What to Do Following China’s New Crackdown on Commercial Bribery

On 4 November 2017, the Standing Committee of the National People’s Congress passed the amendment to the PRC Anti-Unfair Competition Law (AUCL), which provides more clarity on the scope of what constitutes commercial bribery.

The Amendment will become effective on 1 January 2018 and is the first amendment to the AUCL since its implementation in 1993. This important development indicates that China’s anti-corruption campaign continues to escalate.

We anticipate that commercial bribery via third parties will be a focus of future investigations and enforcement in China, following a similar pattern of recent enforcement under US, UK and Brazilian anti-corruption laws

What it means for companies in China

The Amendment creates potentially greater risks for commercial bribery activities in China, including exposure to increased penalties. The Amendment reflects the legislators’ advanced understanding and awareness of the nature of commercial bribery, which follows global anti-corruption trends.

Multinational companies in China will find that the Amendment clarifies the activity of commercial bribery, which requires a purpose of “seeking transaction opportunities or competitive advantage.” A transaction-counterparty is no longer expressly listed as a potential bribe-recipient, and bribe-recipients are now clearly stated to include third parties engaged by a transaction-counterparty.

We anticipate that commercial bribery via third parties will be a focus of future investigations and enforcement in China, following a similar pattern of recent enforcement under US, UK and Brazilian anti-corruption laws.

The following table sets out a brief overview of the Amendment affecting commercial bribery.

Changes to China’s Anti-Unfair Competition Law

Key features of the new commercial bribery rules

The changes in the amended AUCL include a revised definition of commercial bribery, increased administration penalties, expanded investigative powers, penalty for interference of supervision and investigation, vicarious liability of enterprises and scenarios of mitigated penalties, and redress through civil litigation.

The State Administration for Industry and Commerce has been granted additional powers. As a result, we expect companies to face more challenges in future SAIC dawn raids

Commercial bribery definition revised. The revised definition of commercial bribery requires a business operator to use cash, property or other means to seek transaction opportunities or competitive advantage by bribing any of the following entities or individuals:

a) employees of a transaction-counterparty

b) entities or individuals entrusted by a transaction counterparty to handle relevant affairs (e.g., subcontractors, agents)

c) entities or individuals that use authority or influence to influence a transaction.

The previous reference in the AUCL to transaction-counterparties as bribe-recipients was a constant source of complaint and confusion for the business community. However, there is yet no clear explanation regarding items b) and c) in the revised definition above, and so we cannot rule out the possibility that a transaction-counterparty may still be considered as a bribe-recipient in certain circumstances.

This observation is supported by the leader of the Anti-Monopoly and Anti- Unfair Competition Bureau of the State Administration for Industry and Commerce (SAIC). In a recent interview conducted by the PRC Industry and Commerce News, the leader said that, under item b), the transaction- counterparty will be viewed on a de-facto basis.

For example, if a school purchases uniforms from a supplier, the students are the de-facto purchasers and users. The school is deemed to be entrusted by the students to make the purchase, and falls within item b) of bribe-recipient.

The SAIC has issued a notice to request its local subsidiaries to proactively implement the Amendment and investigate potential violations of AUCL, especially commercial bribery activities.

Before SAIC provides clear guidance on this issue, we recommend that companies take a careful and considered approach when providing any benefit to transaction-counterparties, especially when the transaction-counterparty is a public utility such as educational institutions and hospitals.

Increased administrative penalties. The range of penalties has significantly increased from RMB100,000 to RMB3 million, in addition to confiscation of illegal gains. The authorities also have the power to revoke the company’s business license in cases of severe violations.

The Amendment follows the Interim Rules of the Publicity of Administrative Penalties issued in 2014 by the SAIC, which states that violations of the AUCL will be recorded and publicized. This has the potential to jeopardize the offender’s credit record and reputation, and affect future participation in government contracts.

While there is no penalty for bribe-recipients in the Amendment, recipients of commercial bribes could still be punished under other applicable PRC laws.

Expanded investigative powers.  The 1993 AUCL did not provide the SAIC with investigative powers to seal or detain cash and property in relation to breaches of the AUCL. In order to undertake such coercive measures, the SAIC investigators had to rely on provincial regulations.

