China’s new Anti-Unfair Competition

China’s new Anti-Unfair Competition Law (the New Law) was promulgated by the Standing Committee of the National People’s Congress on November 4, 2017 and will take effect from January 1, 2018, by which date the current version of the law promulgated back in 1993 will cease to be effective.

Whilst the New Law covers different forms of unfair competition practices, this briefing only focuses on the provisions with regard to bribery in commercial transactions.

Since the first draft of the New Law was published for public consultation in early 2016 (the First Draft Amendments), there have been a few amendments made to the draft and the final version of the New Law has deviated significantly from the First Draft Amendments as far as the provisions on bribery are concerned.

By way of background, the current Anti-Unfair Competition Law had long been subject to market criticism due to the fact that it failed to set out clear parameters for the offence of commercial bribery¹. Although some clarity was provided in the Interim Provisions on Banning Commercial Bribery (SAIC Provisions) issued by the State Administration for Industry and Commerce (SAIC, being one of the anti-bribery enforcement agencies in China) in 1996, the line had never been clear between permissible business incentives offered to transaction counterparties and impermissible commercial bribery1. As a result, SAIC’s local counterparts exercised great discretion in the interpretation and enforcement of the law in practice and different opinions often existed as to whether or not a particular act amounted to bribery.

The market therefore expected the New Law to clarify what exactly would be treated as bribery in the commercial arena.

To provide a complete picture, we compare in this article the relevant provisions in the current Anti-Unfair Competition Law, the Frist Draft Amendments and the New Law in order to better understand the implications of the New Law. We focus on three elements which are most relevant in this context: (i) what practices would constitute bribery, (ii) whether a business counterparty would be a briber-taker, and (iii) whether a corporate would bear liability for its employees’ bribery activities.

Article 8 of the current Anti-Unfair Competition Law provides, using an undefined word “bribe” to describe bribery activities, that business operators must not, by using money,property or other methods, bribe others in order to sell or purchase goods. It further provides that (i) provision of off-the-book rebate by a party to its counterparty or individuals shall constitute bribe-giving, whilst acceptance of such off-the-book rebated by the counterparty or individuals shall constitute bribe-taking, and (ii) business operators may give discounts to counterparties or pay commissions to intermediaries provided both parties to the transactions expressly and genuinely record the discounts and commissions in their accounts and books.

Based on the principles set out in the law, the SAIC Provisions explain a few key terms in order to guide its implementation, including “discounts”, “commissions”, “off-the-book rebate” and “expressly and genuinely recording”, and provide that business operators must not give cash or property to business counterparties as gifts in the sale and purchase of goods, with the exception of promotional gifts of small value according to commercial practice, otherwise it will constitute commercial bribery.

It is not certain what practices constitute bribery given the absence of a clear definition of bribery. However, the ways in which the local counterparts of SAIC have interpreted and enforced the current Anti-Unfair Competition Law and SAIC Provisions suggested that corporate-to-corporate incentives may very likely be regarded as commercial bribery unless they fall squarely within the narrowly described scope of discounts, commissions and promotional gifts, as briefly described above. As a result, business operators have been struggling in trying to figure out what may be offered in this competitive market without crossing the line. The tension between business units who propose innovative commercial incentives and compliance team has been phenomenal.

Bribes may be given to individuals as well as to corporates. In practice, there have been many cases, including, for instance, the ten cases relating to tyre companies published by Shanghai AIC early this year, where corporate-tocorporate arrangements between direct transaction parties (e.g. manufacturers and distributors) were regarded as bribery.

Although the current Anti-Unfair Competition Law is silent on this point, the SAIC Provisions do make it clear that the act of an employee who sells or purchases goods for a business operator by way of bribery shall be regarded as the conduct of the business operator. The SAIC Provisions however do not provide any defence that the corporate concerned may use to defend its position.

The First Draft Amendments took the bold step of trying to define commercial bribery. Article 7 of the First Draft Amendments provide as follows:

“A business operator may not engage in the following commercial bribery acts: (i) to gain financial interests for its entity, department or persons in or through public services; (ii) to offer financial interests without truthfully reflecting that in contracts or accounting documents; or (iii) to offer or promise to offer financial interests to a third party who may exercises influence on the transaction, whereby damaging the lawful rights and interests of other business operators or consumers.

Commercial bribery refers to the circumstances where a business operator offers or promises to offer financial interests to its business counterparty or a third party who may exercise influence on the transaction, so as to induce them to seek business opportunities or competitive advantages for the former. The party who offers or promises to offer financial interests shall be regarded as the party of giving commercial bribery, while the party who accepts or agrees to accept such financial interests shall be regarded as the party of taking commercial bribery.”

Clearly, the First Draft Amendments made an attempt to provide a clear definition of commercial bribery which is missing from the current Anti-Unfair Competition Law. According to the provisions quoted above, commercial bribery comprises the following components

• Financial interests being offered or promised to be offered.
• To the business counterparty or a third party.
• To seek business opportunities or competitive advantages.

The logical connection between the definition of commercial bribery in the second paragraph and the specific circumstances in the first paragraph, as both quoted above, is not entirely clear.

It is unclear whether the first paragraph merely serves as an illustration of a few examples of commercial bribery or intends to supplement conditions for an act to be regarded as commercial bribery. Specifically, while financial interests are offered by a business operator to its counterparty in seeking competitive advantages, would such act only be regarded as commercial bribery if the parties failed truthfully to reflect such arrangements in contracts or accounting documents? Whilst such financial interests are offered by a business operator to a third party who may exercise influence on the transaction, would such act only be regarded as commercial bribery if such arrangement damages the lawful rights and interests of other business operators or consumers? If the answers to these questions are “no”, the ambit of commercial bribery under the First Draft Amendments becomes even wider.

