importance of accurate interpretation and application of filing and prosecution standards. It clarifies the criteria for determining cases with multiple offenses, the calculation standards and methods for overstating or understating assets, operating income, profits, and the involvement of significant non-disclosure of major issues in financial reports, among other issues. Additionally, it specifies that individuals and entities that engage in fraudulent financial reporting and false balance sheet practices should be held criminally responsible. Overall, the "Answer" aims to punish financial falsification crimes and thereby uphold the health of capital markets. It follows the guidance set out by the Third Plenum of the Twentieth Party Congress and seeks to improve the institutional foundations of market economies by rigorously prosecuting crimes such as fraudulent issuance of securities and improper disclosure of information.Company Law, Securities Law, Regulations on Information Disclosure Management of Listed Companies, Regulations on Management of Major Asset Restructuring of Listed Companies, Regulations on Management of Acquisition of Listed Companies, Regulatory Guidelines for Listed Companies, Regulations on Information Disclosure Management of Non-Listed Public Companies, etc., shall be determined in accordance with the law. After the issuance of bonds, the issuer has a regular disclosure obligation and an ad hoc disclosure obligation during the bond term, and should make determinations in accordance with the Securities Law, Measures for the Administration of Corporate Bond Issuance and Trading, Regulations on the Administration of Enterprise Bonds, Measures for the Administration of Information Disclosure of Corporate Credit Bonds, Measures for the Administration of Convertible Corporate Bonds, and other laws and regulations. (3) After overseas companies issue depositary receipts and list on domestic exchanges, the overseas issuer of the underlying securities has regular disclosure and ad hoc disclosure obligations regarding the overseas company's operations, financial situation, and major events, and should make determinations in accordance with the Securities Law, Measures for the Administration of Depositary Receipt Issuance and Trading (Trial), Regulations on the supervision of domestic and foreign securities exchanges' connectivity for depositary receipt business, Measures for the Implementation of Continuously Supervising Stocks or Depositary Receipts Issued by Innovative Enterprises Listed Domestically (Trial), and other related laws and regulations.1. Disclosure obligations regarding specific matters. The disclosure obligations for specific matters such as major litigation, arbitration, guarantees, related party transactions, etc., can be determined in accordance with the listing rules and specific matter disclosure guidelines formulated by securities exchanges. (II) Issue of multiple crimes 1. Issue of the number of crimes related to securities fraud and violation of rules on disclosure or non-disclosure of material information. If a company or enterprise uses the same false financial data to commit both securities fraud and violations of disclosure or non-disclosure of material information, it constitutes two separate illegal acts, each constituting a crime. Therefore, criminal liability should be pursued for both securities fraud and violation of disclosure or non-disclosure of material information. 2. Issue of the number of crimes related to securities fraud and bribery. According to the provisions of the "Provisions on the Jurisdictional Standards for Filing and Prosecution of Criminal Cases by Public Security Organs (II)", if a company commits securities fraud and bribes units or individuals responsible for financial supervision, criminal proceedings should be initiated. In cases where bribery constitutes a separate crime, multiple crimes should be prosecuted. (III) Order of application of multiple filing and prosecutorial standards, and whether all criteria must be fully clarified 1. The multiple standards set out in the filing and prosecutorial standards are used simultaneously, with a requirement for accurate selection but no prioritization. If one of the standards is met, criminal proceedings should be initiated. The bottom-line provision should be cautiously applied, but it should be construed as having a parallel application with other provisions of the same clause. 2. Due to the interrelated nature of financial fraud crimes, it is often the case that the criminal behavior meets several filing standards. Therefore, it is necessary to fully clarify all standards legally and logically to fully evaluate the crime's circumstances and consequences. (IV) How to determine "direct economic losses" The filing and prosecutorial standards specify that if the cumulative direct economic losses to investors (shareholders, creditors, or others) exceed 1 million RMB, criminal proceedings should be initiated. In cases where there have been effective judgments in civil cases related to false statements, the determination of direct economic losses can be based on the civil judgment. If it is difficult to accurately calculate the amount of direct economic losses, a specialized institution should be commissioned to provide a calculation report for review and determination. (V) How to understand the criteria for upgrading to "particularly serious circumstances" The conviction and sentencing criteria outlined in the filing and prosecutorial standards can be broadly categorized into three types: amount, proportion, and other circumstances. For the amount category, the "five times rule" commonly used in judicial practice can be relied upon to determine the standard for upgrading penalties. When it comes to the proportion and other circumstances as stated in the filing and prosecutorial standards, given the significant differences in the scale and size of different fraud entities, the penalties should be determined in accordance with the principle of proportionality and combined with common sense and logic to explore and accumulate experience on a case-by-case basis. (VI) Issue of supporting securities dispute representative litigation Given the serious harm caused by financial fraud crimes, it is essential to pursue criminal, administrative, and civil responsibility. Prosecutorial agencies should support securities dispute representative litigation and provide assistance when requested by relevant parties. (VII) How to handle cases where companies or enterprises violate regulations by including cross-period confirmation in their accounts but the transactions involved are genuine When companies or enterprises violate the regulations on basic principles of enterprise accounting, impairment of capital, and recognition of revenue by engaging in activities like cross-period revenue recognition or cost deferral that should be recognized in the current period, it constitutes financial fraud and a criminal offense. In cases where the transactions are genuine, they can be considered as mitigating circumstances in sentencing. (VIII) Issue of hierarchical classification of personnel involved in the case Given the complexity and extensive reach of financial fraud crimes involving many levels of hierarchy and personnel within companies and enterprises, it is necessary to adopt a hierarchical classification approach. 