However, since the issuance of PRC Administrative Coercion Law in 2012, the provincial regulations are no longer permitted to set up coercive measures for investigation against unfair competition activities. This meant that the SAIC was hampered in its ability to investigate bribery activities.

The Amendment rectifies this situation and grants the SAIC the necessary powers to seal or detain cash and property. The SAIC has also been granted additional powers to inquire into bank accounts of business operators that have allegedly committed unfair competition activities.

The exercise of such powers is subject to approval from the supervision and inspection authorities at municipal level or above.

As a result, we expect companies to face more challenges in future SAIC dawn raids.

The amended law provides an opportunity for the company to recover the cost for the internal investigation (e.g., legal, audit and forensic fees) against unfaithful employees who accept bribes from business partners

Penalty for interference of supervision and investigation. The Amendment also follows the recent trend of administrative legislation whereby interference of supervision and investigation against alleged violations will be penalized.

This is by way of a monetary fine of up to RMB5,000 for individuals, and up to RMB50,000 for entities, possibly combined with a public security punishment imposed by the public security authority.

Such penalty is not limited to the alleged bribe giver or recipient. Any interested party, entity or individual deemed relevant to the allegation and that has failed to cooperate with the investigation may incur the penalty.

Vicarious liability of enterprises and scenarios of mitigated penalties. The Amendment reiterates the vicarious liability stipulated in the Interim Rules, that if a business operator’s employee engages in commercial bribery, the employee’s activity will be viewed as the conduct of that business operator.

The Amendment also provides the business operator with a ground of defense if the operator can prove that the employee’s activity does not relate to the business operator’s objective of obtaining specific business transaction opportunities or other competitive advantages.

The leader of the Anti-Monopoly and Anti-Unfair Competition Bureau of the SAIC has commented that business operators may have a valid defense against the vicarious liability offence if they can demonstrate that they:

a) have adopted proper compliance policies and measures

b) have implemented effective measures to supervise and control its employees’ activities

c) do not indulge either openly or in a disguised form, its employees’ bribery activities.

The Amendment also reiterates circumstances for mitigation of the administrative penalties, if the violators proactively eliminate or reduce the harmful consequence, or if the violation is minor, does not cause any harm, and is rectified in a timely manner.

These scenarios were previously set out in the PRC Administrative Penalty Law issued in 1996.

Redress through civil litigation. The Amendment expressly provides that victims who have incurred damage from unfair competition activities (which include commercial bribery) may seek compensation from the business operator conducting those activities, through civil court proceedings.

The amount of damages will be determined by reference to the actual loss and damage suffered by the plaintiff, including the reasonable expenditure for stopping the misconduct.

This rule provides an opportunity for the company to recover the cost for the internal investigation (e.g., legal, audit and forensic fees) against unfaithful employees who accept bribes from business partners.

Actions to take

Due to the significant changes in the definition of commercial bribery, companies should review their business operation risks and compliance controls to ensure they are not infringing the new rules. In particular, we recommend that companies take the following steps:

  • Review existing compliance policies and program, including third-party policies, to ensure there are no gaps or potential exposure under the new regime, and conduct updated face-to-face compliance training for senior management and staff in high-risk roles.
  • Conduct a focused review of existing business arrangements that involve transaction-counterparties and third parties such as agents, distributors and other intermediaries.
  • Conduct compliance due diligence prior to engaging a third-party vendor that is intended to facilitate a transaction with the counterparty.
  • Include effective terms and conditions to require compliance by the third party, including audit rights, and conduct periodic audits and training of the third parties in relation to these requirements.
  • Review internal controls and policies in relation to the giving or receiving of gifts, payments, property, hospitality and other incentives by an employee, bearing in mind the risk of vicarious liability.

About the Author

International law firm Baker McKenzie International is a Swiss Verein with member firms in China, Hong Kong and other Asian jurisdictions. This article first appeared in Global Compliance News UG.

© 2017 Copyright Global Compliance News UG (haftungsbeschränkt). All rights reserved.

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