China Redefines Commercial Bribery and Increases Penalties
China amended its Anti-Unfair Competition Law on November 4, 2017—the first time the law has been amended since it was promulgated in 1993.
The amended AUCL redefines commercial bribery, makes it clear that employers can be held liable for bribery committed by their employees, increases penalties, and gives greater investigative powers to enforcement agencies.
This LawFlash summarizes key amendments to the AUCL.
CHANGES TO DEFINITION OF COMMERCIAL BRIBERY
The main purpose of the AUCL is to regulate unfair competition, but it is also China’s main statute for addressing commercial bribery. The amended AUCL defines commercial bribery as giving something of value to the below three categories of person in order to seek a transaction opportunity or competitive advantage:
- Employees of a counterparty to a transaction
- Any person that a counterparty uses to handle relevant matters
- Any person who can influence a transaction
Certain Payments to Counterparties No Longer Presumed
to Be Bribery
A major change to the definition of commercial bribery is that a payment made to a counterparty to a transaction in furtherance of the sale or purchase of a product is no longer presumed to be bribery. The first and second categories of bribe-taker above include employees and agents who represent a counterparty to a transaction—not the counterparty itself. This is an important distinction because under the old AUCL, a business was (by definition) committing commercial bribery when it made a payment to a counterparty in furtherance of a transaction.
Further, when the State Administration of Industry and Commerce (SAIC)—the agency that enforces commercial bribery laws in China—promulgated the Interim Provisions on the Prohibition of Commercial Bribery (Interim Provisions) in 1996 to implement the AUCL, payments made between businesses for the sale and purchase of products were presumed to be commercial bribery unless they fell within the “discounts,” “commissions,” or “small promotional gifts” safe harbors and were accurately recorded in the accounting books of both parties. The revised definition of commercial bribery may suggest a change in the longstanding enforcement practices followed by local branches of the SAIC.
The third category of person in the new definition of commercial bribery, however, adds potential ambiguity because it is not entirely clear who is considered capable of influencing a transaction. Prior antibribery enforcement by local branches of the SAIC targeted people who could influence the choices of end customers (for example, a tourist guide who received a kickback from a shopping mall for introducing new customers). Director Yang Hongcan of the SAIC’s Antimonopoly and Anti-Unfair Competition Enforcement Bureau provided some clarification by way of example in a press release dated November 4, 2017. He said that students who purchase uniforms through their school are the de facto purchasers. Therefore, if a uniform supplier makes certain payments to the school in furtherance of a sale, the school as the counterparty might still be found to have taken a bribe. It therefore would be incorrect to state categorically that a counterparty to a transaction cannot take commercial bribery. Therefore, companies that do business with public entities such as public schools and hospitals should continue to be wary of potential exposure to commercial bribery because those public entities are often capable of affecting the choices made by end customers.
“Off-the-Books” Kickback Provision Removed
In another important change, the amended AUCL no longer includes the “off-the-books” kickback provision found in the old AUCL. The old AUCL and the Interim Provisions treated off-the-books payments to transaction counterparties as commercial bribery in the form of a “kickback.” The Interim Provisions define “off-the-books” as a payment that has not been accurately recorded in a company’s accounting books, including payments that have not been recorded, were entered incorrectly, or were fabricated.
Previously, local branches of the SAIC had aggressively enforced the “off-the-books” provision. Consequently, some bona fide payments between businesses were considered commercial bribery merely because they had been improperly recorded in the accounting books—even though there had been no apparent intent to commit commercial bribery.
Although off-the-books payments to transaction counterparties are no longer presumed to be kickbacks under the revised AUCL, an off-the-books payment made to any party acting on behalf of a transaction counterparty with corrupt intent can still constitute commercial bribery. Furthermore, even though an “off-the-books” payment to a transaction counterparty may have less exposure to bribery, it still could raise other bookkeeping and tax issues.
There is no vicarious liability provision in the old AUCL that imputes the actions of an employee to the employer. However, the Interim Provisions do say that a commercial bribe made by an employee to sell or purchase products on behalf of an employer may be regarded as an act of the employer.
The amended AUCL now explicitly provides that an employer is vicariously liable for the acts of an employee. It is now a rebuttable presumption: A commercial bribe made by an employee will be imputed to the employer unless the employer can show that the employee’s misconduct was not related to any transaction opportunities or competitive advantages sought by the employer.
Employers may, in practice, find it difficult to rebut the presumption that an employee made a bribe on behalf of the employer. A commercial bribe made by an employee often secures some transaction advantage for the employer, and vicarious liability would therefore attach. Director Yang also addressed this issue in his November 4, 2017 press release. He said that employers should take the following steps to protect themselves from potential employee misconduct:
- Formulate an appropriate compliance program
- Implement effective oversight
- Do not tolerate any bribery committed by any employee
Director Yang’s advice suggests that local branches of the SAIC will consider these factors when they assess the potential liability of an employer for the misconduct of an employee. The burden of proof is still borne by the employer, but a sound corporate compliance program could mitigate the employer’s liability.
INCREASED ADMINISTRATIVE PENALTIES
The amended AUCL increases the maximum penalty for commercial bribery considerably, from 200,000 renminbi ($31,000) to 3 million renminbi ($462,000). Violators also will be compelled to disgorge illegal gains derived from corrupt transactions.
Furthermore, the amended AUCL gives local branches of the SAIC the authority to revoke the business license of a business operator if a violation is “severe.” However, what constitutes a “severe” violation is not explained. We anticipate that this gap will be filled when the SAIC issues implementing regulations.
EXPANDED INVESTIGATIVE POWERS
The amended AUCL for the first time gives local branches of the SAIC the authority to seal or seize assets of business operators under investigation, including their bank accounts. Local branches of the SAIC, however, must first seek approval from the head of the municipal level SAIC before they may exercise these investigative powers.
In addition, the amended AUCL imposes penalties on anyone who interferes with or impedes an investigation conducted by a local SAIC branch. Individual offenders may be fined up to 5,000 renminbi ($770), and entities may be fined up to 50,000 renminbi ($7,700). Offenders may also be penalized by local public security bureaus.
We anticipate that the government will issue implementing regulations to the amended AUCL to provide more clarity and guidance for local enforcement agencies and practitioners. The SAIC may also revisit relevant rules and regulations, including the Interim Provisions, and amend them to be in alignment with the amended AUCL.
Multinational companies operating in China should take heed of the changes to the AUCL and assess the business practices of their China subsidiaries to mitigate compliance risks. We recommend that companies doing business in China take the following steps:
- Review current business models in light of the revised definition of commercial bribery, and focus on payments made to third parties that act on behalf of and may influence the transaction parties
- Continue to closely monitor payments to transaction parties such as public schools or hospitals, as these entities may be procuring goods for use by other end customers and could still be deemed as bribe-takers under the revised definition of commercial bribe
- Strengthen employee oversight and have a sound compliance system in place to mitigate the employer’s vicarious liabilities
- Formulate procedures for responding to the increased risk of dawn raids and seek advice from external counsel to ensure an appropriate response
- Enhance the management of books and records to ensure accuracy