1. For controlling shareholders, actual controllers, directors, supervisors, general managers, deputy general managers, financial managers, and board secretaries who commit or organize financial fraud, or knowingly sign or confirm false information disclosure documents, criminal liability should be pursued under the securities fraud or violation of disclosure laws. Whether these individuals acted knowingly should be determined based on their control, decision-making authority, and specific management responsibilities in the company or enterprise. 2. For middle-level managers or general employees within the company or enterprise who bear partial organizational responsibility or play a significant role in financial fraud, criminal liability should be pursued in accordance with securities fraud or violation of disclosure laws. For individuals who were assigned or ordered by superiors to participate in criminal activities, and whose role was minor, they may not be suitable for direct criminal responsibility. 3. For individuals or entities engaged in contract fraud, invoice fraud, tax evasion, or other crimes to assist companies or enterprises in committing financial fraud, each case should be prosecuted according to the severity of the offense. Individuals or entities providing comprehensive financial fraud services to companies or enterprises should be strictly punished. II. Issues regarding the crime of securities fraud (IX) What bonds are covered by this crime This crime covers bonds issued by companies or enterprises through legal procedures, with a specified period for repayment of principal and interest. These bonds include those issued in the stock exchange market as well as the interbank market. In cases involving new or uncommon types of bonds, opinions from the competent authorities should be sought to determine whether they meet the basic criteria as per the law and regulations. (X) How to calculate the proportions of overstatement or understatement of assets, operating income, and profits as specified in the second to fourth criteria of the criminal filing and prosecutorial standards, whether based on the total for several accounting years disclosed in the issuing document or calculated separately for each accounting year Different types of stock or bond issuances have different requirements regarding financial indicators for enterprises.It can be divided into the requirements for financial indicators for each of the past few years, the requirements for the average financial indicators for the past few years, and the requirements for the financial indicators for the most recent period. The issuance document should make comprehensive disclosure of the corresponding financial indicators. According to the provisions of the second to fourth items of the standards for prosecuting cases, the numerator of the proportion calculation is "artificially increased or decreased assets, operating income, profit", and the denominator is "total assets, total operating income, total profit for the period". For the falsified disclosure in the issuance document, if it involves the financial indicators for each of the past few years, the numerator and denominator should be calculated based on the data for different accounting years; if it involves the average financial indicators for the past few years, the numerator and denominator should be calculated based on the total amounts disclosed for the most recent few accounting years; if it involves the financial indicators for the most recent period or end of period, the numerator and denominator should be calculated based on the data for the most recent accounting year.(11) The fifth item of the standards for initiating prosecution for the crime involves concealing or fabricating significant litigation, arbitration, guarantees, related party transactions, or other significant matters, where the amount involved in a single matter or the cumulative amount over twelve consecutive months reaches more than 50% of the net assets disclosed in the latest period. Should different types of significant matters be calculated separately or collectively? Which period does the disclosure of the latest net assets refer to? This item uses the ratio of the amount of significant matters disclosed in violation to net assets as the standard for initiating prosecution. The calculation of the numerator and denominator should be noted: 1. Numerator: The amount of the significant matters concealed or fabricated should be calculated using the "combine first, calculate later" method. "Combine first" means that the amounts involved in significant litigation, guarantees, arbitration, related party transactions, and other significant matters should be combined, while "calculate later" means that the amounts involved in any significant matters not disclosed in accordance with the regulations for twelve consecutive months should be accumulated, potentially spanning different accounting periods. 