After a recent report by Muddy Waters Research called NQ Mobile “A 'Massive Fraud' Worth $0,” the Chinese target fought back, saying Muddy Waters’ accusations were out of the question.

NQ Mobile reportedly has brought a civil lawsuit against Muddy Waters in China. Can it also ask China prosecutors to file a criminal case under the “crime of damaging another person’s business credit or commodity reputation” (the “Crime of Damaging Business Credit”) against Muddy Waters, its reporter behind the short-selling report, or the executives of the U.S.-based publication?

A critical element of China's Crime of Damaging Business Credit is the “fabrication and spreading of stories.”  Article 221 of the Criminal Law says, “Whoever fabricates stories and spreads them to damage another person's business credit or commodity reputation, if heavy losses are caused to the person, or if there are other serious circumstances, shall be sentenced to fixed-term imprisonment of not more than two years or criminal detention and shall also, or shall only, be fined.”

There's a "safe zone" in Article 8 of the Criminal Law which could protect Muddy Waters. It provides that,

This Law may be applicable to any foreigner who commits a crime outside the territory and territorial waters and space of the People's Republic of China against the State of the People's Republic of China or against any of its citizens, if for that crime this Law prescribes a minimum punishment of fixed-term imprisonment of not less than three years; however, this does not apply to a crime that is not punishable according to the laws of the place where it is committed (emphasis added). 

The maximum imprisonment for the Crime of Damaging Business Credit is two years or less than three years. So the "safe zone" prescribed in Article 8 of China’s Criminal Law probably applies to this case. In addition, lack of any criminal action against Muddy Waters in the United States probably indicates it didn't violate any federal or state criminal laws of the U.S. Therefore it seems safe to say Muddy Waters falls within the safe zone as provided by Article 8 of the Criminal Law.

NQ Mobile, however, could argue that the safe zone of Article 8 shouldn't protect Muddy Waters because NQ Mobile is a corporation and not an individual, and the safe zone protection specifically mentions offenses against "citizens" of China, which implies individuals and not corporate entities.

In another case that arose in late October, Chinese reporter Chen Yongzhou was detained for committing the Crime of Damaging Business Credit under Article 221 of the Criminal Law of China.

In that case, the “victim” was Changsha-based Zoomlion Heavy Industry Science and Technology.

Chen was detained, found guilty and eventually confessed to accepting bribes for fabricating stories, despite a public outcry over his detention.

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* The article was originally published at http://www.fcpablog.com/blog/2013/11/19/could-muddy-waters-face-charges-under-chinas-criminal-law.html

 ** Licensed in the PRC and the New York State of the U.S., Henry Chen, the author, is a Shanghai-based partner at MWE China Law Offices in stratetic alliance with McDermott Will and Emery.

Henry has extensive experience representing enterprises in administrative and criminal investigations of alleged commercial bribery cases;  providing counsel for the investigation of employee misconducts; helping clients conduct pre-merger due diligence investigations and post-merger integrations; providing training and seminars in Chinese and English to the employees of MNCs regarding anti-corruption and bribery pitfalls; providing FCPA investigations and auditing for the presence of American companies in China and for companies listed in the U.S.; helping companies update and strengthen their internal anti-corruption compliance programs and controls and tailoring them to the unique features of Asian markets.

Henry’s research about FCPA enforcement and Chinese anti-bribery and -corruption law has been published or quoted in leading publications, including the Bloomberg Asia Pacific Law Report, Wall Street Journal, China Law & Practice and ALB.  Henry is also the host of Linkedin groups: "Compliance in China” and “Anti-Corruption Compliance Asia.”

Henry is available at henrychen@mwechinalaw.com