Bribery watch: draft Anti-unfair Competition Law cracks whip

The revised AUCL further lists three categories of commercial bribery conduct that are prohibited by law:

• Obtaining economic benefits for entities, departments or individuals in the course of providing public service;
• Failing to record economic benefits provided in contracts and accounting books between business operators;
• Providing—or promising to provide—economic benefits to a third party with influence over the transaction, and thereby harming the legitimate interests of other business operators or consumers.

In the current AUCL, it is not clear how the conduct of an employee can lead to liability for the employer, which is an issue that has a more direct effect on the company itself. The new draft clears this up. It specifies that where an employee commits commercial bribery in order to obtain business opportunities or competitive advantages for the employer, the employer will be deemed to have committed commercial bribery. The only exception is that if there is evidence proving that the employee's bribe-taking is in conflict with the employer's interests, then his or her conduct not implicate the employer.

In relation to administrative sanctions, the current AUCL provides for fines of Rmb10,000 to Rmb200,000 ($1,500 to $30,000) and confiscation of the income attributable to the bribe. This year's revision imposes fines in the amount between 10% and 30% of a business operator's illegally-obtained revenue.

Game-changing implications

Promises, third parties and false records

The draft AUCL implies that the actual provision of benefits is not required to constitute commercial bribery–even the mere promise of providing benefits is sufficient. This broader scope will expose more companies to potential anti-bribery risks.

The definition of commercial bribery and the types of conduct listed in the revised AUCL introduces a new act that will be considered bribery: providing or promising to provide bribes to a third party which has influence over a transaction. So not only does offering bribes to the counterparty in a transaction constitute commercial bribery, offering bribes to any third party can as well. Examples can include shopping malls providing benefits to travel agencies or tour guides in order to attract tourists, a beer company promising goods to hotel staff in order to have them promote its products to hotel guests, and an insurance company working with schools to have them promote certain insurance packages to students.

The new AUCL clearly states that any failure to truthfully record, in contracts and accounts, economic benefits provided between business operators will be considered commercial bribery. What this means, in practice, is that authorities can impose sanctions once they identify any unrecorded benefits, and do so without having to investigate the origin or purpose of the benefits or whether they have caused unfair competition.

Legitimate discounts, commissions or benefits are usually specified in contracts and properly documented in accounting books, so this provision is aimed at punishing the conduct of disguising bribe-related transactions in company records.

Clear liability for employees' actions

Employee conduct will generally expose employers to potential legal liability under the proposed revision. The employer must provide substantial proof that its employee has accepted bribes contrary to the company's interests in order to qualify for exemption.

The concept is not new and under the current law, the authorities sometimes will find an employer liable for its employee's bribery conduct even without any clear evidence that the latter has been instructed by the management. The new AUCL, however, has made it more difficult for the employer to successfully argue that its employee's conduct is against company policies and has not been approved. This creates more challenges for the establishment and implementation of the employer's internal compliance policies and programs.

Proportionate penalties

The current AUCL's administrative sanctions for commercial bribery include fines and confiscation of illegal income. The fines are defined to be within a certain range and cannot be adjusted according to the amount of bribes involved or the illicit benefits obtained. Illegal income, on the other hand, is difficult to determine in practice as the authorities need to calculate the gains by deducting the legitimate costs. This method of calculation is rife with ambiguity and uncertainty.

The fines imposed by the new draft are set by a certain percentage (10%-30%) of the illegally-obtained business revenue, which is much easier to apply and reduces controversy. In addition, without deducting the costs, fines of a certain percentage of the illegally-obtained business revenue could be more than the illegal gains calculated under the law presently in force.

Also, according to the draft, administrative sanctions and criminal penalties can be enforced concurrently, while under the current law imposes criminal penalties if the conduct constitutes a crime, and if not, only imposes administrative sanctions.

Surviving the corruption crackdown

Although the draft AUCL is currently still soliciting comments, the provisions on commercial bribery emphasize the government's intention to increase regulatory supervision. They will provide clearer legal guidance for law enforcement authorities and make it easier for them to reach decisions or impose sanctions.

The business operators or the companies, on the other hand, will generally be subject to a higher standard of proof in commercial bribery investigations. For instance, the broader scope of prohibition under the proposed amendments requires companies to update their internal compliance policies to cover the act of promising bribes and third party bribery. The new requirement to truthfully record economic benefits in contracts and accounting books also calls for setting strict internal control systems and accounting policies. Lastly, the draft law entails greater risks for businesses when acts of bribery are committed by their employees. It is therefore critical for companies to not only have the necessary compliance policies in place, but also implementing these policies through regular, sufficient and effective employee trainings.

Jianwei (Jerry) Fang, Alan L. Zhou and Jieqiong Fei, Global Law Office, Shanghai

On February 25 2016, the Legislative Office of China's State Council published a draft of the revised PRC Anti-unfair Competition Law (AUCL), which is open to public comments until March 25 2016. It addresses issues such as misleading publicity, improper promotion through rewards or prizes, infringement of trade secrets and commercial bribery. The AUCL currently in force was enacted in 1993 and contains a total of 33 provisions. The draft proposes amendments for 30 of them and adds two new ones.

Commercial bribery is an important element of the revised AUCL, as seen by the amendments to Article 7 and Article 20. The draft offers a clearer definition of commercial bribery, identifies both the offering and receiving of bribes and explicitly lists three categories of bribery conduct. It also specifies the liability for employees that commit such acts and sets different levels of penalties.

