Commercial bribery and liability

Under Article 93 of the PRC Criminal Law, state functionaries include: (i) persons who perform public service in state organs in the legislative, administrative or judicial branches or the military, in state-owned companies or units, or state institutions; (ii) such persons assigned to companies, enterprises or institutions not owned by the state or people's organisations to perform public service; and (iii) other persons who perform public services according to law.¹ In addition, The Summary of Symposium of National Courts on the Trial of Cases of Economic Crimes of November 2003 defines “engaging in public services” as performing the function of organising, leading, supervising, managing, etc. state-owned property on behalf of state organs, a state-owned company or enterprise, an institution or a people's organisation.

It should be noted that the definition of state functionaries does not differentiate between different ranks. Even actions involving only low-ranking employees can constitute official bribery. The key point is that a person has official capacity. This notably includes persons who at first sight do not work for the state or a state-owned entity, but in fact do perform a state function – for example by assignment, delegation or authorisation.

(2) Giving property

Official bribery must involve the act of giving, which means that an offer is not sufficient for legal liability. It must also involve “property”. This refers not only to money and property in kind, but also to property benefits, as long as the value can be calculated in monetary terms. This includes housing decorations, membership cards containing money, token cards and travel expenses (Article 7 of the Opinions); purchasing a house, automobile or any other item at a price that is obviously lower than the market price, or selling such item for a higher price; accepting, without contribution, proceeds by entrusting a person for investment in securities or futures or any other financial management; and arranging a job for a particular associate so that the latter can collect so-called wages or salaries without actual work in order to secure benefit.²

On the other hand, it is noteworthy that offering or accepting non-property benefits, such as qualifications for entering a college, sexual favours, etc., are as yet excluded from the scope of official bribery.

(3) For illegitimate benefit

Generally speaking, the person or unit providing the bribe must do so with the intent of securing an illegitimate benefit which the state functionary is in the position to grant, even if no benefit or preferential treatment is finally gained. In the Opinions, Article 9 expands on the understanding of the intention of illegitimate benefit, in accordance with China's changing circumstances: as long as a bribing party seeks any aid or convenience in violation of a law, administrative regulation or rule, policy or industrial norm, this should be regarded as an intention of illegitimate benefit. This also includes, in commercial activities such as bidding and government procurement, the giving of property to a relevant person in violation of the principle of fairness in order to secure a competitive advantage. On the other hand, this excludes conduct for which the only purpose is to help officials to perform their legitimate work.

In fact, the intent of illegitimate benefit is not an absolute condition for criminal liability. The second paragraph of Article 389 of the PRC Criminal Law, for example, already prescribes that “Whoever, in economic activities, violates state regulations by giving a relatively large amount of money or property to a state functionary or by giving him rebates or service charges of various descriptions shall be regarded as guilty of offering bribes and punished for it.” It is difficult to draw the line when a businessperson pursues general business goals by chasing an opportunity or trying to exclude competitors; in that case, reference should be made to the means of pursuing a transaction.

In other words, where the intent for illegitimate benefit is difficult to prove, the law offers an alternative; as long as the gift is relatively large, the constitution of a crime could be assumed. This word “relatively” indicates that the standard is in fact one of reasonableness, which is a common feature of Chinese judicial practice. For guidance, a judge will often refer directly to the below prosecution standards, though he may also take other factors into consideration.

(4) Standards

In the Guidelines for Bribery Prosecution Standards of December 22 2000, the Supreme People's Procuratorate set the standards for prosecution in cases involving the bribery of state functionaries at Rmb10,000 (US$1400). For a bribe to a state functionary worth less than Rmb10,000, the local People's Procuratorate should proceed with prosecution only in one of the following aggravated circumstances: (a) the purpose of the bribe was to gain an illegitimate benefit; (b) the bribe was given to three or more state functionaries; (c) the bribe was given to a China Communist Party or government leader, a judicial officer, or an officer that enforces the law (such as from the Public Security Bureau or the State Administration for Industry and Commerce); or (d) the bribe caused severe damage to national or social interests. With this, the People's Procuratorate retains considerable discretion to prosecute cases it finds worthwhile – even though the clear message is that smaller cases need not always be prosecuted.

Moreover, according to the same Guidelines, higher standards have been set where a bribe involves an entity rather than an individual; criminal prosecution will follow if an individual's bribe to an entity is at least Rmb100,000, or when a unit's bribe of an individual or entity is at least Rmb200,000. Cases that do not reach these standards will only be prosecuted in case of aggravated circumstances (see above).

Liability Among Business Operators

Bribery that does not involves the state, termed as “commercial bribery to non-state functionaries”, is a crime under Articles 163 and 164 of the PRC Criminal Law. Conditions for property and intent are similar to those for official bribery; however, the bribing of a non-state functionary is only a crime where the amount in question is “relatively large”. This term is further explained in the Guidelines for Criminal Prosecution of Economic Crimes passed jointly by the Supreme People's Procuratorate and the Public Security Bureau on April 18 2001. Article 8 stipulates that company employees should be prosecuted for criminal liability if they accept a bribe of Rmb5,000 or more, while under Article 9 individuals and units giving a bribe are liable for criminal prosecution if the bribe amounts reach Rmb10,000 and Rmb200,000, respectively.

