The Era of Substantive Piercing in Trust-Related Transactions: Building Compliance Systems for Central and State-Owned Enterprises

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（Source: Yongyi Research）

Introduction

Under the top-level strategic main line of “strengthening regulation, preventing risks, and promoting development,” related-party transaction supervision—serving as a key tool to prevent the transfer of interests and safeguard market fairness—has shown a clear trend of both strengthening institutional supply and law enforcement efforts.

The trust industry is the first to be hit in this round of regulatory upgrades. Practice shows that many risk events in the trust sector are often directly or indirectly linked to improper related-party transactions, exposing deep-seated deficiencies in internal governance at some trust companies. Especially for trust companies with a central SOE (state-owned enterprise) or SOE background, they have a large number of related parties, complex equity structures, and diverse business scenarios. In addition, they must comply with the “dual-track” requirements of both financial regulation and state-owned assets regulation, making compliance management of related-party transactions an even more severe challenge than for other trust companies.

The newly revised 《Administrative Measures for Trust Companies》 in 2025 deletes the prior-reporting provisions for related-party transactions. It aligns effectively with the 《Administrative Measures for Related-Party Transactions of Banking and Insurance Institutions》 (hereinafter referred to as the “No. 1 Order”), indicating a paradigm shift in related-party transaction supervision for trust companies from “approval-based control” to “self-governance + post-facto accountability.” This institutional change not only grants trust companies greater room for autonomy, but also sets higher requirements for their compliance management framework.

This article attempts to systematically analyze the core issues and pathways to resolve related-party transaction problems for trust companies with central SOE or SOE backgrounds, from three dimensions: the evolution of regulatory systems, industry practical challenges, and the advancement of compliance management.

I. Evolution of the regulatory system: A paradigm leap from “general prohibition” to “fine-grained compliance”

(1) Three paradigm shifts in regulatory logic

Looking back at the development of related-party transaction supervision in China’s financial sector, three key paradigm shifts can be clearly observed:

First stage: the period of “general prohibition.” Early regulatory rules took a relatively rough approach of “generally prohibiting related-party transactions, with exceptions allowing approval,” focusing on formal determinations and paying attention to whether a transaction occurs rather than how it occurs. This model had certain institutional rationality in the early stages of trust industry development; however, as the complexity of trust business increased, its limitations became increasingly apparent.

Second stage: the period of systematic standardization. Marked by the issuance of the “No. 1 Order,” the regulatory framework achieved a qualitative leap from “formal compliance” to “substance-through” oversight. The “No. 1 Order” builds a complete regulatory closed loop covering related-party penetration identification, transaction classification management, internal controls across the entire process, and multi-layer information disclosure, reflecting the synchronous evolution of regulatory policy and market complexity.

Third stage: the deepening of responsibility. The newly revised 《Administrative Measures for Trust Companies》 in 2025 deletes the prior-reporting provisions for related-party transactions, a change of far-reaching significance. On the one hand, it achieves effective alignment with the “No. 1 Order,” unifying regulatory requirements for related-party transactions among the three types of asset management institutions. On the other hand, by canceling prior reporting, it further presses down the responsibility of management subjects onto the trust company itself, while also effectively saving regulatory resources.

(2) The institutional core and practical impact of the “No. 1 Order”

The institutional design of the “No. 1 Order” can be summarized as a “four-in-one” regulatory framework: the mechanism for related-party penetration identification, the mechanism for transaction classification management, the mechanism for internal control across the entire process, and the mechanism for multi-layer information disclosure. Among them, the penetration identification of related parties is the logical starting point of the entire system and also the most difficult segment in practical operations.

Of particular note is that in the 2025 revision, the “No. 1 Order” expands the natural person scope related to “directors, supervisors, and senior management (董监高)” to “close relatives.” This is a clear difference from the original scope of “spouse, parents, adult children, and brothers and sisters.” According to Article 1045 of the 《Civil Code》, “close relatives” include spouse, parents, children, brothers and sisters, grandparents, great-grandparents, grandchildren, and great-grandchildren. This means that the identification scope for related natural persons is significantly expanded, imposing higher requirements on related-party management work for central SOE and SOE trust companies.

