By Jake Liddle

A company seal, or chop, is integral to the administration of a company and the key to legally authorize documentation in China. An electronic chop– the digital version of its physical counterpart– can be used for online transactions. However, electronic chops are susceptible to misuse, which can have severe financial and legal implications.

China released an updated version of the Electronic Signature Law in April 2015. The update clarifies and standardizes the legal validity of electronic signatures, including electronic chops. This article explores how to correctly deal with and avoid the misuse of electronic chops by employees, and how to maintain compliance with the updated Electronic Signature Law.

The Law

According to the updated law, an electronic chop is as legally binding as a real chop or handwritten signature if the electronic chop’s creation data is exclusively owned and controlled by the signatory at the time of signing. In addition, if any subsequent alteration to the electronic chop and any relevant data is made, it must is detectable. The law also stipulates that a signatory must properly keep and retain all electronic chop creation data, and if they become aware that the data has become compromised they must inform the relevant parties and stop using the electronic chop.

Unauthorized Use

Although an electronic chop generally functions the same way as an electronic signature, which relies on an encrypted digital signature as a verification method, in some cases, the electronic chop image can be lifted and subsequently circulated to unauthorized users. Often, the re-appropriation of an electronic chop is not done maliciously, but unauthorized use can have serious security implications. For example, an unauthorized employee may use the electronic chop when a supervisor is unavailable, an issue many businesses, especially those who sign contracts with external parties on a regular basis, face.

Use of electronic chops by unauthorized employees creates legal liabilities for the company because the disclosure of confidential electronic chop security data is a criminal offence. In most court cases involving misuse of electronic signatures, parties who make unauthorized disclosure are generally cited for improper storage methods or user misuse and are held responsible for any losses that occurred as a resule.

Risk Management

The law emphasizes proper management of electronic chop creation data– the encrypted data that accompanies the electronic chop– to maintain its security and validity. To do so, a company should designate personnel to be responsible for contract signing, develop management practices for properly tracking and logging the use of electronic chops, and ensure the employee handbook contains relevant provisions and disciplinary measures for their use. This is a key control point for guarding against and quickly identifying misappropriation and unauthorized use of an electronic chop.

Key Takeaways

An electronic chop’s legal validity is important because it is the means of confirming the identity of a document’s signatories. It proves the signatory understands and recognizes the content of the contract and acts as evidence of the intention between signing parties. In addition, if an electronic chop is misused, disputes can be lengthy and have severe repercussions. It is therefore of paramount importance for a company to ensure that its electronic chop is not abused by unauthorized employees by implementing a sound chop management system.

 

About the Author
This article was originally published on Asia Briefing Ltd., a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

Posted by Jake Liddle