2. Denominator: The net assets disclosed in the latest period, with "latest period" referring to the period of the issuance document disclosure. The information required to be disclosed during the issuance and listing stage is intended to help investors understand the operating conditions of the company or enterprise at the time of issuance, providing a reference for investment decisions. The impact of significant matters on investor decisions should also reflect their effect on the production and operation of the enterprise at the time of issuance. Therefore, the severity of the offense should be determined by the proportion of the amount involved in significant matters to the net assets disclosed in the issuance period. III. Issues regarding the crimes of unauthorized disclosure or non-disclosure of important information (12) How should we understand the criteria for initiating prosecution in the fifth item of the standards for the crime, which states that "the amount involved in significant litigation, arbitration, guarantees, related party transactions, or other significant matters not disclosed in accordance with regulations or the cumulative amount of such matters over twelve consecutive months exceeds 50% of the net assets disclosed in the latest period"? Should calculations be made separately based on temporary disclosure obligations and regular disclosure obligations? According to Articles 79, 80, and 81 of the Securities Law, companies or enterprises with information disclosure obligations must disclose significant litigation, arbitration, guarantees, related party transactions, and other significant matters through both interim and regular reports. Therefore, the proportions of violations related to the disclosure of significant matters in interim reports and regular reports should be calculated separately. If either proportion meets the standard set in this item, prosecution should be initiated. 1. Calculation of the proportion of violations related to the disclosure of significant matters in interim reports. Companies or enterprises should promptly disclose significant matters that may have a significant impact on securities trading prices. The calculation method for violations related to this interim disclosure obligation is as follows: The numerator is calculated using the "combine first, calculate later" method, where the amounts involved in significant litigation, guarantees, arbitration, related party transactions, and other significant matters not disclosed as required should be combined. The denominator is the net assets disclosed in the last annual report before the final significant matter not disclosed in accordance with the regulations over the last consecutive 12 months. It is important to note that for the numerator, if a single significant matter does not meet the temporary disclosure standard but the cumulative amount of multiple significant matters reaches the temporary disclosure standard (according to the business rules of the stock exchange, significant matters such as litigation, arbitration, guarantees, related party transactions, etc., should be cumulatively disclosed to a certain amount for temporary disclosure), the amount to be disclosed for that time should be included in the numerator. As for the denominator, since the business rules of the stock exchange determine whether significant matters should be disclosed temporarily based on the proportion of the most recent audited amount, the denominator should be taken from the annual report that has been audited, not the interim report. 2. Calculation of the proportion of violations related to the disclosure of significant matters in regular reports. Regular disclosure documents should provide a complete disclosure of significant matters such as litigation, arbitration, guarantees, related party transactions, among others, for the current period. The calculation method for violations related to this regular disclosure obligation is as follows: The numerator is the combined amount of significant matters not disclosed as required in the current period disclosure document, while the denominator is the net assets disclosed in the current period disclosure document. (13) Issues related to the statute of limitations for prosecution of this crime 1. For cases where fabricated financial data is followed by false off-balance sheet activities, the false off-balance sheet activities are considered part of the financial fraud, and the statute of limitations for prosecution is calculated from the end of the false off-balance sheet activities. 2. In cases where companies or enterprises fail to disclose important information in violation of regulations, and the illegal act continues, the end of the continuous status marks the end of the act, and the statute of limitations for prosecution is calculated from that date. IV. Issues related to the conviction of crimes committed by intermediary organizations and their personnel (14) Issues related to conviction If intermediary organizations and their personnel intentionally provide false documentary evidence and the circumstances are severe, they will be held criminally liable for providing false documentary evidence, and if they are also involved in financial fraud activities, they will be deemed accomplices to financial fraud and punished according to the more severe provisions. If intermediary organizations and their personnel exhibit serious irresponsibility in their duties, issue significant false certifications, and cause serious consequences, they will be held criminally liable for issuing false certifications in accordance with the law. (15) Issues related to the determination of serious irresponsibility When handling criminal cases involving intermediary organizations and their personnel, determining serious irresponsibility is a common issue. Serious irresponsibility generally refers to non-compliance or negligence in fulfilling responsibilities, depending on the nature of the intermediary organization and different judgment standards. Take audit personnel of accounting firms as an example, the current criteria for recognition mainly include the following situations: failure to perform necessary audit procedures according to auditing standards; failure to detect issues that a normal auditor would detect; directly signing and confirming audit conclusions without conducting audit work. Actual case handling should not be confined to past recognition criteria, and specific recognition standards should maintain necessary openness to counter increasingly hidden criminal methods and enhance the anti-investigation capabilities of individuals involved. At the same time, it should be noted that serious irresponsibility often hides beneficial relationships or acts of benefit transfer, for which thorough investigations and comprehensive crackdowns should be maintained. This article is excerpted from the "Supreme People's Procuratorate Official Website," GMTEight editor: Xu Wenqiang.