From the overall logic of institutional evolution, the core regulatory demand of the current regulatory framework has shifted from “restricting related-party transactions from occurring” to “ensuring related-party transactions are fair and transparent.” This requires trust companies to move from passive response to proactive governance and to build related-party transaction management capabilities that align with regulatory requirements.

II. Industry practice landscape: Multi-dimensional perspectives on scale, structure, and risk

(1) Scale and structural characteristics of related-party transactions

Based on analysis of industry annual report data from 2020 to 2024, current related-party transactions of trust companies show clear characteristics of large scale, complex structure, and concentrated risk. Among the four types of related-party transactions in trust companies, “transactions between trust entrusted assets and related parties” holds the dominant position. According to statistics, the industry’s average balance at the end of 2024 is about RMB 33.5 billion (33.5B元), and its scale far exceeds the combined average balances of other types of related-party transactions at the end of that year.

From the perspective of ownership type, central SOE trust companies have the highest average amount for “transactions between trust assets,” while SOE trust companies have the highest average amount for “transactions between trust assets and related parties.” The reason is that the number of related parties for central SOE and SOE trust companies is far higher than for trust companies with private enterprise backgrounds. This is both an objective reflection of the equity structures of central SOE and SOE groups and implies that central SOE and SOE trust companies face greater pressure in managing related-party transactions.

(2) Trend analysis of regulatory penalties

Between 2018 and 2025, regulatory authorities issued related-party transaction-related penalty notices to 14 trust companies. After reviewing these cases, the author found two noteworthy features:

First, related-party transaction violations have a “co-occurring” nature. In 86% of the penalty cases, the violation of related-party transactions occurred alongside other compliance issues. This indicates that failure in related-party transaction management is often not an isolated incident, but a reflection of weak overall internal control systems at the trust companies. From a practical standpoint, this means trust companies should not view related-party transactions in isolation, but instead consider them within the overall framework of corporate governance and comprehensive risk management.

Second, related-party transaction violations have a “continuing” nature. Each year over the eight-year period, there were cases where companies were penalized for related-party transactions, showing that non-compliant related-party transactions have become an industry-wide management pain point. On one hand, it reflects deep-seated governance deficiencies in related-party transaction management at some trust companies. On the other hand, it also shows that as regulatory “penetration” efforts increase, previously hidden non-compliant behaviors are gradually being exposed.

III. “Five Hard Problems” in compliance management: Practical dilemmas for central SOE and SOE trust companies

Based on in-depth research into multiple central SOE and SOE trust companies, the Daoquet Financial Capital team summarizes the core challenges currently faced in related-party transaction compliance management as “five hard problems,” namely: difficulty in identification, difficulty in pricing, difficulty in business execution, difficulty in disclosure, and difficulty in submission. These “five hard problems” are intertwined with each other, forming systemic challenges for related-party transaction compliance management for central SOE and SOE trust companies.

(1) Difficulty in identification: related-party penetration identification and dynamic management

Accurate identification of related parties is the logical starting point for related-party transaction compliance management and also the most difficult part in practice. The challenges faced by central SOE and SOE trust companies in this area mainly manifest in the following aspects:

First, complexity of equity penetration. Central SOE and SOE trust companies often involve multi-level legal entities and situations such as cross-holdings and entrusted shareholding, making the tracing chain of the actual controller often extremely long. Especially within central SOE groups, the layers of embedded equity relationships make it extremely difficult to construct a complete profile of related parties.

Second, ambiguity in SPV recognition. Whether special-purpose vehicles (SPVs) set up for trust business constitute related parties has not yet established a unified judgment standard. In practice, trust plan investment project companies, intermediate-layer entities in channel businesses, and so on are often located in the “gray area” of related-party recognition. This issue is particularly prominent in business scenarios such as asset servicing trusts and asset securitization.

Third, lag in dynamic management. The list of related parties changes continuously due to equity changes, management turnover, business dealings, and other factors. However, at present, most trust companies’ list databases still rely on manual operations, have long update cycles, and cannot achieve real-time synchronization. Combined with the expansion of the aforementioned “close relatives” scope, the pressure for dynamic management further increases.

