The first half of 2018 saw a number of significant changes to the Chinese anti-corruption regime, including amendments to the Anti-Unfair Competition Law and formation of new anti-corruption regulatory bodies. Amidst an anti-corruption campaign in China that continues to gain traction, companies operating in the country should continually evaluate whether current business models run afoul of the latest regulations. This article discusses several of these key changes to the anti-corruption landscape and the implications for multinational corporations operating in China.
1. REVAMPED ANTI-UNFAIR COMPETITION LAW
Last year, the Standing Committee of the National People's Congress passed revisions to the Anti-Unfair Competition Law (AUCL), the primary legislation that regulates commercial bribery by individuals and entities in China. This revised AUCL (the Amended AUCL), which came into force on 1 January 2018, represents the first time the AUCL has been revised since its introduction in 1993. The Amended AUCL makes a number of significant changes, but we have limited our discussion to the three amendments relating to anti-corruption that may have significant implications for companies operating in China.
A. Broadened definition of 'commercial bribery'
Expanded purposes of commercial bribery
While article 8 of the 1993 AUCL limited commercial bribery to bribing "by offering money or goods or by any other means, in selling or purchasing commodities"(emphasis added), article 7 of the Amended AUCL now prohibits bribery "by offering money or goods or by any other means . . . in order to seek a transaction opportunity or competitive advantage" (emphasis added).
Expanding on the differences between the 1993 AUCL and the Amended AUCL, the Director of the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration for Industry and Commerce (SAIC), Yang Hong Can, explained, during an interview on 9 November 2017, that 'competitive advantage' refers to "obtaining an unfair competitive advantage in business activities through the offering of property or other means to induce the bribe recipient to commit acts that violate the integrity of the recipient's official duties or business ethics".
This effectively expands the circumstances in which conduct may be found to constitute bribery. For example, whereas paying a tax bureau official in order to reduce one's tax liability may not have previously fallen within the ambit of 'commercial bribery' under the 1993 AUCL, the same act would certainly give the party offering the bribe a competitive advantage and so could potentially violate the Amended AUCL.
Redefined scope of bribery recipients
Whereas article 8 of the 1993 AUCL generally refers to the recipients of bribes as "transaction counterparties", article 7 of the Amended AUCL replaces this definition in favour of three specific categories of individuals and entities:
- Employees of transaction counterparties
- Entities or individuals entrusted by transaction counterparties to handle relevant transaction matters
- Entities or individuals that use their position, power, or influence to affect a transaction
The new definition represents a significant departure from the 1993 AUCL. First, the updated definition excludes transaction counterparties from the scope of 'bribery recipients', reflecting criticism from the business community that the prior definition penalised commercial transactions that are often regarded as legitimate in other jurisdictions, such as business-to-business rebates and discounts. Second, the inclusion of entities and individuals falling under categories (b) and (c) above, indicates a focus on payments to third party intermediaries (e.g., agents, distributors, and other intermediaries) that mirrors anti-corruption enforcement trends in other jurisdictions, including the United States and UK, that historically have not been a focus of SAIC anti-bribery investigations.
Vicarious liability of employers
While the 2013 AUCL was silent on whether an employer would be held liable for the acts of its employees in the context of commercial bribery, the Amended AUCL makes clear that there is a rebuttable presumption that an employer will be liable for its employees' misconduct unless the employer can prove that any such misconduct was not related to the seeking of a transaction opportunity or competitive advantage.
During the 9 November 2017 interview, Director Yang stated that in order to meet this burden of proof, employers must show that they have implemented "reasonable" and "effective" measures to "monitor" potential corrupt conduct by employees, and that they are not taking a "lenient stance" or "covering up" corrupt conduct.
