Commercial Bribery Under Fire in China

Although many countries have laws focusing on foreign bribery that would affect foreign-invested enterprises (FIE) in China, such as the United States' Foreign Corrupt Practices Act, only Chinese regulations on commercial bribery, which apply to both domestic and foreign entities and their employees, will be addressed.

The primary regulations are:

· PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法) (December 1993)

· Tentative Provisions for the Prohibition of Acts of Commercial Bribery (November 1996)

· PRC Criminal Code (October 1997)

· Opinions on the Launch of Dedicated Work to Tackle Commercial Bribery (February 2006)

'Commercial bribery' is defined as offering bribes for the purpose of selling or purchasing products or services in the form of property or other methods by a business operator to another party to a transaction. An act having adverse effects on fair competition is also an essential element in deciding if a case constitutes commercial bribery.

'Property' includes:

i. commercial products (for example, tobacco, liquor, jewellery);

ii. cash payments or non-cash payments (which may be disguised as marketing fees, publicity fees, sponsorship fees, research and development fees, labour service fees, consulting fees or commission fees, as well
as coupons and vouchers), or

iii. securities

'Other methods' include:

i. housing and renovation;

ii. low or zero interest loans;

iii. reimbursements;

iv. domestic and overseas tours and study/research trips under various guises;

v. employment arrangements and job transfers;

vi. residence permits, foreign passports, and visas;

vii. school admission;

viii. debt forgiveness, or

ix. sex services.

The conduct of the employees or agents of a business operator who sell or purchase products for the business operator by means of commercial bribery will be deemed as bribery by the business operator.

The potential recipients of commercial bribery include not only the other party to the transaction but also any third parties (such as friends, relatives and government officers who facilitate the transaction), which are closely related to the transaction.

Legal liabilities

An organization engaged in commercial bribery may incur the following liabilities.

Administrative liability

Administrative liability may be enforced by the State Administration of Industry and Commerce and its local delegates. This may include fines ranging from Rmb10,000 (US$1,200) to Rmb200,000, as well as confiscation of illegal income generated by the bribery. For example, all profits, if not the entire revenue, derived from a project or contract that has been secured using bribery may be confiscated. Any amount of commercial bribery may trigger administrative liability. The bribe recipient may be a company (state-owned enterprise (SOE) or otherwise), its employee or a government officer.

Criminal liability

Criminal liability may include imposing fines on the offending organizations, criminal detention or imprisonment (up to a life sentence) for those in charge of offending organizations and other people directly responsible for the offence. It should be noted that criminal liabilities will not arise when one private business entity bribes another private business entity. Criminal liabilities will arise, however, if the recipient of the bribe is an employee of the business entity.

Criminal liabilities automatically come into effect if the total value of the bribe is over Rmb200,000 and may come into effect if the bribe is valued at over Rmb100,000 and involves:

i. a goal of illegal benefits;

ii. bribes to three or more recipients;

iii. bribes to Communist Party leaders, government leaders, judicial officials or law-enforcement officers, or

iv. severe damage to national or social interests.

Civil liability

Civil liability involves the payment of resulting damages to third parties. However, since these damage are difficult to prove, civil liabilities for commercial bribery are rarely pursued in practice.

Best practices

Despite all the academic discussions about adopting local business practices, a good rule of thumb for FIEs is to not engage in any activity that would be considered unethical or clearly illegal at home.

Payments

Discounts to the other party of the transaction, commissions to intermediaries, and other contractual payments must be (i) provided in a contract, (ii) based on a bona fide transaction, and (iii) explicitly and accurately recorded in the account books. The amount and the type of any payments must be accurately recorded (without omitting account entries, moving payments to other accounts or forging accounts) in the account books.

Gifts

Promotional gifts of insignificant value (as low as possible) but never in excess of Rmb5,000, which are in line with prevailing commercial practices are permissible. Examples of generally acceptable promotional gifts can include umbrellas, stationery, and mugs. Customary gifts, such as moon cakes for the Mid-Autumn Festival, are also acceptable. The list of inappropriate gifts is endless, but the prominent examples are those that have been discussed.

Dining and entertainment

For meals and entertainment, meals are only appropriate when not meant for gaining an unfair competitive advantage or for exerting undue influence over government officials. In addition, dining bills should not include inappropriate gifts (such as take-home cigarettes and liquor or after-dinner entertainment) and should be of a reasonable cost (according to local standards).

Entertainment, such as karaoke, bathing, saunas, spas, massages, concerts, golfing or awards or sponsorship for such activities or events is not advisable, especially when dealing with government/SOE officers.

Combating commercial bribery

Commercial bribery can be a complex issue, particularly in China where the practice is widespread and prevailing attitudes may be at odds with the letter of the law. To combat commercial bribery, companies would be well-advised to create their own company policy outlining practices regarding gift-giving, entertainment and other situations, which can give rise to commercial bribery.

* The authors would like to thank Jake Schneider for his contribution to this article.