(2) Difficulty in pricing: practical difficulties in fair-value judgment

The fairness of pricing for related-party transactions is the core focus of regulatory review and also one of the biggest practical challenges faced by trust companies.

Non-standard assets lack an active public trading market, so fair value cannot be directly determined through market transaction prices. In addition, the industry currently lacks unified and operational valuation standards, causing valuation outcomes for the same type of assets to differ significantly among different institutions. Such differences not only make it difficult to truly reflect risks, but also result in “fair pricing” becoming, to a large extent, a matter of subjective judgment.

From the perspective of internal control, most central SOE and SOE trust companies have not yet established an end-to-end supervision mechanism for the pricing of related-party transactions. Internal audit often focuses on reviewing whether “procedures are compliant,” paying attention to whether the approval process is complete, but not enough attention is paid to whether the transaction pricing is “substantively fair.” In the author’s practical experience, in many cases, although approval materials for related-party transactions at trust companies are formally complete, the sufficiency and persuasiveness of the pricing basis often cannot withstand scrutiny.

(3) Difficulty in business execution: the tension between serving the primary responsibilities and regulatory rules

This is the most special and most troublesome issue faced by central SOE and SOE trust companies. Trust companies with a central SOE background are mostly part of enterprise groups operating in important industries and fields related to national security and the lifeblood of the national economy. Serving the primary responsibilities is the unification of their political responsibility and business mission.

However, the “No. 1 Order” provisions that funds used for related parties must originate from shareholders or related parties, in objective terms, restrict the ability and scope of central SOE trust companies to serve their primary responsibilities and serve the real economy. For example, a central SOE trust company may plan to raise social funds through trust products for infrastructure projects under the group, which both aligns with the national policy direction for infrastructure investment and helps achieve steady preservation and appreciation of investors’ assets. Yet it is constrained by the source-of-funds restriction.

The essence of this contradiction is that the original intent behind the current regulatory rules is to prevent shareholder self-dealing behavior in the form of “a提款机,” but under a “one-size-fits-all” application of the rules, reasonable related-party transactions that are beneficial to the real economy are also restricted. How to find a balance between risk prevention and promoting development is a common challenge facing both regulatory authorities and trust companies.

(4) Difficulty in disclosure: conflicts in standards under multiple reporting frameworks

The “No. 1 Order” requires that banking and insurance institutions disclose information on related-party transactions on the company website and disclose the overall situation of related-party transactions during the year in the company annual report. However, in practice, trust companies face a dilemma where the audit standards and regulatory standards are not fully aligned.

Specifically, accounting standards differ from the recognition standards under the “No. 1 Order” regarding the definition of related parties. During the company annual report and audit process, the accounting standards still apply. This leads to the possibility that the same trust company may need to apply two sets of standards in the same annual report, increasing disclosure complexity and the likelihood of errors. In addition, although most companies can obtain ongoing data through systems, when it comes to aggregating quarterly amounts, they still commonly rely on manual processing, resulting in low efficiency and a high risk of errors.

(5) Difficulty in submission: efficiency bottlenecks under multi-head regulation

In addition to submitting related-party transaction data to the National Financial Regulatory Administration, central SOE and SOE trust companies also need to report to entities such as the State-owned Assets Supervision and Administration Commission (SASAC). Different regulatory subjects overlap in reporting content, but the data format and statistical requirements differ. More troubling is that because different regulatory systems have differences in certain definitions and statistical scopes of related-party transactions, the same transaction may be recognized entirely differently under different regulatory interpretations, creating significant difficulties for trust companies’ data compilation and submission work.

These “dual-track” and even “multi-track” submission requirements not only increase compliance costs for trust companies, but also easily cause data inconsistencies due to differences in interpretation, which can then trigger regulatory questioning. The fundamental resolution of this issue relies on coordination and harmonization among different regulatory authorities.

IV. Advancing compliance management: Building a long-term mechanism for related-party transaction governance

In the face of the above systemic challenges, central SOE and SOE trust companies need to systematically推进 (推进) related-party transaction compliance management system construction from three levels: the governance framework, institutional mechanisms, and technology enablement.