While it remains unclear how "reasonable" and "effective" a compliance programme must be under the AUCL, companies seeking guidance can look to other jurisdictions that have adopted a similar defence. For example, section 7 of the UK Bribery Act imposes criminal liability on a company for failing to prevent bribery by an associated person (including employees), unless the company can prove that it "had in place adequate procedures designed to prevent persons associated with [it] from undertaking such conduct." Earlier this year, in the first-ever case to test the 'adequate procedures' defence under the UK Bribery Act (R v. Skansen Interiors Ltd.), the jury came back with a verdict of guilty, finding persuasive arguments put forth by the prosecution that Skansen did not have adequate procedures to detect and prevent misconduct, as it failed to (1) keep adequate records of its efforts to actively monitor or manage bribery risks; (2) provide active communications or trainings; or (3) appoint a designated individual responsible for compliance. Perhaps more instructive, the jury found unpersuasive Skansen's arguments that having general policies requiring employees to deal with third parties ethically, embedding anti-bribery clauses in its contracts, and having an overall culture of honesty, constituted sufficient measures.
B. Increased penalties
While both the 2013 AUCL and the Amended AUCL allow for the Chinese government's confiscation of illegal gains, article 19 of the Amended AUCL has increased the penalties for commercial bribery.
First, the range of monetary fines have been increased from between RMB 10,000 (approximately US$1,500) and RMB 200,000 (approximately US$30,000), to between RMB 100,000 (approximately US$15,000) and RMB 3 million (approximately US$460,000). Second, a company's business licence can be revoked where the misconduct is "serious". Third, the monetary penalty will be recorded in the company's credit records, and the underlying misconduct disclosed to the public.
C. Investigatory powers enhanced
While both versions of the AUCL allow for regulators to make inquiries to the company under investigation (including requiring the company and its employees to provide testimony or materials related to the activity under investigation), and to inspect and make copies of potentially relevant agreements, accounting records, or other documents, article 13 of the Amended AUCL provides regulators with two additional broad investigatory powers: (1) the power to seize and hold financial assets related to the suspected bribery; and (2) the power to access bank accounts of parties suspected of engaging in bribery.
2. NEW ANTI-CORRUPTION ENFORCEMENT REGULATORS
The first half of 2018 also saw the formation of two 'super agencies' charged with investigating corruption in the public and private sectors.
A. Regulator of corruption in private sector – State Administration for Market Regulation
In March 2018, the SAIC, the regulatory body formerly responsible for anti-bribery enforcement in the private sector, was consolidated with certain other regulatory bodies (including the General Administration of Quality Supervision, Inspection and Quarantine; the Certification and Accreditation Administration; the Standardization Administration of China; and the China Food and Drug Administration) to establish the State Administration for Market Regulation (SAMR). The SAMR is empowered to investigate corruption by private individuals and entities under the Amended AUCL.
B. Regulator of corruption in public sector – National Supervision Commission
Whereas the SAMR is authorised to investigate private sector corruption, the National Supervision Commission (NSC) was formed in March 2018 to investigate corruption in the public sector, merging the anti-graft functions of the police, prosecutors, and other supervision departments, with the Central Commission for Discipline Inspection (CCDI). This new regulatory body extends the CCDI's investigative scope, which previously covered only corruption by Chinese Communist Party members, to managers and heads of state-owned enterprises, as well as public health care, scientific research, and educational institutions.
The NSC also wields extensive investigatory powers that mirror those held by the CCDI, including the power to obtain and collate evidence from relevant individuals and entities, and to seize property, documents, and data relevant to the suspected misconduct. Perhaps most controversial is the NSC's power to detain and question suspected bribe-givers and bribe-recipients for a period of up to six months without access to an attorney.
According to the NSC's internal statistics, during the first half of 2018, over 240,000 public officials were disciplined, including 28 ministers and provincial officials, and over 1,500 bureau-level officials.
3. IMPLICATIONS FOR COMPANIES OPERATING IN CHINA
With the roll-out of the Amended AUCL and the newly formed regulatory bodies charged with enforcing it, all current signs point to even more aggressive anti-corruption enforcement under President Xi Jinping's 'tigers and flies' initiative in the years to come.