It seems that the First Draft Amendments also failed to answer the questions that the market expected to be answered.

Under the First Draft Amendments, bribes may be given to a business operator’s counterparty as well as a third party who may exercise influence on the transaction. Therefore, business counterparties are captured in the scope of bribe-takers under the First Draft Amendments.

The First Draft Amendments provide that an employee’s act of commercial bribery in seeking trading opportunities or competitive advantages for a business operator shall be considered as the act of the business operator, unless it can be proven that the employee’s act is in breach of the interests of the business operator.

The First Draft Amendments make an improvement by providing a defence that a corporate may rely on although the scope of such defence is rather vague. “Interests of the business operator” may refer to a short-term interest, (e.g. securing a sales contract), or a long-term interest, (e.g. being compliant to avoid penalties). It would no doubt receive different interpretations if such defence is raised in practice.

The New Law has made a rather significant change in taking out a business operator’s counterparties from the scope of bribe-takers, which indicates that corporate-to-corporate commercial incentives, which have long been the targets of anti-bribery enforcement by SAIC (and its local counterparts) would most likely no longer be regarded as a commercial bribery under the New Law.

Article 7 of the New Law provides as follows:

“Business operators must not use financial or other methods to bribe the following entities or individuals in seeking business opportunities or competitive advantages:

• Staff members of transaction counterparties.
• Entities or individuals entrusted by transaction counterparties to handle relevant matters.
• Entities or individuals that may take advantage of the work position or influential power to exercise influence on transactions.”

Article 7 further restates the position under the current Anti-Unfair Competition Law that business operators may offer express discounts to business counterparties or pay commissions to intermediaries and shall genuinely record such discounts or commissions on the books and accounts by both parties involved.

The New Law goes back to the approach under the current Anti-Unfair Competition Law in using “bribe” to describe “bribery”, as may be seen from the provisions above, which may be rather disappointing. It is also notable that it expands the purpose of bribery from “selling or purchasing goods” under the current Anti-Unfair Competition Law to “seeking business opportunities or competitive advantages” which sensibly captures a broader scope of activities.

The most fundamental change introduced by the New Law is the removal of transaction counterparties from the scope of briber-takers, as shown in the provisions highlighted. According to market commentary, this change was based on comments collected in the draft consultation stage that China had been penalizing commercial arrangements (e.g. sales bonus, incentives) between transaction parties as bribery which were however often regarded as legitimate in other jurisdictions. It was noted in some of the comments that “bribe” was often defined in many jurisdictions as an improper offer or payment of something of value to an individual employee, agent or other fiduciary with the intent to induce or reward the recipient for acting in violation of the recipient’s legal duties to the recipient’s employer or principal and that the scope of bribery defined under Chinese law appeared to be a lot broader.

Obviously these comments have been reflected in the New Law. It looks from the market commentary so far that this change has been viewed as a positive step allowing transaction parties to agree on flexible transaction arrangements which would have been regarded as bribery under the current Anti-Unfair Competition Law.

However, the following questions have arisen from this change which call for further clarification

• If the transaction counterparty is out of the scope of bribe-takers in the first instance, what is the implication of the provisions requiring the discounts and commissions between the transaction parties to be recorded genuinely to the books and accounts? What if these requirements are not complied with? Would non-compliance make the transaction a bribery again? If the answer is yes, it is certainly contradictory to the position established by other provisions of Article 7, and if the answer is no, what is the point of having these provisions included in Article 7? The penalty provisions of the New Law only refer to “bribery”?
• If the arrangements between transaction parties fall outside of the scope of commercial bribery under the New Law, how should these arrangements be viewed with respect to offences under the PRC Criminal Law with regard to bribe-giving to entities (in Chinese: 对单位行贿罪, Article 391) and bribe-taking by entities (in Chinese: 单位受贿罪, Article 387)? Under these PRC Criminal Law provisions, off-the-book rebate and commissions taken by, or given to, a state-owned enterprise may constitute a criminal offence. The New Law is meant to govern not only transactions between private companies but also transactions between private companies and state-owned enterprises. The gap therefore emerges where an improper transaction arrangement between a private company and state-owned enterprise would not be regarded as bribery under the New Law but could potentially constitute a criminal offence of bribery under the Criminal Law.

Given the above, it remains to be seen how the newly defined bribery under the New Law will be implemented.

The New Law takes the same position as the First Draft Amendments in confirming that bribery committed by an employee of a business is deemed to have been committed by the business. It makes it a defence for the business if the business can prove that the act of the employee is irrelevant to seeking a transaction opportunity or competitive advantage for the business.

Compared to the defence under the First Draft Amendments, the defence under the New Law is more specific and less ambiguous, which is an improvement. However, proving the irrelevance between the bribery and the transaction opportunity or competitive opportunity can be very challenging for the corporates in practical terms, which will make it difficult to use the defence successfully.

Corporates should seriously consider the risks that may be extended to it by employees’ bribery conduct, given the position under the New Law.

Beyond all these achievements and uncertainties under the New Law, administrative penalties that may be applied for bribery are significantly increased from fines ranging from RMB10,000 to RMB200,000 plus confiscation of illegal income under the current Anti-Unfair Competition Law, to fines ranging from RMB100,000 to RMB3 million, confiscation of illegal gains, and in the worst case scenario, revocation of business licence.

Businesses operating in China need to be aware of these upcoming changes and take the necessary precautions by implementing robust and effective anticorruption compliance programs.