These proposed changes could have great practical implications for private companies operating in China. In light of the government's strengthened enforcement efforts, companies should closely monitor the developments to this legislation and its implementation so as to best manage—and set strategies for—the entailed risks.

Commercial bribery heavily targeted

In the current AUCL, commercial bribery is described as prohibiting business operators from resorting to bribery, by offering money or goods or by any other means, in order to purchase or sell commodities. Certain commissions and discounts are permitted if they are documented truthfully and transparently in accounting records.

Compared with the 1993 version, the proposed draft provides a clearer definition of commercial bribery: when a business operator provides—or promises to provide—economic benefits to the counterparty or a third party that could influence a transaction, so that the party can obtain business opportunities or competitive advantages for the operator.

The revised AUCL further lists three categories of commercial bribery conduct that are prohibited by law:

• Obtaining economic benefits for entities, departments or individuals in the course of providing public service;
• Failing to record economic benefits provided in contracts and accounting books between business operators;
• Providing—or promising to provide—economic benefits to a third party with influence over the transaction, and thereby harming the legitimate interests of other business operators or consumers.

In the current AUCL, it is not clear how the conduct of an employee can lead to liability for the employer, which is an issue that has a more direct effect on the company itself. The new draft clears this up. It specifies that where an employee commits commercial bribery in order to obtain business opportunities or competitive advantages for the employer, the employer will be deemed to have committed commercial bribery. The only exception is that if there is evidence proving that the employee's bribe-taking is in conflict with the employer's interests, then his or her conduct not implicate the employer.

In relation to administrative sanctions, the current AUCL provides for fines of Rmb10,000 to Rmb200,000 ($1,500 to $30,000) and confiscation of the income attributable to the bribe. This year's revision imposes fines in the amount between 10% and 30% of a business operator's illegally-obtained revenue.

Game-changing implications

Promises, third parties and false records

The draft AUCL implies that the actual provision of benefits is not required to constitute commercial bribery–even the mere promise of providing benefits is sufficient. This broader scope will expose more companies to potential anti-bribery risks.

The definition of commercial bribery and the types of conduct listed in the revised AUCL introduces a new act that will be considered bribery: providing or promising to provide bribes to a third party which has influence over a transaction. So not only does offering bribes to the counterparty in a transaction constitute commercial bribery, offering bribes to any third party can as well. Examples can include shopping malls providing benefits to travel agencies or tour guides in order to attract tourists, a beer company promising goods to hotel staff in order to have them promote its products to hotel guests, and an insurance company working with schools to have them promote certain insurance packages to students.

The new AUCL clearly states that any failure to truthfully record, in contracts and accounts, economic benefits provided between business operators will be considered commercial bribery. What this means, in practice, is that authorities can impose sanctions once they identify any unrecorded benefits, and do so without having to investigate the origin or purpose of the benefits or whether they have caused unfair competition.

Legitimate discounts, commissions or benefits are usually specified in contracts and properly documented in accounting books, so this provision is aimed at punishing the conduct of disguising bribe-related transactions in company records.

Clear liability for employees' actions

Employee conduct will generally expose employers to potential legal liability under the proposed revision. The employer must provide substantial proof that its employee has accepted bribes contrary to the company's interests in order to qualify for exemption.

The concept is not new and under the current law, the authorities sometimes will find an employer liable for its employee's bribery conduct even without any clear evidence that the latter has been instructed by the management. The new AUCL, however, has made it more difficult for the employer to successfully argue that its employee's conduct is against company policies and has not been approved. This creates more challenges for the establishment and implementation of the employer's internal compliance policies and programs.

Proportionate penalties

The current AUCL's administrative sanctions for commercial bribery include fines and confiscation of illegal income. The fines are defined to be within a certain range and cannot be adjusted according to the amount of bribes involved or the illicit benefits obtained. Illegal income, on the other hand, is difficult to determine in practice as the authorities need to calculate the gains by deducting the legitimate costs. This method of calculation is rife with ambiguity and uncertainty.

The fines imposed by the new draft are set by a certain percentage (10%-30%) of the illegally-obtained business revenue, which is much easier to apply and reduces controversy. In addition, without deducting the costs, fines of a certain percentage of the illegally-obtained business revenue could be more than the illegal gains calculated under the law presently in force.

Also, according to the draft, administrative sanctions and criminal penalties can be enforced concurrently, while under the current law imposes criminal penalties if the conduct constitutes a crime, and if not, only imposes administrative sanctions.

Surviving the corruption crackdown

Although the draft AUCL is currently still soliciting comments, the provisions on commercial bribery emphasize the government's intention to increase regulatory supervision. They will provide clearer legal guidance for law enforcement authorities and make it easier for them to reach decisions or impose sanctions.

The business operators or the companies, on the other hand, will generally be subject to a higher standard of proof in commercial bribery investigations. For instance, the broader scope of prohibition under the proposed amendments requires companies to update their internal compliance policies to cover the act of promising bribes and third party bribery. The new requirement to truthfully record economic benefits in contracts and accounting books also calls for setting strict internal control systems and accounting policies. Lastly, the draft law entails greater risks for businesses when acts of bribery are committed by their employees. It is therefore critical for companies to not only have the necessary compliance policies in place, but also implementing these policies through regular, sufficient and effective employee trainings.

Jianwei (Jerry) Fang, Alan L. Zhou and Jieqiong Fei, Global Law Office, Shanghai