China's Ongoing Anti-Corruption Drive Also Affects Foreign Companies

Foreign companies do also get caught in the anti-corruption net. In 2017, a court in Lanzhou city jailed and fined six Nestlé employees, after a years-long investigation into bribery allegations surrounding sales of baby formula, according to a Reuters report. Over the years, the China outfits of other major foreign companies have also been penalized following corruption allegations, such as GlaxoSmithKline, IBM, Daimler, Pfizer, Avon and Morgan Stanley.

Although China has had anti-bribery laws in place for more than two decades, until recently they had not been often acted upon. But in March last year, efforts to improve enforcement were significantly raised when the country enacted the Supervision Law and established the National Supervisory Commission, or NSC. This created a new, highest-level, independent supervisory agency to monitor all public functionaries in the country, and granted it significant powers.

Foreign companies are also covered in recent legislation, although indirectly. Laws such as the revisions to China's 1993 Anti-Unfair Competition Law, or AUCL, passed in November 2017; and revisions to the PRC Criminal Procedure Law, introduced in 2018; do have an impact on foreign companies and acts of bribery.

In the 1993 AUCL, the purpose of commercial bribery was defined as “buying or selling goods,” while the definition in the 2017 AUCL has a broader scope of “seeking business opportunities or competitive advantages.”

The 2017 AUCL also states that bribery committed by an employee will be generally attributed to the business operator itself, without considering whether the business operator is aware of, or authorizes, such bribery. A foreign company will be held responsible for its employees' misconduct, whether it is aware of it or not.

In the revised Criminal Procedure Law, or CPL, passed in October 2018 – which was mainly intended to improve the government's capabilities to track down and prosecute corrupt officials and their assets overseas – foreign companies are also indirectly affected. “Although the primary purpose of the CPL reform is to strengthen the government's fight against official bribery, the new procedures potentially apply to all suspects involved in corruption and bribery-related crimes under PRC law, regardless of their nationality and even if they are outside of China at the time of prosecution,” said law firm Baker McKenzie in a recent review of the Act. “Companies and employees doing business in China need to remain vigilant as they can still be implicated if involved in bribery-related activities.”

Foreign companies need also be aware that activities that may be considered acceptable business practice in their home jurisdictions may now fall foul of Chinese law. The acceptable levels of gift giving and entertainment expenses are cases in point.

In 2018, the Shanghai Market Supervision Bureau, or MSB, penalized two medical device companies on the grounds of committing “commercial bribery” under China's revised AUCL because they had paid for meals and provided entertainment to doctors. For many foreign companies, paying for meal and entertainment expenses of a customer is a customary business practice, and not regarded as 'bribery' within reasonable amounts.

The two MSB cases, however, seem to overturn that accepted practice, according to a report by law firm Squire Patton Boggs. “In both decisions, the MSB does not appear to have analyzed the value of the meal and entertainment expenses, or even given weight to such expenses, as a factor in determining whether bribery had been committed,” says the report. “Instead, the MSB seems to have interpreted the activity itself (i.e., paying the meal and entertainment expense of a customer or potential customer) as commercial bribery. In fact, in the first case, the total cost of the meal was only $90 for two or more persons, less than the threshold of many multinational companies.”

These sorts of rulings are not rare. The NSC and the Communist Party of China Central Commission for Discipline Inspection said that a total of 5,143 Chinese officials were punished for violating frugality rules in March 2019. Of these, the awarding of unauthorized allowances or bonuses; the giving or accepting of gifts; and the misuse of public funds for banquets were cited as the most common misdemeanors.