On 25 February 2016, the State Council released for public consultation draft amendments (“Draft Amendments“) to the PRC Anti-Unfair Competition Law (“AUCL“), the first time after more than 20 years since the AUCL’s enactment. Notably, the Draft Amendments introduce new definitions, enhanced enforcement measures and tougher sanctions to regulate commercial bribery, which echoes the ongoing corruption sweep in China. The Draft Amendments signal the Chinese government’s intention to further tighten their stance on tackling commercial bribery.
Major Implications
The existing AUCL, promulgated in 1993, is vague in defining commercial bribery. At present, the governing authorities, namely, the State Administration of Industry and Commerce (“SAIC“) and its local counterparts, have wide discretion on the interpretation of the rules. As a result, enforcement on commercial bribery has been uneven and difficult to predict. The Draft Amendments aim to reshape the commercial bribery arena with clearer definitions. Specifically, the definition of “commercial bribery” will include payments or economic benefits to a trading counterparty or third party who may influence the transaction. This means that parties doing business in China will need to be more vigilant than ever in relation to the use of third parties and consultants when pursuing business opportunities. Organizations can also find themselves vicariously liable for their employees’ actions and face increased fines which are to be calculated as a percentage of their illegally obtained business revenue. The Draft Amendments also explicitly allow credit for cooperation and impose severe penalties for non-cooperation.
Key Features of the Draft Amendments
The table below sets out a summary of the key features of the Draft Amendments compared against the existing AUCL.
| Existing AUCL | Draft Amendments / Comments |
|---|---|
| 1. Definition of commercial briberyNot clearly defined, although a definition is provided under the Interim Regulations of Prohibition of Commercial Bribery issued by SAIC and effective on 15 November 1996 (“Interim Regulations”). | Refers to the act whereby a business operator pays or promises to pay economic benefits to its trading counterparty or a third party that may influence the transaction, thereby enticing them to seek trading opportunities or competitive advantage for the business operator. Comment – This streamlines the definition of commercial bribery and explicitly includes liability for bribes paid to third parties. |
| 2. Vicarious Liability of Employer Not clearly defined, although the Interim Regulations provide general guidelines. | Where employees strive for trading opportunities or competitive advantage for employers by taking advantage of commercial bribery, such acts shall be deemed to be the acts of the employers, unless evidence shows that the employees acted in contravention to the employers’ interests. Comment – This is the first time that the vicarious liability of employers for the actions of their employees will be codified. |
| 3. Books & Records Off-the-book discounts and commissions between business operators are prohibited. | Business operators will be prohibited from paying each other economic benefits without truthfully recording them (including the prohibition of paying or promising to pay economic benefits to third parties that influence the transactions). Comment – The broader requirements on truthful recording means that proper internal controls and record-keeping will become essential, but we do not consider that this can absolve a party from committing commercial bribery. |
| 4. Penalties Fines of RMB 10,000 to RMB 200,000 (about USD$1500 to $30,000) | Fines will be between 10% and 30% of a business operator’s illegally obtained business revenue. However, credit will be available for cooperation with law enforcers, while there will be severe penalties for non-cooperation. Comment – The proposed method of calculation means that companies can potentially face far greater fines than the existing regime. The amendments explicitly emphasize the importance of cooperating with the authorities. |
Legislative Process
The Draft Amendments are currently under public consultation. After the close of the public consultation period, the Legislative Office of the State Council may make revisions to the Draft Amendments as needed based on the feedback obtained through public consultation. After the updated draft is adopted by the State Council, the draft will be submitted to the Standing Committee of the National People’s Congress (“NPC“) for review. During the review process, the Standing Committee will consult with relevant government authorities and further update the draft for final approval and adoption by the NPC. In practice, this process can take a few months or even years.
Actions to Consider
Multinational companies are increasingly targeted by PRC authorities and should stay alert to potential commercial bribery risks. As the Draft Amendments aim to provide clearer guidance in this regard, companies should closely review the Draft Amendments and monitor its enactment process. We recommend that companies review their business and record-keeping policies, including the use of third party intermediaries to promote business, and adopt strict guidelines in relation to incentive programs.
Conclusion
The release of the Draft Amendments indicates that the Chinese legislature is making efforts to rectify the deficiencies of the current framework while further enhancing the PRC government’s anti-corruption campaign. If enacted as drafted, companies may have greater clarity on how to interpret commercial bribery but those found guilty of commercial bribery would face tougher sanctions. We will continue to monitor the developments on the promulgation, interpretation and enforcement of the amendments to the AUCL.
