China releases draft anti-commercial bribery legislation

By 1st March 2016General News
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The Legislative Office of China’s State Council has released draft amendments to its Anti-Unfair Competition Law (AUCL) that could reshape how commercial bribery in China is interpreted and enforced. In addition to changing the definition of commercial bribery, the changes would:

  1. include liability for bribes paid through third parties;
  2. impose vicarious liability on employers for actions of employees; and
  3. increase penalties for companies and those facilitating or turning a blind eye to bribery.

Whilst the amendments appear to prevent the incorporation of free-standing anti-bribery law, they will create new challenges for companies’ compliance programs in China.

Current law

The existing version of the AUCL contains a vague provision prohibiting commercial bribery: “A business operator shall not resort to bribery, by offering money or goods or by any other means, in selling or purchasing commodities”. In addition to the ambiguous drafting, carve-outs allow for certain commissions and discounts where accurate accounting records are established.

Proposed law

The draft changes indicate significant progress on reform, amending the definition of commercial bribery as follows:

“A business operator providing or promising to provide economic benefits to the opposing party in a transaction, or to a third party able to influence the transaction, to entice it to seek a transaction-related opportunity or a competitive advantage for the business operator. Providing or promising to provide economic benefits is offering a commercial bribe; accepting or agreeing to accept an economic benefit is accepting a commercial bribe.”

Prohibition on Commercial Bribes paid via Third Parties

In addition to the change to the definition of bribery, and in order to increase the scope of liability for bribery involving third parties, the amendments would prohibit “providing or promising to provide economic benefits to a third party able to influence the transaction or harm the legal rights of other business operators or consumers”.

Vicarious Liability for Acts of Employees

The revised draft would establish vicarious liability on an employer as follows:

“The act of an employee using commercial bribery to seek a transaction-related opportunity or competitive advantage for a business operator should be deemed as an act of the business operator.” 

This proposed amendment means that a ‘business operator’, a company, can no longer use an internal prohibition of bribery as a shield against the acts of its employees.

Books & Record-keeping

The current legislation provides that companies are entitled legitimately to provide discounts and commissions between business operators as long as accurate accounting records relating to the provision of those sums are maintained.

The proposed draft covers broader “economic benefits” and requires not only that those benefits be transparently and accurately reflected in accounting records but also in contracts and agreements.

Penalties

The penalties for commercial bribery under the current AUCL are:

  1. fines of RMB 10,000 to RMB 200,000 (£1100 – £22,000 at current exchange rates); and
  2. confiscation of illegal income and gains (i.e. disgorgement).

Significant changes would modify those provisions in line with the UK and US approach, allowing for the calculation of penalties as a percentage of illegal revenue.

In addition, it is envisaged that fines of up to RMB 1 million (£110,000) could be imposed on other parties that knew or ought to have known that bribery was occurring, and facilitated or supported that activity.

Comment

It remains to be seen how the proposed changes may affect the actual enforcement of commercial bribery in China. However, it would be prudent for companies to consider their compliance programmes against the proposed changes, in particular:

  1. whether their current contracts or agreements adequately describe the nature and purpose of payments to business counterparties; and
  2. whether procedures for the issuing of invoices or receipts with counterparties is compliant with all Chinese accounting and record keeping rules.

It will be interesting to note the extent to which the Legislative Office draws upon UK legislation and guidance in the upcoming consultation phases prior to the introduction of the new rules.

The period for public comment closes on 25 March 2016. Fulcrum Chambers will provide further updates on the proposed changes as they are provided.

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