Employee dishonesty, such as conflicts of interest and embezzlement, is a ubiquitous business risk in China. Consider the case of Huawei, which took action against 72 different employees for dishonesty in 2025.[1] In this article, we will provide you with the tools you need to stop employee dishonesty. With the right techniques, you will have the right to fire them when even early warning signs occur, and if late, use clawbacks to recover funds, in some cases, have them criminally prosecuted.

Contents

• Use Disciplinary Actions
• Make Proprietary Claims
• Unfair Competition Claims
• Pursuing Criminal Liability
• Risk Management Best Practices

Use Disciplinary Actions

Employers may take disciplinary actions against employee dishonesty, including termination when you can prove material losses are caused. If well written, disciplinary provisions and a clear definition for “material loss” in the company policy can help justify disciplinary actions even without such proof.

China Employment Contracts Act § 39(c) provides an employer may discharge an employee whose dishonesty causes material losses to the employer. This provides a clear legal basis for employers to address employee dishonesty. However, the employer bears the burden of proving that the employee’s dishonesty was the direct cause. Employers may define what constitutes “material loss” in company policy, and courts usually accept such definitions if clear and reasonable. Conversely, if the threshold amount is set too low, courts may disregard it for being unduly strict. If the company policy does not provide for criteria, courts typically consider these factors:

• Decisions reached in similar cases
• Totality of the circumstances
• Objective economic risks inherent in the employer’s business
• Employer’s financial capacity
• Employee’s role and their salary

Make Proprietary Claims

With adequate documentation, employers may recover any unlawful gains executives obtained through their position, and the resulting losses.

The legislative intent of the proprietary claims rule is to prevent waste of corporate assets, usurpation of corporate opportunities, and employee competition. It provides clear legal grounds for the company to recover such unlawful gains. China Corporate law imposes statutory duties of loyalty and care on executives, which means prioritizing the company’s interests while at work and they must not use their positions for personal gain or to harm the company. If an executive exploits their position for personal gain, the proprietary claim rule entitles the company to such gains. The damages are calculated based on either the actual economic gains the executive obtained through dishonesty or the financial losses the company suffered as a result. However, challenges often arise in how to reasonably calculate the exact amount of the losses or unlawful gains.

Proprietary claims require sufficient evidence. To make a claim, you must provide records of fund flows, transaction contracts, and evidence demonstrating the causal relationship between the dishonesty and the losses incurred. The recovery amount calculation methods also differ depending on the type of dishonesty. For events involving misappropriation, high-interest borrowing, or gift loans, the claim typically includes both the principal and interest losses, and the interest may be calculated based on the bank lending rate or loan prime rate for the same period.

Self-dealing claims are for the amount transacted. Non-compete violations under Chinese law include the employee’s compensation and benefits, equity, stock, and other property obtained from the competitor, which are easy to quantify and show. In. Executive dishonesty claims require showing there was no shareholder approval and they acted for their own or others’ benefit, exploit their position to secure business opportunities, or engage in business activities similar to the company’s. These kinds of claims are hard to prove, so consider hiring a third-party firm, such as an accountancy firm, to show it with an audit. If not quantifiable, the court will make a determination in view of industry profit margins, average profits, and the company’s historical financial data.

Finding the right firm at cost-effective rates in China can be difficult. If you need help here, consider getting in touch with CBL to draw on our network of affordable, qualified local experts.

Unfair Competition Claims

If the main remedies found in employee misconduct terminations and clawbacks are not feasible, you can try pursuing unfair competition claims.

Employees who collude with external parties to harm the company’s interests or misappropriate trade secrets may have engaged in unfair competition under the China Competition Act,[2] and may be held liable thereunder. Some things not specifically enumerated in the Act, may fall under the general definition in § 2 which provides, “any business activity that disrupts market integrity or harms other businesses and consumers in violation of the Act” is unfair competition. Courts typically apply § 2 only when necessary to distinguish unfair competition from lawful competitive conduct, out of caution to respect economic liberty.

When other laws, such as the China Civil Code, China Employment Contracts Act, China Companies Act, or sections addressing specific dishonesty within the China Competition Act (e.g., those in Chapter 2), are applicable, courts generally avoid using the general definition as a catch-all.[4][5] Specifically, China Competition Act § 2 is usually applied only when no law specifically governs the conduct in controversy, other businesses suffer losses as a result, and the conduct is unfair or blameworthy due to violating the principle of good faith and fair dealing.[2]

Pursuing Criminal Liability

Credible threat of criminal prosecution can be a strong defensive tactic. Severe employee dishonesty leading to criminal liability can result in possible imprisonment for years or even decades, along with the lifelong stigma of a criminal record. Law enforcement investigations can rapidly identify wrongdoing and recover losses. All of this deters potential embezzlers and other offenders.

Under § 271 of the China Criminal Law Act and its adjudication guidelines, an employee who exploits their position to steal company property commits employee theft if the amount stolen clears the low bar of 30,000 yuan (about $4,500).[3] Common types of employee theft include abuse of trust, where an employee directly misappropriates goods or cash under their control and falsifies shipping records or purpose of funds to conceal the theft. A second category involves contracts, such as falsifying contracts, creating dual contracts, or inflating purchase quantities or prices to misappropriate company funds.

