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Carlson and Yuan: China releases draft amendments to law governing commercial bribery

China released draft amendments Thursday to its Anti-Unfair Competition Law that could reshape how commercial bribery in China is interpreted and enforced.

Specifically, the Draft Amendments would (1) more precisely define commercial bribery, including liability for bribes paid through third parties, (2) clearly include vicarious liability for employers for the actions of their employees, and (3) significantly increase penalties for commercial bribery for companies and for those facilitating or turning a blind eye to bribes. 

Existing Anti-Unfair Competition Law (AUCL). The AUCL was first enacted in 1993, and in releasing the Draft Amendments (Chinese here), the State Council noted that the law has not been updated since then to reflect current market realities in China, and that the existing penalties are too lenient.

The existing AUCL covers a range of anti-competitive conduct, including commercial bribery, which is defined by way of a prohibition: “A business operator shall not resort to bribery, by offering money or goods or by any other means, in selling or purchasing commodities.” Carve-outs include certain commissions and discounts, provided that they are recorded accurately and transparently in accounting records. Subsequent regulations and judicial interpretations have given those definitions a bit more color, but the underlying statute has remained vague and prone to wide degrees of interpretation by local enforcement officials.

New Definition of Commercial Bribery. The Draft Amendments released yesterday for public comment (due no later than March 25) would amend the definition of commercial bribery as follows:

Commercial bribery refers to a business operator [i.e., company] providing or promising to provide economic benefits to the opposing party in a transaction, or to a third party able to influence the transaction, to entice it to seek a transaction-related opportunity or a competitive advantage for the business operator. Providing or promising to provide economic benefits is [considered] offering a commercial bribe; accepting or agreeing to accept an economic benefit is [considered] accepting a commercial bribe.

Commercial Bribes Paid Via Third Parties Prohibited. The Draft Amendments also would prohibit “providing or promising to provide economic benefits to a third party able to influence the transaction or harm the legal rights of other business operators or consumers.” The term “economic benefits” is undefined, but this provision would appear to significantly increase the scope of liability for bribes paid via third parties. This change parallels recent amendments to China’s Criminal Law that became effective in November 2015.

Vicarious Liability for Acts of Employees. The existing AUCL is silent on vicarious liability for acts of employees, although interpretive regulations in 1996 provided for such liability.

The Draft Amendments would codify and clarify the scope of vicarious liability: “The act of an employee using commercial bribery to seek a transaction-related opportunity or competitive advantage for a business operator should be deemed as an act of the business operator. If there is evidence proving that the employee violated the interests of the business operator in accepting a bribe, this will not be deemed as an action of the business operator.”

Broader Books & Record Requirement. The existing AUCL provides a safe harbor for certain discounts and commissions between business operators, provided that they are accurately recorded in accounting records. The Draft Amendments would prohibit “transferring of economic benefits between business operators without being accurately reflected in contracts and accounting records.” The term “economic benefits” is undefined, but its scope appears to be broader than merely “discounts and commissions” exempted by the existing AUCL. The Draft Amendments would also specify that the “economic benefits” must be reflected accurately in contracts and agreements, in addition to accounting records. 

Benefits Leveraged from Public Service. The Draft Amendments also would prohibit benefits obtained by business operators “in the course of” or “through” public service. The language of the specific provision is not clear, but it would seem to apply to misuse of authority to reap improper benefits (for an organization or individual) in the context of public-facing organizations — potentially public utilities, public hospitals, public institutions (事业单位), or similar organizations. We anticipate that this provision may be clarified further in future drafts.

Penalties. The current AUCL provides for fines of RMB 10,000 to RMB 200,000 (about US $1500 to $30,000) or confiscation of illegal income attributable to the commercial bribes. The Draft Amendments would modify those provisions to impose fines of between 10 percent and 30 percent of a business operator’s illegally obtained business revenue.

The Draft Amendments also would impose fines of RMB 10,000 to RMB 1 million (about $1500 to $150,000) on others that knew or should have known that bribery was occurring but still provided certain facilitation or support (such as in production, sales, warehousing, transportation, network services, technical support, advertising, payment and settlement, or other services).

The Draft Amendments suggest that cooperation credit is available in some cases; simultaneously, more severe penalties are imposed for non-cooperation.

Enforcement and Implications. It remains to be seen how the Draft Amendments, if enacted as drafted, might affect enforcement of commercial bribery. Historically, significant discretion has been delegated to local Administrations of Industry and Commerce (AICs) to enforce commercial bribery rules, and local AICs at the municipal and sub-municipal level have interpreted and enforced commercial bribery rules rather unevenly.

Our firm has handled matters where, in discussions with various AICs, the same conduct that would be improper in one city in China would be deemed unobjectionable in another. It is not clear whether these Draft Amendments, even with clarified definitions, would affect the distribution of enforcement authority, and how local AICs would interpret the Draft Amendments. Given the historical trend of local AICs pressing for larger fines, we anticipate that the larger penalties in the Draft Amendments may result in still larger penalties imposed on companies deemed to be in violation.

After the existing AUCL was enacted in 1993, implementing regulations followed in 1996 that fleshed out and interpreted further the AUCL. We anticipate that the government will revise or replace new implementing rules after the Draft Amendments are formally enacted.

Finally, the Draft Amendments seem to preclude the possibility of a free-standing antibribery law, which has been under discussion for several years,.

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Covington is preparing a more detailed analysis of the Draft Amendments in English and Chinese that is available upon request.

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Eric Carlson, a contributing editor of the FCPA Blog, is a Shanghai-based partner at Covington & Burling LLP. James Yuan is an associate in Covington’s Shanghai office. Both specialize in anti-corruption compliance and internal investigations, with a particular focus on China and other regions in Asia. Eric Carlson speaks fluent Mandarin and Cantonese and can be contacted here. James Yuan speaks native Mandarin and fluent English and can be contacted here.

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