Risk exposure in the notification-commitment mechanism for the registration of market entities

wWith the advancement of the market economy, the notification-commitment mechanism for the registration of market entities emerged. This article delves into a recent case of fraudulent business exchange registration to scrutinize the mechanism, identifying its inherent flaws and risks and identifying key remedial solutions.

Overview of the case

Beijing-based company A specializes in Internet data services under the umbrella of a state-owned company.

Using the company’s good reputation for criminal purposes, the suspect, Zhao, forged resolutions of the shareholders’ meeting and the board of directors, while reporting the loss of the corporate seal and business license, to successfully and fraudulently change the company’s registration information. company A in the Market. Haidian District Regulation Office.

This allowed him to modify the information recorded on the legal representative, registered office, board members, supervisors and managers of company A, replacing these personnel with members of his own criminal group.

The authors retrieved the registration file of Company A and checked it with the staff, only to find that all the resolutions of the shareholders’ meeting and the board of directors necessary for the change of registration were affixed with forged shareholder seals, and unauthorized signatures or false shareholders. directors

In response, the perpetrators helped Company A to file a criminal case against counterfeiting its seal, prompting the Criminal Investigation Detachment of the Xicheng Branch of the Beijing Municipal Public Security Bureau to launch an investigation into the case.

An application to cancel the registration of fraudulent exchanges has also been submitted to the Haidian District Market Regulation Office.

Later, the authors learned from Haidian’s office that the materials submitted for the change of registration of Company A were not stamped with the seal of Company A and did not include an original or a duplicate of its business license.

Seeking an explanation, Haidian’s office replied that in order to simplify the registration process of market entities, a company can apply for a change of registration when it reports the loss of its corporate seal and business license.

In this case, Zhao and his accomplices took advantage of the policy loophole, managing to complete an exchange registration for Company A simply with forged shareholder seals and directors’ signatures, without any connection to Company A or authorization from Company A.

As a result of Zhao’s fraudulent change, the official seal and business license of Company A were invalidated, while the legal representative and board members were replaced by unrelated persons. Meanwhile, the suspect, Zhao, was able to exploit the new registration information and forge company seals to issue numerous board resolutions and company documents for illegal activities.

Communication with the Haidian District Market Supervision Administration revealed that the revocation of this registration change could take several months to a year.

Not only did Company A suffer significant financial losses in this case; it remains uncertain whether Zhao and his team took advantage of the fraudulent registration to commit more serious crimes, such as illegal collection of public funds and fraud.

It also exposes substantial risks to the notification-engagement mechanism for the registration of market entities.

Policy gaps and risks

This case exposes the gaps and risks of the notification and commitment mechanism for the registration of market entities in practice. Now is the time to re-examine the mechanism and assess the need for revision.

First, the mechanism’s biggest problem is its inability to predict and control credit risks. Registration of market entities depends on their credible commitment, rather than oversight by the registration authority. Given the current imperfections of China’s social credit system, it is likely that some offenders will use policy loopholes for fraudulent registration change.

Second, the registration authority adopts the examination of procedures, which makes it difficult to quickly detect false submissions and fraudulent acts. In the absence of a background check, criminals can easily use loopholes in the policy to provide false material for illegal purposes. The integrity of market players is seriously undermined by such regulatory loopholes that are easily exploited by law breakers.

Furthermore, when key roles such as legal representatives and directors are illegally changed, the company is likely to experience operational difficulties and chaotic management. That undoubtedly contradicts the political demands aimed at protecting and promoting the development of small and medium-sized private companies.

In practice, the process for victimized companies to defend their rights against illegal changes is also complex and lengthy, which makes it difficult to mitigate losses immediately.

This leads to a distorted situation where a mature business can easily be ruined by criminals at very little cost.

Response to risk

Once illegal changes to your company’s registration information are detected, the victim company should take action without delay.

You should immediately contact the company registration department to explain the situation in detail and request the cancellation of the fraudulent registration. In addition, the company can file an administrative lawsuit in court to seek a ruling that overturns the registration department’s approval of the changes.

In addition, if there are illegal activities, such as forging company seals, the company should report the case to the police so that they can file criminal charges and protect their legal rights.

Key to take

The notification and commitment mechanism for the registration of market entities has boosted the market economy. However, their inherent flaws also pose significant risks to businesses.

To address these challenges, the relevant authorities must take these issues seriously and implement fundamental fixes in the mechanism. At the same time, companies must take proactive measures to safeguard their development, contributing to a fair, transparent and orderly market economy.

Xu Rui is a partner and Wang Wenchao is an associate at Starrise Law Firm.

Starrise Law Firm
30 Beixingqiao Toutiao Alley
Dongcheng District
Beijing 100007, China
Telephone: +86 10 6401 1566
Email: xurui@xinglailaw.com
wangwenchao@xinglailaw.com
www.xinglai.com