However, proving employee theft requires clearing a high burden of proof. Judicial precedents show that the main challenge in prosecuting employee theft is establishing the employee’s intent to unlawfully convert company property. The fundamental issues include: whether the employee borrowed the property but intended to return it; or if the company owes them money and they took an equivalent amount without authorization, this lacks intent to convert, so is not theft.

Transferring funds to a personal account for everyday purchases without falsifying the purpose, may be charged as misappropriation and not theft. Under § 272 of the China Criminal Law and its adjudication guidelines, an employee who exploits their position to misappropriate company funds for personal use or lend them to others commits the crime of misappropriation of corporate funds if: the amount exceeds 50,000 yuan; and is either not returned within three months or is used for business activities; alternatively, if the misappropriated funds exceed 30,000 yuan and are used for illegal activities.[5]

The personal use and lending described above is an element of the crime, moreover, difficult to prove. The adjudication guidelines define this element as use of company funds for oneself, relatives, friends, or other individuals; using company funds in one’s own name for the benefit of another company; or using company funds in the company’s name without authorization for the benefit of oneself or another organization. However, even if an employee transfers funds to another company in the company’s name without authorization, the conduct does not constitute misappropriation if the employee did not seek personal gain. For example, if the funds did not ultimately flow into the employee’s or another individual’s account, or if the employee didn’t receive a kickback.

Risk Management Best Practices

Several strategies can be used to provide yourself with ammunition and capabilities to stop China employee dishonesty in its tracks. Below are the techniques commonly applied by sophisticated businesses in this market.

Develop company policies that clearly define prohibited conduct and penalties for conflicts of interest, trade secret misappropriation, and embezzlement. Employers may also include disciplinary provisions for employee dishonesty in company policies. For example, an employee handbook or other documents typically include provisions on conflicts of interest, confidentiality obligations, and non-competes; this can be enhanced with a list of prohibitions. Examples include selecting suppliers with whom they have a conflict of interest, establishing or controlling affiliates to carry on similar business, unauthorized disclosure of company trade secrets, and using one’s position for personal gain.

Communicate the policy to all employees through handbooks, disclosures, or training programs, so that requirements and penalties are understood. Enforce policies consistently following established procedures to avoid disputes and legal risks. Evaluate each case individually to determine whether the employee’s conduct violates policy and impose appropriate disciplinary action. For example, issue warnings or take other moderate disciplinary actions for minor conflicts of interest that have not resulted in material harm to the company, and terminate employees involved in embezzlement that causes material harm. As long as these requirements are established and communicated in advance, employers may terminate violators without needing to prove financial losses. Of course, the policy must meet the Chinese legal requirements. Contact CBL if you need help finding lawyer to ensure compliance.

Routinize documentation processes to prepare of potential disputes. Maintain transaction contracts, records of fund flows, and approval documents to ensure transparency and traceability in business operations. Create a periodic disclosure system for employees on high-risk positions involving supplier selection and clients to disclose potential conflicts of interest or transactions with affiliates. Follow the four-eyes principle or use collaborative review processes to monitor critical transactions and improve risk control. Initiate an internal investigation upon discovering possible violations, and secure relevant information such as transaction records, internal communications, and reports through lawful processes. Categorize investigation documents and organize the chain of evidence to support subsequent actions.

Egregious violations may be submitted to regulators or police. Where conditions permit, the facts and determinations of the conduct established during arbitration and civil litigation proceedings may lay the groundwork for future proceedings to prosecute implicated persons to the full extent of law. If an employee files for employment arbitration, the company may also defend on grounds of employee embezzlement and resulting financial loss to the company, and file counterclaims for damages.

Developing effective documentation is best handled by an attorney familiar with labor regulation in your local jurisdiction. In addition to being very comprehensive, your policy documents should be tailored to your business model to cover risks that would not otherwise be covered. Finding the expert at cost-effective rates in China can be difficult. If you need help here, consider getting in touch with CBL to draw on our network of affordable, qualified local experts.

FURTHER READING

Get more insights about Chinese employment law:

• Terminating Employees for Disciplinary Violations in China
• Deter China Employee IP Theft with Referral to PRC Prosecutors

FOOTNOTES

[1] 72 Huawei Employees Disciplined for Dishonest Conduct, (华为通报外包招聘舞弊 72名员工受处分), (Sina, Mar. 11, 2025), (in Mandarin)

[2] China Competition Act (中华人民共和国反不正当竞争法), (National People’s Congress, Jun. 27, 2025), (in Mandarin)

[3] China Criminal Law Act (中华人民共和国刑法), (National People’s Congress, Mar. 14, 1997), (in Mandarin)

[4] China Civil Code (中华人民共和国民法典), (Ministry of Justice, May 7, 2025), (in Mandarin)

[5] China Companies Act (中华人民共和国公司法), (National People’s Congress, Dec. 29, 2023), (in Mandarin)