(1) Optimization of the governance framework: from “compliance attainment” to “governance embedding”

According to survey data, at present, the industry has generally established an organizational management framework centered on a related-party transaction control committee under the board of directors in line with regulatory requirements. The lead department for related-party transaction management is highly concentrated in the legal compliance department (52.5%), followed by the risk management department and the office of the board of supervisors/board of directors and supervisory board.

The Daoquet Financial Capital business team believes that the optimization of the governance framework should go beyond the level of “compliance attainment” and truly embed related-party transaction management into the core processes of corporate governance. Specific recommendations include:

First, related-party transaction management should be positioned as a “top-leadership project.” The complexity and sensitivity of related-party transactions mean that their management cannot remain at the departmental level only; it should be coordinated and advanced by the company’s principal responsible person, with strategic-level attention. Trust companies should incorporate Party leadership into the corporate governance structure to ensure that related-party transaction management is effectively connected with the decision-making mechanisms of the Party committee (Party branch group).

Second, establish a coordinated mechanism for the “three lines of defense.” The business department serves as the first line of defense, responsible for the initial identification and reporting of related parties at the transaction level; the legal compliance department and risk management department serve as the second line of defense, responsible for the re-review and recognition of related parties, transaction review, and ongoing monitoring; the audit department serves as the third line of defense, responsible for independent assessment of the effectiveness of the related-party transaction management system. The three lines of defense should each perform their duties and link effectively.

Third, strengthen the substantive role of independent directors and external supervision. In related-party transaction decision-making, it should genuinely protect independent directors’ right to be informed and right to vote, preventing independent directors’ review from becoming a mere “formality.” At the same time, consideration may be given to introducing external professional institutions to provide independent opinions on the fairness of material related-party transactions.

(2) Deepening institutional mechanisms: focusing on breakthroughs in the “five hard problems”

To address the above “five hard problems,” the author proposes the following practical response strategies:

1. Solve “difficulty in identification”: build a multi-dimensional penetration identification system

Trust companies should establish a multi-dimensional penetration identification framework centered on equity relationships, supplemented by personnel relationships and business relationships. For equity penetration, it is recommended to set clear penetration tiers and tracing rules. For “gray area” issues such as SPVs, before regulatory implementing details are issued, it is recommended that trust companies proactively adopt more prudent identification standards—“be strict, not lax.” At the same time, a dynamic update mechanism for the related-party list should be established to shorten update cycles and gradually achieve real-time synchronization of related-party information.

2. Solve “difficulty in pricing”: build a fair-value demonstration/argumentation system

It is recommended that trust companies establish a multi-dimensional argumentation system for related-party transaction pricing, institutionalizing pricing methods such as the “comparable transaction method,” the “cost-plus method,” and the “independent quotation method.” For material related-party transactions, independent third-party valuation institutions should be introduced to issue fairness opinions. In addition, internal audit’s review focus should be expanded from “procedural compliance” to “substantively fair pricing,” and a normalized oversight mechanism should be established for both the pricing process and results.

3. Solve “difficulty in business execution”: explore compliant innovation paths

For the tension between serving primary responsibilities and regulatory rules, the author suggests responding from two levels. At the institutional level, trust companies should strengthen communication with regulatory authorities, fully demonstrate the reasonableness, necessity, and controllable risks of the relevant related-party transactions, and seek regulatory understanding and support. At the industry level, industry self-regulatory organizations should reflect industry demands to regulators and push for differentiated adjustments to regulatory rules. This will help prevent “提款机” behavior while preserving necessary space for reasonable related-party transactions.

4. Solve “difficulty in disclosure” and “difficulty in submission”: promote standardized alignment and process automation

At the standards level, it is recommended that industry self-regulatory organizations take the lead in promoting guidance on the linkage between accounting standards and regulatory standards, clarifying the differences in the definition of related parties between the two sets of standards and how to handle them, thereby reducing misunderstandings and deviations in real-world execution. At the process level, efforts should be accelerated to build automation for data submission. By connecting data through systems, implement “one-time collection, multi-standard generation” to reduce manual work and repeated tasks.

