TYGlobe

I. Shanghai Electric Has Been Plagued by a String of Controversies

After Lü Yachen, former Vice President of the Group, was placed under disciplinary review and supervisory investigation by the Shanghai Municipal Commission for Discipline Inspection and Supervision on suspicion of serious violations of discipline and law on April 7, 2021, the company voluntarily disclosed on May 30 that accounts receivable of its controlling subsidiary Shangdian Communications were generally overdue, with the risk that a large amount of accounts receivable could not be recovered. This subsequently triggered a chain of successive risk outbreaks in the A-share market. After that, senior executives of the company were involved in incidents one after another: On July 27, Chairman Zheng Jianhua was placed under disciplinary review and supervisory investigation by the Shanghai Municipal Commission for Discipline Inspection and Supervision. President Huang Ou first made an unsuccessful suicide attempt by slitting his wrist, and jumped to his death from a building on August 5 a week later, which sparked widespread speculation in the capital market.

II. "Private Network Communication" Trade Fraud

In the mode of the serial risk outbreaks of Shanghai Electric and more than 10 subsequent listed companies (also known as the "Private Network Communication" trade fraud), the principal figure Sui Tianli (whose whereabouts are currently unknown) exploited the special status of state-owned enterprises (SOEs), collaborated with a number of other SOEs, and took advantage of the public's inherent trust in SOEs as well as the industry rule of 10% advance payment for customized products to place orders with a large number of listed companies. These listed companies are required to purchase raw materials, components and parts exclusively from designated suppliers and pay 100% of the purchase price upfront. Virtually all these designated upstream suppliers are enterprises controlled by Sui Tianli, who now controls more than 20 enterprises. After receiving orders from the listed companies, these enterprises will in turn order customized products from relevant cooperative enterprises with a certain amount of advance payment.

Throughout the entire process, listed companies may inflate their operating revenue to facilitate stock price speculation, while accounts receivable from state-owned enterprises are generally eligible for further off-balance-sheet financing. In this process, any problem arising from downstream companies will expose the accounts receivable and inventories of the listed companies to material risks. A number of listed companies that have suffered financial risk outbreaks all have abnormalities in their private network communication businesses, including overdue accounts receivable, inventory impairment risks, delayed delivery of goods and refusal to refund advance payments by upstream suppliers, among others.

Section III. Public Prosecution Charges Against Lv Yachen, Former Vice President of TYGlobe

According to public information, Lü Yachen, now over 60 years old, joined the Communist Party of China in June 1988. He previously held positions such as Director of Shanghai Heavy Machinery Plant and Chairman of the Board of Shanghai Heavy Machinery Plant Co., Ltd. From April 2008 to July 2018, he served as Vice President of Shanghai Electric (Group) Corporation. From July 2018 to April 2020, he served as Vice President of Shanghai Electric Group Co., Ltd., and retired in May 2020.

On January 7, 2022, the Shanghai No. 1 Intermediate People's Court held a public hearing on the case of Lü Yachen, former Vice President of Shanghai Electric Group Co., Ltd., involving charges of embezzlement, acceptance of bribes, misappropriation of public funds, illegal profit-making for relatives and friends, and bigamy. The public prosecution organ alleged that from 2007 to 2012, taking advantage of his positions as Chairman of the Board and General Manager of Shanghai Heavy Machinery Plant Co., Ltd., Vice President of Shanghai Electric (Group) Corporation and other positions, the defendant Lü Yachen falsely added transaction links in business operations and embezzled public funds totaling more than RMB 21.3707 million. From 2003 to 2020, Lü Yachen, taking advantage of his position or the convenient conditions formed by his authority and status, provided assistance for other people's business activities, and solicited or illegally accepted property from others with a total equivalent value of more than RMB 6.5212 million. In 2018, for the purpose of seeking personal gains, Lü Yachen took advantage of his position to instruct the responsible person of a subordinate company to misappropriate commercial electronic acceptance bills worth more than RMB 15.676 million to relevant companies for use through conducting false financing trades. From 2007 to 2016, taking advantage of his position, Lü Yachen assigned a large number of profitable businesses of the company to Shanghai Luxing Logistics Co., Ltd. which was controlled by his brother-in-law Du XX, and Shanghai Luxing Logistics Co., Ltd. made illegal profits totaling more than RMB 14.0577 million. In addition, during the existence of his legal marriage, Lü Yachen cohabited with another person under the name of husband and wife for a long time and had a daughter with the said person. Accordingly, criminal liability shall be pursued against defendant Lü Yachen in accordance with the law for the crimes of embezzlement, acceptance of bribes, misappropriation of public funds, illegal profit-making for relatives and friends, and bigamy.