The Amended AUCL's inclusion of "entities or individuals entrusted by transaction counterparties to handle relevant matters" reflects China's recognition of third party intermediaries as common conduits for improper payments, mirroring the enforcement trends of the U.S. Department of Justice and UK Serious Fraud Office. In a country where the use of third parties is ubiquitous (be it distributors, resellers, agents, or consultants), companies should continue to carefully review their relationships with third parties on a periodic basis to ensure they are offering legitimate bona fide services, and not acting as intermediaries for potential corrupt payments.
To avoid liability under the AUCL for the corrupt acts of 'rogue employees', companies should also review existing compliance policies and procedures to ensure that they represent "reasonable" and "effective" measures for detecting and combatting any potential corruption. While there is no one-size-fits-all compliance programme, companies should take a risks-based approach, conducting periodic audits to identify potential risk areas and designing appropriate procedures to minimise those risks.
While time will tell how AUCL enforcement will differ under the newly formed SAMR and NSC, the consolidation of the various regulatory bodies into these super agencies will certainly streamline enforcement procedures and harmonise enforcement objectives by decreasing the inefficiencies of the prior regime, under which the jurisdictions, rules, definitions, and objectives of different bureaus investigating the same companies or facts often clashed. These agencies are now able to dedicate their full range of resources to a common objective.
For example, on 24 May 2018, the SAMR announced the launch of a five-month nationwide initiative from May to October 2018 to crack down on unfair competition, focusing on areas of "strong social concern", including "pharmaceuticals (and medical devices), public enterprises and institutions, and other industries and fields that are closely related to people's livelihood". The SAMR described this as a "key initiative" to "fully implement the spirit of the 19th National Congress of the People's Republic of China" and to "further promote the implementation of the [Amended AUCL]".
A recent administrative sanction imposed by the Shanghai Qingpu Administration for Market Regulation (SQAMR) is illustrative. On 19 July 2018, the SQAMR issued a penalty notice and a fine of RMB 150,000 to a Shanghai-based medical device company, Lepu Medical Technology (Shanghai) Co., Ltd. (Lepu Medical), in connection with paying speaker fees to medical experts to give presentations at a satellite meeting convened by the company during a broader symposium. Specifically, the SQAMR found that Lepu Medical had engaged in commercial bribery under article 7, section 1(iii) of the Amended AUCL by: (1) preparing the PowerPoint presentations on behalf of the speakers, and including in the presentations information about the company's products, and (2) paying speaker fees to the experts, and recording them as sales expenses; and that these actions had unduly influenced the experts with the goal of gaining an unfair competitive advantage.
Similarly, the NSC has also pointed to the food and health care industries as sectors on which it intended to focus its attention. In an announcement made on 14 May 2018, the NSC stated that it would implement "specific steps" to fight corruption in Shanghai's health care system, calling the receipt of bribes by medical personnel by medical personnel a "chronic disease". Further, following the recently reported scandal regarding the production of hundreds of thousands of defective children's vaccines, the NSC has also launched an official investigation into Wu Zhen, the former deputy director of the China Food and Drug Administration.
Companies in the life sciences industry should continue to closely monitor potential risk areas historically associated with corruption (including gifts, meals and entertainment, charitable donations, payments to medical associations, sponsorships, grants, speaker fees, and interactions with distributors), and to implement reasonable controls to mitigate those risks.
The changes in the first half of 2018 reinforce China's commitment to its ongoing anti-corruption campaign. With the formation of new super agencies wielding a wide range of investigatory powers and charged with enforcing broader anti-bribery legislation under the Amended AUCL, companies operating in China would be well-advised to remain vigilant in monitoring business operations and evaluating existing policies and procedures to reduce the risk of running afoul of Chinese anti-corruption regulations.
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