(3) Technology enablement: from “passive screening” to “proactive governance”

Research results show that currently most central SOE and SOE trust companies’ related-party transaction management still remains in a passive state of “manual screening and post-facto remediation.” Related-party lists are stored in risk control systems, transaction records are kept in core business systems, pricing information is scattered across financial systems, and approval workflows rely on OA systems—this “fragmented” information architecture seriously constrains the improvement of management effectiveness.

The Daoquet Financial Capital business team believes that technology enablement should become the core driving force for upgrading related-party transaction management. The core functions of a related-party transaction management system should focus on three areas:

First, data integration. Build a unified related-party transaction data platform to comprehensively integrate information such as related-party information, transaction data, approval records, and pricing basis, breaking down “data silos.”

Second, real-time control. Establish an intelligent full-process management mechanism covering pre-event prediction, in-process control, and post-event monitoring. The system should be able to automatically identify whether a business involves related-party transactions at the stage of initiating business; automatically verify compliance during the approval stage; and continuously monitor changes in risk indicators during the holding period.

Third, automated submission. Enable automatic generation of regulatory reports and one-click submission. Support flexible conversion of multi-standard data to improve submission efficiency and data accuracy. Worth noting is that the industry already has external professional institutions that have launched related-party transaction management systems, which provides important external support for trust companies’ technology enablement.

V. Optimization of the industry ecosystem: outlook on institutional supply and regulatory coordination

Overall improvement in the level of related-party transaction compliance management not only depends on the efforts of individual institutions, but also relies on optimization of the industry ecosystem and adaptation to the regulatory environment.

(1) Give full play to the leading role of industry self-regulatory organizations

It is recommended that industry self-regulatory organizations take the lead in formulating unified standards for related-party transaction management and business management guidelines, helping form an industry-best-practice case library. Through organizing experience exchanges and case sharing, promote the adoption of advanced management methods. On controversial issues such as related-party transaction pricing and SPV recognition, industry self-regulatory organizations can take the lead in forming industry consensus opinions to provide practical support for the formulation of regulatory implementing rules.

(2) Promote differentiated adaptation of regulatory rules

It is recommended that regulators, while holding the risk bottom line, explore implementing differentiated supervisory policies. For compliant related-party transactions that can both support serving the real economy and primary responsibilities while achieving preservation and appreciation of investors’ assets, reasonable policy space should be provided. For “提款机”-style shareholder self-dealing related-party transactions, strict prevention and severe penalties should be applied. At the same time, integrate different regulatory authorities’ data submission systems and standards to effectively “reduce burden and increase efficiency” for financial institutions.

(3) Promote industry-level digital infrastructure construction

It is recommended to push the development of industry-wide digital management platforms for related-party transactions. Such industry-level infrastructure can effectively realize centralized management and dynamic updating of related-party information, automatic verification and integration analysis of related-party transaction data, intelligent early warnings of risk indicators, and automatic generation and submission of regulatory reports—thereby systematically addressing industry-level pain points such as “data silos,” “inconsistent standards,” and “easy-to-mistake statistics.” This is both a key path to improve industry related-party transaction management efficiency and data quality, and an important institutional arrangement for implementing the “reduce burden and increase efficiency” goal.

Conclusion

Related-party transaction management is both a legal compliance proposition and a corporate governance proposition. Against the backdrop of “strong regulation, risk prevention, and promoting development,” central SOE and SOE trust companies should treat related-party transaction compliance management as an important component of modernizing corporate governance—from “passive response” to “active governance,” and from “formal compliance” to “substantive compliance.”

This transformation will not happen overnight. It requires coordinated efforts formed into a synergy through sustained investment at the institutional level, cooperation at the industry level, and institutional supply at the regulatory level. The author expects that, as the regulatory framework keeps improving, industry self-regulation deepens continuously, and technology enablement accelerates, the level of related-party transaction governance at central SOE and SOE trust companies will achieve a qualitative leap, laying a solid institutional foundation for high-quality development of the trust industry.

Author: Financial Capital Team

Source: Dao Ke Te Law & Finance World

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