(1) Administrative liabilities

On the other hand, authorities have established a system of rules of administrative liability for bribery among companies. Based on provisions of the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法), the Tentative Provisions for the Prohibition of Acts of Commercial Bribery (Tentative Regulations) of November 15 1996, the PRC Administration of Pharmaceuticals Law and other similar provisions, the State Administration for Industry and Commerce (SAIC) and its local counterparts above county level may investigate cases of commercial bribery that fail to meet the standards of the PRC Criminal Law, and impose a punishment where illegal activities are ascertained.

Under Article 8 of the Anti-unfair Competition Law, a business operator, when selling or purchasing commodities, may not offer an off-the-book rebate in the form of money or property or by other means. A business operator can give a discount or pay commission to a middleman but only if this transaction is properly entered into the accounting books.

In the Tentative Regulations, the SAIC provides more specific definitions:

(i) “Money or property” refers to cash and physical objects, including money or properties paid by business operators to other organisations or individuals in the name of promotional fees, propaganda fees, sponsorship fees, scientific and research expenses, service fees, consulting fees or commissions, or by means of reimbursing all kinds of fees in order to sell or purchase commodities. The “other methods” are defined much more broadly than in the PRC Criminal Law, and include the provision of other benefits, such as domestic and overseas travel and study, employment, or special treatment.

(ii) Off-the-book is a key issue for administrative liability. A discount, made in an open and explicit way and properly accounted for, may be given; on the other hand, secret kick backs shall be punished.

(iii) Another key issue to differentiate legal and illegal activities is the qualification of the middleman. Commissions, which are a kind of service reward arising from the performance of a brokerage contract, by an independent, legally qualified middleman, are permitted. Paying a promotion fee to a third party without a direct interest or relevant legal qualifications, such as an employee or related company, shall be punished. Moreover Article 8 provides that “managers shall not send cash or objects incidentally to other organisations or individuals in commodity trading, except small-amount advertising gifts according to business practices.”

Article 22 of the Anti-unfair Competition Law provides that the SAIC may impose a fine for bribery of between Rmb10,000 and Rmb200,000, and confiscate the illegal income – normally meaning the balance between the sales price and the purchase price. In practice, the confiscated illegal income is the biggest part of the losses suffered by business operators, and usually exceeds the maximum fine. Previously, the SAIC tended to include all sales income after the bribe (including the paid tax) to calculate such illegal income, rather than distinguishing between legal sales income and sales income with direct causality to the bribe. However the Measures on Calculating Illegal Income in Cases Involving Administrative Penalty (Zong Ju Ling NO.37) issued by the SAIC on November 21 2008 (effective on January 1 2009), prescribes in detail the different ways to calculate illegal income depending on the industrial sector in which the bribe is made.

Specific industries also have their own governing measures. For instance, in the pharmaceutical sector, the PRC Administration of Pharmaceuticals Law provides that “if the circumstances are serious, the SAIC shall revoke the business licences of the pharmaceutical producing enterprises and pharmaceutical trading enterprises, and shall notify the pharmaceutical supervisory and administrative departments which shall revoke the Pharmaceutical Production Licence and Pharmaceutical Trading Licence.” Another example is the 2007 Regulations on the Establishment of the Fault Records of Commercial Bribery in the Field of Medicine Purchasing and Selling issued by the Ministry of Public Health, which requires that local Administrations for Public Health establish a black list of companies that have engaged in commercial bribery, effectively barring them from further doing business.

Mitigating the Risks

With bribery continuing to be pervasive especially in certain industries, a good understanding of China's legal framework regarding commercial bribery is imperative for many business operators. To avoid liabilities, counsel should help their companies to establish clear, strategic guidelines on dealing with bribery, and teach employees how to handle requests for bribes. Above all, the concept of bribery under Chinese law is different than in many other countries, and so business operators and their counsel are advised to understand these differences.

Some of the golden rules for reducing risk are:

• A buyer should explicitly indicate a discount in the sales contract, rather than offer a kick back or discount separate from the contract.

• Under some circumstances, the buyer can employ a qualified consultant to assist with negotiations, but the remuneration shall be recorded in the accounting books, according to the facts.

• Employees should be prohibited from accepting any money or goods without authorisation, as the company will assume liability for their employees' activity.

To tackle corruption, China's legal framework for bribery is being actively expanded and detailed, with the courts and administrative authorities under great pressure to deal with instances of bribery in the most severe way, whether involving state functionaries or only business operators. However it takes time to change business practices, particularly in sensitive industrial sectors such as pharmaceuticals and construction. Foreign investors are easy targets, and should therefore actively consider the legal risks of their China strategies, and take measures to mitigate potential liabilities.

Footnotes

1. “Other persons” is dealt with in more detail in the Interpretations of the Standing Committee of the National People's Congress on Paragraph 2 of Article 93 of the Criminal Law of the People's Republic of China, April 29 2000.

2. See the Opinions on Issues Concerning the Application of Law in the Handing of Criminal Cases Involving the Acceptance of Bribes, issued jointly by the Supreme People's Court and the Supreme People's Procuratorate and effective as of July 8 2007.