Draft Anti-unfair competition law: commercial bribery implications

Practical Law UK Legal Update 6-624-3645 (Approx. 7 pages)

Draft Anti-unfair competition law: commercial bribery implications

by Practical Law China

Background

Commercial bribery (that is, the bribery of private individuals or companies for commercial gain, as opposed to the bribery of public officials) may constitute both a criminal and an administrative offence under Chinese law. For details of the elements of the offences of commercial bribery, see Practice note, Bribery and corruption offences, enforcement and penalties: China: Commercial bribery. Bribe-givers also have civil liability to any person who suffered as a result of the bribe (typically, this would be a competitor who business suffered from having to compete with a company that was winning business through bribery).

The principal civil and administrative penalties arise out of Articles 2 and 8 of the Law of the People's Republic of China against Unfair Competition 1993 (1993 Anti-unfair Competition Law) and Article 2 of the Interim Provisions on the Prohibition of Commercial Bribery 1996 (1996 Interim Provisions on Commercial Bribery), which are enforced by the State Administration for Industry and Commerce (SAIC). Discounts and commissions may be offered to win business if properly recorded in corporate accounts, but off-book rebates may not (Article 8, 1993 Anti-unfair Competition Law). Companies may be liable for bribery carried out by their employees (Article 3, 1996 Interim Provisions on Commercial Bribery).

Over time, it has become clear that the 1993 law is inadequate to deal with China's ever-more complex commercial and regulatory landscape; at the same time, inconsistencies began to emerge between the 1993 law and newer, more tightly drafted anti-bribery and other commercial legislation.

To address this, on 24 February 2016, the Legislative Affairs Office of the State Council published for public comment a revised draft of the law (2016 Draft Anti-unfair Competition Law). Among other changes, such as bringing the definitions used in the anti-unfair competition law into line with other recent legislation such as the 2007 Anti-monopoly Law, 2015 Advertising Law and 2013 Trademark Law and addressing the use of internet technology for anti-competitive purposes, the draft law would affect:

The elements of and penalties for commercial bribery in China.
New administrative offence of bribery of influential third parties.
New administrative offence of abusing public services.
Compliance requirements to take advantage of the books and records exemption.
Companies' vicarious liability for commercial bribes paid by their employees and agents.

The proposed changes would not affect criminal liability for acts of commercial bribery. These fall under Articles 163 and 164 of the Criminal Law of the People's Republic of China 1997, as amended with effect from November 2015 to change the elements and penalties of the criminal offences of giving and receiving a commercial bribe (for more information on these changes, see Legal update, Criminal Law amendment: changes to China's anti-bribery regime).

Changes to the elements of administrative offences of commercial bribery

The elements of the administrative offence of commercial bribery under the 1993 Anti-unfair Competition Law are:

Bribery by a business operator of the other party to a transaction.
The bribe is in the form of property or other means.
The bribe is for the purpose of the sale or purchase of goods.

For guidance on how to interpret this and the other elements, see Practice note, Bribery and corruption offences, enforcement and penalties: China: Elements of commercial bribery giving rise to administrative liability. A significant problem with this definition is that the term"bribery" is not defined. In the absence of a clear definition, the SAIC and its local branches have interpreted the rule differently in different administrative jurisdictions within China.

New definition of commercial bribery

The 2016 Draft Anti-unfair Competition Law introduces a new defined term, "commercial bribery" (商业贿赂):

“Commercial bribery means a business operator giving or promising to give an economic benefit to the other party in a transaction, or to a third party that can influence the other party in a transaction, to induce them to solicit for the business operator a transaction opportunity or competitive advantage. Giving or offering to give an economic benefit constitutes giving a commercial bribe; accepting or agreeing to accept an economic benefit constitutes accepting a commercial bribe".(Article 7, 2016 Draft Anti-unfair competition Law)

The elements of an administrative offence of commercial bribery would therefore be changed to:

Provision or a promise to provide (if the giver) or acceptance or agreement to accept (if the recipient).
Economic benefit (see What is economic benefit?, below for more information on how to interpret this).
A qualifying recipient, that is, the other party to a transaction or an influential third party (see New offence of bribing an influential third party for more information on how to interpret this).
The intention on the part of the giver to induce the recipient to solicit a transaction opportunity or a competitive advantage.

