Proposed Amendments to the Anti-Commercial Bribery Provisions Under the Anti-Unfair Competition Law

March 25, 2016

On February 15, 2016, the Legislative Affairs Office of the State Council published, for public comment, a draft of the amended Anti Unfair Competition Law (the AUCL) which the State Council proposes the National People’s Congress or NPC should adopt (Proposed Draft). As a matter of procedure, the Proposed Draft is not yet in its final form for submission to the NPC for its reading and promulgation. However, it is highly likely that any substantive amendment to the Proposed Draft will remain in one form or another in the final draft of the amended AUCL.

This newsletter intends to summarize and comment on the proposed major changes to the anti-commercial bribery provisions under the AUCL.

1. Who are subject to anti-commercial bribery provisions?

Under the AUCL, “business operators shall not use money, properties or any other methods to bribe others in order to sell or purchase commodities”. Arguably, this definition under the current AUCL would not apply to certain nonprofit organizations, quasi government agencies and NGOs. One school of thought is that a government unit, public utility company, quasi government agency or nonprofit organization could commit bribery, and that the State Administration of Industry and Commerce (“SAIC”) would not have legal ground to go after these non-commercial entities under the AUCL. This irregularity will persist if the AUCL is not amended to state that seeking economic benefits for one’s own unit, department or for oneself, while providing public services or by “pigging-back on” public services constitutes commercial bribery.

Moreover, the Proposed Draft would not limit anti-commercial bribery provisions to cases whereby a business operator gives a bribe to the counterparty. Rather, the Proposed Draft would make the anti-commercial bribery provisions under the new AUCL, if passed by the NPC, applicable to situations where any economic benefits have been provided, or a promise has been made to provide economic benefits to a third party who has influence over the transaction, and such bribery has resulted in harm to the lawful rights and interests of other business operators or consumers.

2. What constitutes commercial bribery?

If the Proposed Draft is adopted by the NPC, this will mark the first time that the definition of “commercial bribery” has been codified in China. According to the Proposed Draft, the definition of “commercial bribery” refers to a business operator’s providing or offering to provide economic benefits to the counter party(ies) or a third party who has influence over the contemplated transaction, enticing that party to secure business opportunities or gain competitive advantage for the business operator. In such circumstances, providing or offering to provide economic benefits constitutes giving commercial bribes, and accepting or agreeing to accept economic benefits constitutes taking commercial bribes.

There are different interpretations as to the relationship between the above definition of commercial bribery and the three specifically-listed commercial bribery offences under Article 7 of the Proposed Draft. Our reading of Article 7 is that (i) the three specifically-listed offences would constitute commercial bribery per se; (ii) listing them in Article 7 is intended to illustrate them as typical examples of commercial bribery; (iii) the intent on the part of the offender would be assumed and imputed to the offender under the specifically-listed commercial bribery offences; (iv) the definition of commercial bribery would be used as a general catch-up clause, which SAIC may invoke to tackle other forms of commercial bribery practices.

3. Third party who has influence over the transactions

It is worth noting that Article 7 of the Proposed Draft states that “providing or promising to provide economic interests to a third party, resulting in harm to the lawful rights and interests of other business operators or consumers” (Third Party Influence Clause) would be deemed to constitute commercial bribery. A literal reading of this Third Party Influence Clause is as follows: a commercial bribery offense has been committed so long as (A) economic benefits are provided or promised by a business operator to a third party who has influence over the contemplated transaction, and (B) as a result of the “influenced” decision the lawful rights and interests of the counterparty(ies) or consumers have harmed; for example, the counterparty(ies) has to pay for the purchased products at a price higher than the prevailing market price as a result of the “influenced” decision. However, if this is indeed what Article 7 under the Proposed Draft intended, without assessing whether the person taking the bribe has breached his/her fiduciary duty or loyalty to his/her company in the case of legal intermediaries, the Third Party Influence Clause would be much broader and inclusive than what it appears to be, and as result might be used as grounds for charging a third party agent who has acted as a legitimate intermediary in the sale of goods, and who would otherwise have not breached any other provision under anti-commercial bribery laws or regulations.

4. Imputing employees’ commercial bribery to the employer

Article 7 of the Proposed Draft appears to automatically impute blame to the employer for any employee action constituting commercial bribery i.e. securing business opportunities or gaining competitive advantages for his/her employer by resorting to commercial bribery; it also lays out the following “rebuttable presumption” in cases where employees of the counterparty accepted bribes from the selling party:

Where evidence demonstrates that the employee accepted bribes to the detriment of the business operator’s interests, the act of the employee shall not be imputed to the business operator.

If passed, the foregoing provisions under Article 7 of the Proposed Draft would provide SAIC with broad power and discretion in actively policing and penalizing business operators, MNCs’ Chinese subsidiaries in particular, whose employees engage in commercial bribery to increase their employer’s sales and profit margin (and thereby increase their commission or bonus) without authorization of the management . Although MNCs have voiced their concerns about these proposed amendments through the public comment channel, it remains to be seen whether their concerns will be properly addressed in the next round of proposed amendments to the AUCL.

5. Proposed penalties for violations intended to deter commercial bribery

The Proposed Draft would authorize SIAC to impose a fine in amounts aggregating 10% – 30% of the offending entity’s revenue generated while operating its business in violation of the anti-commercial bribery provisions under the new AUCL (if passed by the NPC). This proposed range of fines appears to be a significant increase of actual monetary penalty, vis-à-vis the penalties of (i) RMB10,000 – RMB200,000 and/or forfeiting the illegal income under the existing AUCL. Seemingly, it would do away with the practical difficulties the judges and lawyers run into in determining what constitutes “illegal business income” in bribery litigations. Based on our prior experience, however, the new penalty mechanism might, depending on the actual circumstance, significantly weaken SAIC’s ability to crack down on commercial bribery, as well as the deterring effect of the anti-commercial bribery provisions under the AUCL. This is because under the existing AUCL, SAIC has broad discretion in determining what constitutes illegal income of the party charged with commercial bribery. As a result, forfeiture of illegal income has been a huge deterrent to engage in commercial bribery for business operators.

The Proposed Draft, if passed by the NPC, would overhaul China’s anti-commercial bribery law, and create a huge impact for our clients who do business in China. FuJae Lawyers will closely follow this legislation and keep its clients informed of impending changes.