China Passes Anti-Bribery Law

China, where many companies get tripped up for violating the U.S. Foreign Corrupt Practices Act, has passed an anti-bribery law of its own.

The measure, passed in late February, is an exercise in brevity. While the FCPA weighs in at 16 pages, and the U.K. Bribery Act runs about 17 pages, the Chinese anti-bribery law is a whopping two lines of text.

But don't judge the regulation by word count alone. China's anti-bribery provision, actually an amendment to the People's Republic of China Criminal Law passed in late February, has the potential to be an important piece of legislation with a wide range of consequences for multinational companies operating in China and elsewhere.

Some critics dismiss the amendment as simply another political tool of Beijing. It's so short, they assert, because the Chinese leaders want to use it to suit their needs, whether that means attacking domestic rivals or weakening foreign competitors. “In the Chinese system, the Party is above the law,” says Bob Broadfoot, managing director of Political & Economic Risk Consultancy, a Hong Kong firm he founded in 1972. “No matter what act they pass, it's subject to the interpretation of the Party. The U.S. FCPA deals with very clear behavior, and it is not subject to the whims of the U.S. government; same with the British act.”

Even if it doesn't turn out to be a blunt instrument of the ruling Communist Party of China, the China anti-bribery measure is easily viewed as legislation passed more for image than impact. The country has a real public relations problem when it comes to corruption, closer in the annual rankings to rogue states than to solid international actors—it's currently 78 on the Transparency International list, just below Columbia and Peru and just ahead of Lesotho and Malawi.

Critics of the law suspect that China might just be signing agreements and making proclamations in an attempt to prove that it's a leader in reform rather than the target of the reform. “The government is concerned that corrupt officials are besmirching the good name of the Communist party by engaging in corrupt behavior,” says Amy Sommers, Shanghai-based national China partner for Squire, Sanders & Dempsey.

Yet there is a distinct possibility that China's anti-bribery law isn't just another political weapon or act of window dressing. While it's too early to tell how vigorously the government will enforce the law—the amendment goes into effect on May 1—professionals are beginning to contemplate what it means if China does actually enforce the law.

Corporate attorneys are now looking at what types of practices would run afoul of the rule. There's no doubt that U.S. and European companies might engage in activity that could fall under the new law, they say. If they have a presence in China and if one of the employees of that unit makes a business trip to a foreign country and gives a bribe, it might violate the China law. Indeed, local employees may be more likely—because of historical practice in China and the tradition of gift giving—to consider inducements for favorable treatment acceptable. And neighboring countries, where they are likely to travel to drum up sales or buy materials, are still quite corrupt.

“If you have a joint venture in China selling to the government of Vietnam or Mongolia, it would be subject to the law,” says Eric Carlson, a lawyer at Covington & Burling in Beijing.

Some attorneys wonder exactly how this will work, and how far the Chinese are willing to reach. There's the obvious question of what to do about Hong Kong, Macau, and Taiwan, since they can be considered foreign countries, or not, by Beijing for different purposes. Of greater concern for multinationals is the fate of a branch office running afoul of the law. It would be in China, but not a separate legal entity from the parent company, so the Chinese government might go after the home office.

“It used to be that when a company resolved its FCPA exposure, that was it. Now companies are going to have to deal with enforcement from two, three, four different countries.”

—Mike Koehler,

Assistant Professor of Business Law,

Butler University

But most of all, attorneys wonder how China will deal with the finer points of anti-corruption theory and practice. More than 30 years after the U.S. FCPA was passed, the exact definitions of a bribe and of a foreign official are still being debated. The law is as contentious as ever. China's anti-bribery measure, with only a two-line description and no case law backing it up, could be enforced in almost any possible manner. The Chinese might be strict constructionists, prosecuting only those giving bags of cash to foreign officials. Or they could choose to examine practices that are not so obviously corrupt, such as lavish dinners held for corporate officers at government-owned companies.

There's certainly no standard. Under the U.S. FCPA, facilitation payments are allowed. Under the U.K. Bribery Act, they are not. “Even two peer nations don't agree,” says Mike Koehler, assistant professor of business law at Butler University.