The principal changes made by the new definition are:

Receiving any kind of bribe now expressly constitutes an offence. Formerly, this was limited to accepting an undisclosed off-book rebate.
Bribes to third parties are now offences.
The introduction of the intention element.

Although the subject matter of what can constitute a bribe has been changed from "property or other means" to "economic benefit", this does not constitute a meaningful change in scope. For a discussion of this point see What is economic benefit?, below.

New offence of bribing an influential third party

The 1993 Anti-unfair Competition Law prohibits parties from bribing counterparties for commercial advantage, but does not cover bribes paid to third parties who might be in a position to exert influence over a counterparty.

The draft law would close this loophole by extending the key offence to include the bribery of a third party that can influence a transaction counterparty (Article 7, 2016 Draft Anti-unfair competition Law).

Neither the draft law nor its explanatory notes contain any guidance on how to interpret this term, which seems intentionally broad. At face value it would include any attempt to distort competition by suborning an intermediary, for example:

Bribing a valuer to give a favourable valuation of an asset (high if the seller, low if the buyer).
Bribing a bank to give a fair valuation opinion or a lawyer to sign off on a false due diligence report.
Bribing an accountant to classify convertible securities as equity rather than debt.
Bribing an e-commerce company to remove competitors' products from search results.
Bribing an agent to promote a company's products at the expense of competitors.

It is likely that it is also intended to work as an anti-avoidance mechanism, similar to the concept of a"close connection" of state personnel, which forms part of the expanded criminal offence of public sector bribery that was introduced in the ninth amendment to the Criminal Law in 2015. A close connection in that context means close family members as well as anyone else who might reasonably be in a position to exert influence on or as a proxy for the recipient, such as a mistress or business partner. For more information on the definitions used in public sector bribery, see Practice note, Bribery and corruption offences, enforcement and penalties: China: Who is state personnel?

New offence of abuse of public services

The draft law also introduces a new act of commercial bribery described as soliciting an economic benefit for any person, organisation or department either in the course of providing any public service, or by making use of any public service (Article 7(1)).

This is a broader restatement of the specific offences contained in Article 6 and 7 of the 1993 law that prohibit public monopolies and governmental agencies from using their monopoly status or administrative privileges to demand that counterparties only do business with designated suppliers, interfere with the legitimate operations of third parties or shut out non-locally produced goods.

New books and records requirements

The 1993 Anti-unfair Competition Law prohibits the gift of off-book commissions or rebates but permits those which have been both:

Given to an intermediary publicly.
Accurately entered in the company's and the recipient's accounts.

(Article 8, 1993 Anti-unfair competition Law)

The draft law expressly prohibits the"transfer of economic benefit" between companies unless accurately reflected in both:

The contract governing the transaction; and
Both parties' financial statements.

(Article 7, 2016 Draft Anti-unfair competition Law)

As a practical matter, this will mean that companies need to have some basis for all transfers of value that form part of a transaction. Services, rights and other kinds of intangible asset that could look like an inducement to favour one competitor over another will need to be scrutinised and, if appropriate, properly recorded.

For more information on the concept of economic benefit see What is economic benefit?, below.

Vicarious liability for commercial bribery

Since companies can only act through natural persons such as employees or shareholders, it has always been the case that a company could be responsible under the 1993 Anti-unfair competition law for bribes given by its staff. Neverthless, this was not expressly stated, leaving it open to a company to argue that it should not be liable for a commercial bribe paid by an overzealous employee in the pursuit of the company's business ends on the grounds that the act was not carried out by the company itself.

