On February 25, 2016, the Legislative Office of China’s State Council published a draft of the revised Anti-Unfair Competition Law (AUCL) for public comment. The AUCL is China’s fundamental law on the prohibition of, and administrative enforcement against, commercial bribery, and the new law, if passed, will have a significant impact on business operations in China.

The current version of the AUCL was passed and became effective in 1993, and contains a very general provision on prohibition of commercial bribery. The vagueness of this provision has given the enforcement authority i.e., the State Administration for Industry & Commerce (SAIC) and its local offices, a great deal of discretion in enforcement. In the revised AUCL draft, the anti-commercial bribery provision has become significantly clearer, which may help to eliminate uncertainties and increase the effectiveness of companies’ internal compliance measures – but significant ambiguities still exist.

Definition of Commercial Bribery

The revised AUCL draft has an entirely new definition for commercial bribery i.e., “a business operator provides or offers to provide financial benefits to its transaction counterparty or a third party that has influence on the business transaction to induce them to procure transaction opportunities or competitive advantages for the business operator.”

This new definition constitutes significant progress in that the corrupt intent behind the payment is now a prerequisite to commercial bribery. The current AUCL, by comparison, does not explicitly require this corrupt intent.

Commercial Bribery Scenarios

The revised AUCL draft also sets forth three typical commercial bribery scenarios. One scenario relates to public service providers and one repeats the legal definition of commercial bribery. However, there is one scenario highly relevant to companies: “provision of financial benefits between business operators that are not truthfully recorded in agreements and accounting books.” This clause seems to set up an assumption that any payment, if not supported by an agreement and accounting records, is commercial bribery. This clause, if finally adopted, will significantly increase the risk related to inaccurate book-keeping.

Corporate Liabilities for Employee Violations

In previous years, companies have been heavily fined for payment of bribes by individual employees in violation of company policies and compliance requirements. The revised AUCL draft has only increased, not reduced, companies’ liabilities for individual employees’ violations.

The revised AUCL draft clearly provides that “if employees have procured transaction opportunities or competitive advantages for business operators through commercial bribery, such activities shall be viewed as the activities by the business operators.” This clause implies a strict liability for companies, and as a result companies may not use internal prohibition of commercial bribery as a defense.

Penalties

In the current AUCL, the penalties for commercial bribery are:

  • Fines from RMB10,000 to RMB200,000; and
  • Confiscation of illegal gains, i.e., disgorgement.

The revised AUCL draft has proposed a significant change in this regard and the penalty for commercial bribery will be 10 percent to 30 percent of the “illegal turnovers.”

In the previous years, calculation of penalties has been a key area of ambiguity and discretion, and this new clause, if passed, does not seem to resolve this issue.

Observations

The new AUCL, if passed, will revamp the anti-commercial bribery clauses in the law and create new challenges for companies’ compliance programs in China. Though the new AUCL draft has proposed some welcome revisions, it also has created more room on certain issues for government discretion.

Companies need to continue to monitor the development of the new law, and in the meantime, pay attention to certain aspects of their compliance programs where the draft AUCL indicates significant risks, for example:

  • Whether their internal compliance programs are sufficient to prevent or detect individual violations;
  • Whether their agreements have clearly described the nature and purpose of payments to business counterparties (such as rebate payments, currently an enforcement hot area); and
  • Whether they require their business counterparties to issue invoices or receipts acceptable under Chinese accounting rules for payments and to accurately record the payments in their accounting books.