For the first time in more than two decades, Chinese regulators have amended the Anti-Unfair Competition Law, giving companies more clarity on what constitutes commercial bribery, while introducing increased compliance risk, as well.
On Jan. 1, the new version of China’s Anti-Unfair Competition Law (AUCL) took effect, marking the first technical changes to the law since its implementation in 1993 and drawing on lessons learned over the past two decades. Although the main purpose of the AUCL is to regulate unfair competition, it’s also China’s main statute for addressing commercial bribery.
Revisions to the AUCL are separate and distinct from the anti-corruption campaign of the Communist Party leadership, which began in 2012 and has been targeting almost exclusively party and government officials, members of the armed forces, and executives at state-owned enterprises. “The changes made to the Anti-Unfair Competition Law are another step in this longstanding effort to curb corruption,” says Kevin Jones, who leads the China Labor and Employment Practice at law firm Faegre Baker Daniels in its Shanghai office. “The initial years of the campaign were mainly focused on corruption within the government, where it has had a profound and wide-ranging effect, while the AUCL tackles it in the commercial context.”
Among the most significant changes, the revised AUCL clarifies the definition of commercial bribery; expressly imposes vicarious liability on companies; and significantly increases administrative penalties for commercial bribery acts.
Both national and local regulators are tasked with enforcing the law in China. Because the original 1993 AUCL vaguely defined what constitutes “commercial bribery,” this led to inconsistent interpretations by national and local regulators. “Payments that traditionally were not thought of as bribes were being treated as bribery or as violations of the law’s books and records provisions—shelf fees, for example,” says Wendy Wysong, who leads the Asia Pacific Anti-Corruption and Trade Controls Practice at Clifford Chance.
The amended AUCL attempts to clarify some definitions that “could lead to more consistency in how the law is enforced,” Wysong says. Further clarification is still needed, however, from the State Administration for Industry and Commerce (SAIC)—the agency that enforces commercial bribery laws in China—if those inconsistent practices are to be standardized, she says.
“The changes made to the Anti-Unfair Competition Law are another step in this longstanding effort to curb corruption.”
Kevin Jones, China Labor and Employment Practice, Faegre Baker Daniels
“Commercial bribery” defined. One important amendment addresses the definition of “commercial bribery,” whereas the original version of the AUCL did not define commercial bribery at all. Specifically, the amended AUCL clarifies the scope of what constitutes a bribe under Article 7, which defines commercial bribery to mean the “offering [of] money or goods or by any other means” to obtain a “transaction opportunity or competitive advantage.”
In comparison to the U.S. Foreign Corrupt Practices Act, which is focused on prohibiting bribes paid to foreign officials, the AUCL is focused on prohibiting bribes in the commercial context, even when there is no government involvement. “This is an important difference for U.S. companies with operations in China, as compliance with the FCPA does not guarantee compliance with the provisions of the AUCL,” Jones says.
One significant change to the definition of commercial bribery is that payments made to a counterparty to a transaction for the sale or purchase of a product is no longer presumed to be bribery. Rather, the law lists other potential bribery recipients, including employees of the counterparty in a transaction; any entities or individuals hired by the transaction counterparty to handle matters related to the transaction (e.g., sub-contractors, agents, etc.); or any entities or individuals that may “influence” a transaction through abuse of their power, function, or influence.
Sven-Michael Werner, a partner at law firm Bird & Bird in the firm’s Shanghai office, says the revisions made to the AUCL “do not constitute a major shift or leap of development in China’s regulation of commercial bribery.” Rather, the changes “bring welcome clarifications” to current rules on dealings with third-party business partners—in particular, sales agents, distributors, and competitors in the marketplace, he says.
Vicarious liability. Another notable feature of the revised AUCL is the express provision regarding vicarious liability. Under the law, companies will be liable for bribery acts committed by their employees, unless the company can prove that the employee’s actions were unrelated to the company’s efforts of seeking a transaction opportunity or competitive advantage.
This provision differs from the original AUCL, which did not address vicarious liability at all. “Previously, employers could escape liability if authorities were unable to prove a direct link between an employee’s actions and the employer,” Jones says.
Says Wysong, “The law is not clear on what test the regulators will apply to determine if an employer's actions are irrelevant: Is it the objective impact of his or her actions? The subjective intent?” Guidance from the SAIC is needed, but what this provision signals is that PRC regulators will have more incentive to pursue companies for their employees’ misconduct, which is already the case under the FCPA and the U.K. Bribery Act, she says.
Increased penalties. Penalties for commercial bribery are now much more severe, with a potential maximum fine of RMB three million (about U.S.$450,000), whereas the previous maximum fine was capped at RMB 200,000 (about U.S.$30,000), in addition to the confiscation of illegal gains. If a business operator commits a “serious” act of bribery, that operator will have its business license revoked.
It remains to be seen what Chinese regulators will consider a “serious” act of bribery, but just the threat of having a business license revoked should deter companies from taking such a risk. Moreover, if a business operator receives an administrative penalty for engaging in commercial bribery, enforcement agencies will publicly record that penalty, harming not just the company’s credit record, but potentially its business reputation, as well.
“Some of these changes were already enforced by local AICs, and many will see these changes as merely codifying previous enforcement priorities into law,” says Mimi Yang, a partner at Ropes & Gray and a senior foreign legal consultant in its Hong Kong office. “Regardless, because of the harsher penalties, multinational companies may now see that the cost of doing business in China has just increased.”
Compliance measures. In response to these amendments, compliance officers at multinational companies with operations in China should review existing compliance policies and procedures relevant to their business activities in the country. Consider conducting a focused review of existing business arrangements involving transaction counterparties and third parties, including agents, distributors, or other intermediaries that may pose a high risk. Werner recommends, for example, reviewing dealings with intermediaries and other third-party sales representatives, such as how rebates or sales commissions are granted, booked, and paid.
As a proactive compliance measure, always conduct due diligence prior to engaging third-party vendors who are intended to facilitate a transaction with the counterparty. And include terms and conditions requiring compliance by the third party pertaining to audit rights, conducting periodic audits, and third-party training in relation to these requirements.
Wysong of Clifford Chance further reminds compliance officers to keep in mind industry-specific standards, such as the PRC Pharmaceutical Administration Law, which prohibits pharmaceutical companies from offering or accepting kickbacks or other benefits off the books.
Finally, it’s important to train senior management and employees in China, especially those in high-risk roles, and ensure they’re informed of these changes. Moreover, as in any country, having eyes and ears on the ground is always a good idea, if possible.
“Companies need proper compliance oversight of their China operations, with reports to regional or U.S. compliance teams,” Jones of Faegre Baker Daniels says. “We see a lot of companies get into trouble because of a lack of oversight.”