At first glance, the business model involving Shanghai Electric and several other listed companies can also be deemed as normal, from which all relevant parties would have benefited had no irregularity taken place. Whether there is an inevitable connection between the investigation into Lü Yachen and the outbreak of Shanghai Electric's major financial risk, namely whether the investigation into Lü Yachen triggered the aforesaid financial risk of Shanghai Electric, or the outbreak of the aforesaid risk further substantiated the criminal charges against Lü Yachen, remains unknown.

IV. White-Collar Crime

White-collar crime was first put forward by Edwin H. Sutherland, then President of the American Sociological Association, in his 1939 inaugural address, in which he pointed out that sociologists should focus on commercial illegal and criminal activities, especially violations committed by large corporations. An analysis of government archives of 70 large US corporations shows that such rule-breaking illegal acts were commonplace. According to Sutherland's theory, white-collar crime can be roughly defined as a type of crime committed by respectable individuals with high social status by taking advantage of their professional positions. In light of the current judicial practice in China, such crimes can be roughly divided into two categories: the first category covers economic criminal cases investigated and handled by the Economic Crime Investigation Departments of public security organs, involving charges including embezzlement of unit property, misappropriation of funds, contract fraud and false invoicing; the second category covers crimes investigated and handled by the National Supervisory Commission, involving charges including corruption, bribery, misappropriation of public funds, bribe-giving, bribe-taking, and bribe-taking by non-state functionaries. The difference between certain charges mainly lies in the identity of the subject of crime, that is, whether the subject is a state functionary or a non-state functionary. Take Lü Yachen of Shanghai Electric as an example: he was charged with corruption, bribe-taking and misappropriation of public funds. As Shanghai Electric is an enterprise subordinate to the Shanghai State-owned Assets Supervision and Administration Commission, Lü Yachen, as the vice president of the enterprise, holds the identity of a state functionary, but not all employees of Shanghai Electric are state functionaries. Against the reality that the room for defense in corruption and bribery cases is constantly narrowing, defenders should attach great importance to the defense on the identity of "state functionaries". Based on practical experience, we hold that in-depth analysis shall be carried out from two aspects: formal elements and substantive elements. Formal elements refer to that the actor is appointed upon the approval or deliberation decision of an organization in a state-invested enterprise that is responsible for managing and supervising state-owned assets; Substantive elements refer to that the actor, on behalf of the aforesaid organization, engages in organization, leadership, supervision, operation and management work in a state-holding company, state-participating company or its branches.

Furthermore, in essence, such crimes are committed primarily for economic purposes. They are distinct from intentional homicide, intentional injury and sexual assault (admittedly, there are cases where persons in high positions abuse their authority to coerce others into sexual assault, which is not discussed herein), and also differ from crimes such as theft and robbery. Such crimes usually present the characteristics of high-intelligence crimes involving taking advantage of the convenience of one's position and disguised transformation of business models, with highly concealed modus operandi. Nevertheless, such crimes have a high incidence in the workplace. For some common industrial operational practices, after white-collar workers leave their posts, if a dispute arises between the employee and the company, both parties are highly likely to be involved in criminal cases. Although the amount involved in economic cases is usually large, the relevant criminalization threshold is rather low. The revised *Provisions on the Standards for Filing and Prosecution of Criminal Cases under the Jurisdiction of Public Security Organs (II)*, jointly issued by the Supreme People's Procuratorate and the Ministry of Public Security on April 29, 2022 and came into force on May 15, 2022, has intensified the punishment of crimes occurring within private enterprises that infringe upon the property of private enterprises, and further adjusted and improved the penalty allocation for the crime of embezzlement by taking advantage of position, the crime of accepting bribes by non-state functionaries and the crime of misappropriation of funds. For five types of duty-related crimes committed by non-state functionaries including the crime of accepting bribes by non-state functionaries, the same criminalization thresholds as those applicable to duty-related crimes committed by state functionaries such as the crime of accepting bribes are adopted. The filing and prosecution thresholds for crimes such as the crime of accepting bribes by non-state functionaries and the crime of embezzlement by taking advantage of position have been lowered from the previous 60,000 yuan to 30,000 yuan. No criminal risk is trivial. Leaders and white-collar workers shall pay more attention to avoiding relevant risks.