Koehler argues that the China anti-corruption law needs to be viewed in context. Nations globally are getting into the anti-bribery game, in part to work their way up the Transparency International rankings with the hope of raising more money. It turns out that fighting bribery generates huge fines. Koehler says that a sort of arms race might be developing, with countries trying to out-FCPA each other. In addition to the U.S., U.K., and Chinese laws, most European Union countries have passed their own statutes to meet the Organization for Economic Co-operation and Development Convention on Combating Bribery. Japan has Article 18 of its Act Against Unfair Competition. And Russia and India are contemplating their own anti-bribery laws.

THE AMENDMENT

The following excerpt from law firm Norton Rose details the amendment to the PRC Criminal Law:

The Amendment consists solely of one additional sub-article to the PRC Criminal Law which reads as follows:

“Whoever provides property to a foreign official or an official of an international public organization for the purpose of seeking an improper commercial benefit, will be punished [in accordance with the provisions applicable to commercial bribery].”

An initial observation which can be made is that the Amendment has not been inserted into the “Graft and Bribery” chapter of the PRC Criminal Law which deals with corruption of public officials (where one may ordinarily expect it to be placed) but in the “Crimes against the Order of Socialist Market Economy” chapter, which deals with “commercial bribery”, i.e. the offence of actively bribing non-public officials.

While at first glance the placing of the Amendment in the PRC Criminal Law may appear surprising, it is consistent with China's obligations under the United Nations Convention against Corruption to prosecute the bribery of foreign officials where the purpose of the bribe is to obtain an advantage in the conduct of international business. Moreover, by stating that the purpose of the bribe should be the receipt of “an improper commercial benefit”, the Amendment itself suggests that an offense will only be committed when the purpose of the bribe is of a commercial nature.

Both companies and individuals can be punished under the Amendment. In accordance with Articles 6 and 7 of the PRC Criminal Law, the Amendment will be applicable to PRC nationals both in the PRC and outside the PRC, and all PRC companies (and their managers) who carry business overseas (including Sino-foreign joint ventures, and wholly foreign-owned enterprises). If the offense is serious, individuals may face criminal detention of between three to ten years, while companies may receive fines, and managers directly responsible for an offence may also face criminal detention of up to ten years.

Unfortunately the Amendment provides little detail on the behavior that will actually be prosecuted by PRC authorities, or the prosecution thresholds, potential affirmative defenses and potential exemptions. In this regard, the one-sentence addition to the PRC Criminal Code compares rather unfavorably to the FCPA's sixteen-page counterpart or the U.K. Bribery Act. Implementing regulations may soon be passed which should provide guidance and greater legal certainty regarding the operation of the Amendment.

Source: Norton Rose.

“It used to be that when a company resolved its FCPA exposure, that was it,” says Koehler. “Now companies are going to have to deal with enforcement from two, three, or four different countries.”

Corporate attorneys say that in the absence of precedent in and interpretation from countries with new anti-bribery laws, particularly China, companies should reference the OECD and United Nations conventions. The Chinese law was almost lifted verbatim from them, and there is a sense that countries that are new at this game will defer to the international organizations. Attorneys and consultants add that the training undertaken and procedures used by multinationals now to meet their current obligations under U.S. law are probably thorough enough to satisfy the new players in the anti-corruption space.

Proponents of the measure say that the Chinese anti-bribery law is good news for foreign companies. They believe that the country does want to change, and that if it does succeed in doing so, the playing field will be significantly leveled, particularly in Africa and Central Asia. They also assert that the environment is far better than the skeptics would have you believe. Over the last few years, they say, Chinese companies have started to understand that being clean is actually profitable, and in many cases they are leading the anti-corruption push. 

“It's not just the stick. It's the carrot,” says Jim James, a partner at Norton Rose in Hong Kong. “You are seeing Chinese companies approaching anti-corruption procedures with an acceptance that they are a necessary part of their business and that they help the bottom line. It used to be that there was a reluctance to engage in the [anti-bribery] process at all. Now they want to be seen as willing to comply, rather than as a group of delinquents dragging their feet, complying when it suits them and hoping to evade detection otherwise.”

“Foreign companies can go to Chinese companies with a reasonable expectation that the language they speak, the FCPA-Bribery Act language, will not be wholly foreign to their Chinese counterpart,” he concludes.