The digital transformation of Chinese retail companies in a post-COVID-19 era – and challenges and risks for compliance

The state of play

As the pandemic shifted consumer behavior in 2020, the whole industry has had to evolve to respond to the radical change in the market environment. Today, most companies are focused on upgrading e-commerce, live-streaming activities, and engaging Key Opinion Leaders (KOLs) to promote and advertise their products.

For retail companies, the risks often play out in the emerging business model. Working remotely and involving third parties can generate new compliance concerns in terms of commercial bribery, data processing and protection, properly enforcing internal controls, and conducting investigations.

Echoing this sentiment, PVH Corp. (PVH), a leading global retailer and apparel company that owns such brands as Van Heusen, Tommy Hilfiger, and Calvin Klein, considers the management of data and data privacy to be a critical component of its internal compliance programs. Before the pandemic, PVH combined its data privacy and compliance functions into one department – a step it took ahead of most other companies in the industry.

This article addresses enforcement efforts, emerging market trends, and considerations related to internal controls and investigations relevant for global companies like PVH that have significantly accelerated their digital efforts in light of COVID-19. Looking ahead, Chinese retailers should prioritize creating and enforcing strong compliance programs, both to ensure business growth and to support the United Nations’ initiative to “Recover with Integrity.”

Chinese and U.S. enforcement to tackle corruption in e-commerce activities

With the outbreak of COVID-19, most multinational companies have taken various online measures to ensure the resumption of production, and avoid economic collapse. Rapid launch processes, however, can create potential opportunities for corruption. In China, based on the publicly available court judgments in the first half of 2020, it is clear that corruption is a significant risk within the supply chain and throughout marketing activities.

Under Chinese law, commercial bribery is categorized as one of the means of unfair competition. Based on the typical cases released by local market administration authorities in major cities, commercial bribery and e-commerce have always been the focus of enforcements. And the penalties are increasing.

Anonymous whistleblowers are usually the ones to expose cases of commercial bribery, and the whistleblower regime is encouraged and protected by most companies. Indeed, the Chinese government is keen to improve this regime by offering strong supervision. Notably, the leading Chinese e-commerce companies have each established internal anti-corruption departments or whistleblower systems to curb commercial bribery. Furthermore, and as an example to others, JD.com has publicly announced the results of an internal investigation on a real-name basis, to demonstrate its resolution on combating corruption and normalizing the related supervision. The third-party activities with these companies are also restrained by integrity requirements.

Against this backdrop, Chinese retailers should be aware that in the United States, the Department of Justice’s (DOJ) “China Initiative” reflects a strategic priority of countering Chinese criminal acts. The China Initiative was established in November 2018, and is led by DOJ’s National Security Division, which is responsible for countering nation-state threats to the United States. Investigations and prosecutions remain active across multiple Chinese industries. In addition, DOJ and the Securities and Exchange Commission (SEC) utilize the U.S. Foreign Corrupt Practices Act (FCPA) as a law enforcement tool to combat foreign actors engaged in bribery outside the United States, including Chinese retailers. The FCPA prohibits companies with a nexus to the United States from bribing foreign officials for government contracts and other business. In light of these U.S. priorities, Chinese retailers should be ever more vigilant in enforcing internal controls.

Emerging marketing trend – KOL economy in China

As KOLs usually have a breathtaking number of followers on social media in China, retail companies are using their popularity to draw customers’ attention and increase interaction through live streaming. Influencer collaboration is now an indispensable part of retailer marketing strategies with Chinese customers.

However, compliance challenges emerge with the expansion of the KOL economy. Some fake KOLs flaunt huge followings but have very little engagement, and fabricate sales and marketing data to raise their service prices. Other influencers pay for engagement and services that sell automated “likes” or comments, or form alliances in which social media users work together to increase one another’s engagement. Therefore, it is vital for companies to conduct comprehensive background checks on proposed KOLs to judge the authenticity of their marketing power. At the same time, vigilant retail companies will need to monitor the benefits transferred among employees and KOLs, to ensure that staff are not obtaining kickbacks by paying service fees beyond normal market prices.

Internal controls and investigations under the pandemic

It is clear that insufficient internal controls can lead to great financial losses, massive lay-offs, or even total shutdown for the battered multinational companies under the pandemic. For the retail industry, the pandemic has sparked an evolution in thinking about internal controls and investigations.

First, the frequency of risk assessment should be increased to adapt to the rapidly changing market environment. Every few weeks, finding different ways to ensure survival or secure cash flow becomes a “new normal.” As such, it is critical to identify and mitigate at any given time all new or ongoing high-risk activities.

Second, e-commerce supply chains have been impacted due to regional lockdowns and transport disruption, meaning vendors and service providers could be in varying degrees of difficulty, unbeknown to the retailer. Taking effective control and ensuring that vendors are held accountable is important. Retail companies should work to understand what problems the vendors have, to support them or to consider finding alternative suppliers in the event of market disruption.

Third, working remotely requires higher standards of data processing and protection, as highlighted by “Recover with Integrity”. Whether retail companies use their own platforms or third-party vendors to collect personal data for orders and memberships, they must ensure that the platform is secure and, if using a vendor, that the vendor has been appropriately screened for any legal or reputational red flags. When using third-party vendors, retailers need appropriate contractual provisions to ensure vendors: maintain a secure processing environment; will comply with all applicable privacy laws regarding the collection, storage and maintenance of any personal data, etc; and will promptly notify the company if a breach involving its data has occurred. Retail companies must also make sure the data will be stored securely.

Fourth, onsite investigations have changed significantly – interviewing via video conference, rather than in person, has become the undesirable but unavoidable new norm. Pre-COVID-19, companies would instruct in-house or outside counsel to be in the room with a witness. But now, when outside counsel cannot be physically present, there are still steps companies can take to protect attorney-client privilege under the U.S. law. In-house or outside counsel should participate in interviews virtually, and other representatives in the room or online should take careful notes to protect the company from any allegations of misrepresentation – particularly with respect to legal privilege.

Working remotely certainly adds challenges to running investigations. But, as with any challenge, it allows for opportunities too. Retailers are learning to use technology in creative and efficient ways, and during this time, teams also can review and update policies, procedures, and training materials on internal controls. Model retailers also train their employees on appropriate cyber-hygiene practices, to keep company information secure while they’re working remotely.

Looking ahead

Despite early signs of normalcy in Asia, we are not beyond the COVID-19 era just yet. The challenges caused by the pandemic continue, and the new market trends in the Chinese retailer industry – including increased e-commerce activity and the rise of KOL marketing – show no signs of abating. The new U.S. administration is unlikely to radically change the course of law enforcement priorities – especially given that DOJ’s efforts related to China began before the Trump administration.

As such, Chinese retailers should use the lessons learned from a changed retail environment, and continue to prioritize strong compliance programs, internal controls, and (virtual) investigations. As the UN Secretary General described, “[a]s an age-old plague takes on new forms, let us combat it with new heights of resolve.”

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