The new draft law provides that:

If the employee of a business operator solicits a transaction opportunity or competitive advantage for that business operator, the act shall be deemed to have been carried out by the business operator. If there is evidence that the staff member committed bribery against the interests of the business operator, the act shall not be deemed to have been carried out by the business operator. (Article 7, 2016 Draft Anti-unfair competition law)

The implications of this are:

It is no longer open to a company to make the argument that there is a distinction between itself and its employees generally. That is, an employee that gives a commercial bribe will always be deemed to have done so on the company's behalf unless it falls within the exemption.
An exemption applies to bribes that are given "against the interests" of the company (违背经营者利益).

There is no guidance in the law or the explanatory notes as to how the exemption will be interpreted. On its face, this would apply to a bribe that is against the company's general commercial interests: that is, the benefit accrued to the individual giving the bribe or some third party other than the company itself. It is clear the exemption is not intended to apply to protect a company from the damage to its interest caused by the levying of a fine or civil liability to a third party simply because an employee gave a bribe and got caught.

What is economic benefit?

The expression "economic benefit" (经济利益), which is used in several places in the draft law, is not defined in the draft law or its explanatory notes, or elsewhere in Chinese legislation. Taken at face value, it would seem to mean any transfer of actual or potential value; that is, not just assets, but opportunities.

Unlike the term "property or other means", which it replaces in the definition of commercial bribery,"economic benefit" is a term widely used in other laws and regulations. Since the scope is not obviously different than" property or other means", there is no reason to think that it represents a change in the kinds of thing that can form the basis of commercial bribery. It is also not the same as the subject matter of a criminal offence of public sector bribery (that is, "property") or of a criminal commercial bribery (that is,"property in a relatively large amount").

Revised penalty structure

If the draft law were to come into effect, the administrative penalties for offences of commercial bribery would be changed significantly. The 1993 law provides for fines of from RMB 10,000 to RMB 200,000, together with confiscation of the illegal revenue obtained as a result of the bribe (for more details of the penalties including those for criminal commercial bribery see Practice note: Bribery and corruption offences, enforcement and penalties: China: What are the penalties for commercial bribery).

The draft law revises the fine from a specific RMB-based amount to a percentage basis. Specifically, acts of commercial bribery can lead to a fine of from ten to thirty percent of the illegal revenue (Article 20). In cases where the bribe led to a large enough benefit, this would substantially increase the financial exposure suffered by the offenders.

Comment

None of the provisions addressed above in relation to the 2016 Draft Anti-unfair Competition Law are in force at this time. Given the Chinese government's shift in recent years toward a focus on corporate and particularly multinational bribe-givers, the Xi Jinping administration's aggressive pursuit of corruption in Chinese society as a major policy goal and the risk that an investigation in China can lead to a parallel investigation under a foreign anti-bribery regime, it seems likely that commercial bribery will attract substantial government and regulatory attention once the new law comes into effect.

The broad scope of the new prohibition on bribing influential third parties rule could be a particular concern for businesses such as agencies, valuers, marketers and e-commerce platform operators whose work necessarily involves selling to companies in direct competition with one another. In house-counsel at such businesses should take this as a cue to examine their company's working practices and determine whether there is a real prospect that their practices could be anti-competitive. Companies should also consider whether there is a real risk that individual employees could be suborned, as under the draft rules this would impose a clear liability on them.

Where the risk is real, in-house counsel should take immediate steps to address these issues. That should involve not just adding new drafting to their anti-corruption compliance policy to address commercial bribery, but also working with senior management to educate the China work force and rigorously enforce the rules throughout the company's procurement and distribution chains. High profile cases such as that at Glaxo Smith Kline's China subsidiary show that the consequences of public sector bribery in China can be devastating. It seems that commercial bribery will soon carry the same effects (for more details of the GSK case, see Bribery and Corruption: Caught between three regimes: "What happens in China doesn't stay in China") .

Source

State Council press release, Public comment sought on the Anti-unfair competition Law.

Draft Anti-unfair competition law: commercial bribery implications | Practical Law