Background

From 1 January 2015, investors in China may expect harsher liabilities for environmental non-compliance.

On 24 April 2014, the Standing Committee of China’s National People’s Congress (“NPC”) promulgated the first comprehensive amendment to the Environmental Protection Law (“Amendments”) since the law came into effect nearly 25 years ago. The Amendments consolidate many existing environmental rules and increase the economic and legal liabilities of companies and their management for violation of environmental laws and regulations. The Amendments also call for companies and the government to disclose key environmental protection information.

The Amendments will take effect on 1 January 2015.

Key Changes

Toughened Monetary Penalties

The new monetary penalties for polluters could be huge, at least compared to the existing rules. According to the Amendments, a company that has been fined for illegally discharging pollutants and ordered by a competent authority to make corrections may be penalized with cumulative daily fines if corrections are not made. Currently, the majority of fines for environmental non-compliance are on a one-off basis and the amount of a single fine is usually insufficient to act as a deterrent against causing environmental damage.

The Amendments also clarify that local governments may expand, as they deem appropriate, the types of environmental non-compliance for which cumulative daily fines will apply. In fact, a number of local governments have already started imposing cumulative daily fines for activities other than “illegally discharging pollutants”. In Shenzhen, for example, a company may be subject to cumulative daily fines for not conducting an environmental impact assessment before the actual construction of a project.

Increased Personal Liabilities

The Amendments also expand the scope of circumstances in which individuals can face administrative detention due to the environmental non-compliance of a company.

Specifically, “management personnel directly in charge” and “directly responsible personnel” of a company may face up to 15-days administrative detention if the company:

i.          fails to conduct an environmental impact assessment on a project and refuses to cease construction of the project after it has been ordered to do so;

ii.         fails to obtain discharge permits and refuses to cease discharging pollutants after it has been ordered to do so;

iii.         illegally discharges pollutants through concealed drains, seepage wells or pits, high pressure perfusion, or through faking monitoring data, abnormally operating facilities or other means in an attempt to evade supervision; or

iv.        produces or uses prohibited pesticides and refuses to make corrections after it has been ordered to do so.

These new provisions lower the threshold of personal liability. Currently, for most corporate environmental non-compliance, individuals will only be liable for monetary fines. Administrative detention, on the other hand, is only currently applicable to those illegally discharging, dumping or disposing of hazardous substances. For criminal prosecution, existing laws also set a high threshold by providing that the illegal discharging, dumping or disposal must result in “serious” environmental pollution.

The Amendments do not define the term “management personnel directly in charge” or “directly responsible personnel”. In practice, however, “management personnel directly in charge” typically refers to senior executives who are directly in charge of the relevant environmental protection matters (e.g., manager of environmental, health and safety (“EHS Manager”) or equivalent). “Directly responsible personnel” usually refers to those carrying out the actual work under the leadership, authorization, organization or supervision of senior executives (e.g., an individual directly responsible for obtaining discharge permits under the supervision of an EHS Manager).

Public-Interest Litigation

The Amendments set out the criteria for non-profit organizations to qualify to initiate public-interest litigation against polluting enterprises. According to the Amendments, to qualify, a non-profit organization must: (i) be registered with the Chinese government at city-level or higher; (ii) be specialized in environmental protection activities for more than five consecutive years; and (iii) have no record of violating law.

Public-interest litigation was officially provided for in the amendment to China’s Civil Procedure Law (“CPL”) in 2012. However, the amended CPL only permits organizations prescribed by or qualified under NPC-promulgated laws to bring legal suits to court against activities that potentially undermine social and public interests, including activities that could result in environmental pollution. However, to date, the courts have been unable to accept public-interest cases under the amended CPL because there were no qualified public-interest organizations. With the Amendments now providing criteria for public-interest organizations to be qualified, public-interest litigation may begin to play a bigger role in environmental enforcement in China.

Transparency and Information Disclosure

The Amendments recognize the right of the general public to environmentally-related information, and impose various disclosure obligations on both companies and the government.

In particular, companies listed by the government as “key polluters” are required to disclose to the general public, among other things, the names of major pollutants, discharging methods, discharging density and quantity and the operation status of environmental protection facilities.

The government, on the other hand, must disclose, the full-text of environmental impact assessment reports of construction projects, except for those considered as state or commercial secrets. The government is also required to collect and disclose information of companies that violate environmental laws and regulations.

Conclusion

The Amendments demonstrate the continuing effort and determination of the Chinese government to fight against pollution and environmental deterioration. For investors doing business in China, this also means that the economic and legal risks of their China operations being penalized or challenged due to environmental non-compliance will significantly increase. Individual employees will also have greater risks.

We recommend that clients, with the help of their professional advisors, thoroughly review and assess their existing environmental compliance programs and operating practices for compliance with the Amendments.

Companies are advised to keep a close eye on how the environmental protection authority enforces these new rules in practice.

We also recommend that clients seek tailor-made training for individual employees (senior management in particular) with a view to preventing those individuals from causing and being held personally liable for any environmental non-compliance of the company.

* Karen Ip, a partner of Herbert Smith Freehills, is principally involved in private equity investment projects, merger and acquisition transactions and greenfield investments in the manufacturing, infrastructure and financial institution sectors. She also advises on regulatory issues in China.   Karen Is is available at karen.ip@hsf.com