On February 25, 2016, the Legal Affairs Office of the State Council released the 2016 Revised Draft for public comments. In our April 2016 client alert, we introduced the proposed amendments to the commercial bribery provisions under the 2016 Revised Draft, including three types of commercial bribery conduct, the concept of “third party” employees’ conduct as well as the penalty provisions.
This alert focuses on the latest amendments to the commercial bribery provisions in the 2017 Draft Amendments as well as the potential impact and questions or concerns raised by these provisions.
Key Changes in the 2017 Draft Amendments
Below is our summary of the key changes in the 2017 Draft Amendments, which differ from both the 2016 Revised Draft and the current AUCL:
1. Deleting Definition of Commercial Bribery
The 2016 Revised Draft released in 2016 provided a regulatory definition for commercial bribery, i.e., a business operator makes or promises to make payments of economic benefits to the counterparty or a third party that may affect the transaction so as to induce such counterparty or the third party to seek transaction opportunities or a competitive advantage. This was the first time that the legislation provided a clear and general definition for commercial bribery. Furthermore, the 2016 Revised Draft established a clearer legal framework for the regulation of commercial bribery since it provided several elements which constitute the definition of commercial bribery, including “makes or promise to make payment,” “economic interests” and “third party.”
However, the 2017 Draft Amendments delete the above definition. The 2017 Draft Amendments provide that a business operator is prohibited from providing “money and goods or other means” to the counterparty of a transaction or any third party who can influence such transaction, which reverts to the provisions of the current AUCL effective as of 1993, which has been widely questioned by legal experts for its ambiguity.
The term “economic benefits” is abolished by the 2017 Draft Amendments, Some professionals explain this is because the scope of “money and goods or any other means” is broader than “economic interests.”
The 2017 Draft Amendments also raise the question whether “promising to provide” money and goods or any other means to the counterparty or any third party that can influence the transaction will be deemed as commercial bribery. This issue may be clarified in future revisions.
2. Limiting Scope of “Third Party”
Although the 2017 Draft Amendments keep the concept of “third party” as introduced by the 2016 Revised Draft, a limitation is added to the definition of a third party. Under the 2017 Draft Amendments, a third party who can influence the transaction only refers to an entity or an individual that can influence the transactions by using its/his authority of office, e.g., the senior executives of a company.
However, in practice, it is common for a business operator to provide money or goods to the spouse or children of the counterparty’s executives, a retired former executive, or other person who has a close relationship with such executives, to seek transaction opportunities. In addition, in several relevant regulations and rules1 issued by the State Administration of Industry and Commerce (the SAIC), the enforcement authority of the AUCL governing commercial bribery), as well as in a number of enforcement cases handled by the SAIC and its local counterparts, the SAIC has already determined that providing bribes to a person without holding any “authority of office in the counterparty” (such as the design institute for engineering and construction of an office building) but has influence on the transaction, is deemed to be commercial bribery.
Therefore, the scope of a third party in the 2017 Draft Amendments might be too narrow to cover all commercial bribery scenarios and may be inconsistent with current practice.
3. Deleting Two Types of Commercial Bribery Conduct Identified in the 2016 Revised Draft
The 2016 Revised Draft identified three typical types of conduct by business operators as commercial bribery, namely (i) seeking personal economic benefits for such business operator, its departments or any related individuals which are public service activities; (ii) failing to correctly and accurately record any economic interest in one’s contracts and accounting books; and (iii) providing or promising to provide economic benefits to third parties who have influence on a transaction, or damaging the rights and interests of other business operators or consumers.
The 2017 Draft Amendments delete the first two types of commercial bribery and revise the third type of commercial bribery as mentioned in Section 1 and Section 2 above.
Even though the 2017 Draft Amendments delete the second type of commercial bribery, the relevant requirements regarding accurate financial records have been identified in the Interim Provisions of the State Administration for Industry and Commerce on Prohibition of Commercial Bribery issued by the SAIC in 1996 (the SAIC Regulations). Moreover, in practice, keeping “accurate records” in the accounting books of both the business operator and the counterparty in a transaction is one of the important elements the SAIC and Local AICs consider when deciding whether an activity will be deemed to be commercial bribery. As such, business operators still need to pay special attention to keeping accurate accounting records.
4. Reducing Burden of Proof by the Employer for An Employee’s Improper Conduct
The 2016 Revised Draft provided that if an employee offers or provides commercial bribes to seek transaction opportunities or competitive advantages for its employer, it will be regarded as an act of the business operator unless the employer can demonstrate sufficient and clear evidence that the employee did so against the interest of the business operator. This imposes a heavy burden of proof on business operators.
The 2017 Draft Amendments modify the relevant provisions. Namely, for any improper conduct by its employees, the employer only needs to demonstrate evidence showing that the improper conduct by an employee is an individual act rather that the business operator’s act. This will reduce the burden of proof by business operators. However, the 2017 Draft Amendments don’t provide clear instructions how to identify an individual act, which should be clarified in the second Draft Amendments.
5. Setting Penalties for Commercial Bribery
Under the 2016 Revised Draft, the penalty for non-criminal commercial bribery was a monetary fine between 10 percent to 30 percent of business revenues resulting from the illegal conduct. The 2017 Draft Amendments change the amount of monetary fine for non-criminal commercial bribery to “RMB 100,000 (around USD14,555) to RMB 3,000,000 (around USD436,655)” which is much higher than the original range in the current AUCL (RMB10,000 to RMB200,000) but without specifying the formula or method to calculate the amount.
Both the 2016 Revised Draft and the 2017 Draft Amendments abolish the penalty of confiscation of all illegal income under the current AUCL.
6. Interference with Implementation of AUCL Will Be Regulated by MPS
Based on the 2017 Draft Amendments, any interference with the implementation of the AUCL constitutes a violation of the Law of the People’s Republic of China on Administrative Penalties for Public Security (the Administrative Law), and the Ministry of Public Security of the PRC (the MPS) and its local counterparts will have the authority to punish such interference. This change has both pros and cons. The good side is that the discretion of SAIC or its local counterparts in punishing a business operator for suspected interference with any investigation is reduced. However, if the interference occurs but does not constitute a violation of the Administrative Law, including (i) hiding, transferring, selling off or destroying the property or thing of value distrained, sealed up or frozen by the relevant authority according to law; and (ii) forging, concealing or destroying evidence, or providing false testimony or giving false information about a certain case, which impedes the relevant authority in dealing with such case according to law, the relevant business operators will not be punished at all.
Our General Observations
In summary, we believe that the 2017 Draft Amendments improve the current AUCL (such as introducing the concept of “third party” and raising the penalty amount for violation). However, the 2017 Draft Amendments have deleted several provisions in the 2016 Revised Draft which aimed to make the regulations clearer (such as providing a definition of commercial bribery and a formula for calculating the penalty for violations).
We hope that after completing the solicitation of public comments for the 2017 Draft Amendments and completing its second review, the Standing Committee of the National People’s Congress will release a new version with a clearer explanation of the key elements constituting commercial bribery. We will keep you posted of any major changes.
The Pillsbury team has been working with various multinational enterprises in reviewing and upgrading their compliance programs to mitigate risks for many years.
1. For example, the SAIC’s Official Reply regarding How to Determine the Nature of the “Head-count Fees,” “Parking Fees” and Other Types of Fees Payable by Shopping Centers to the Travel Agencies or Tour Guides (国家工商行政管理局关于旅行社或导游人员接受商场支付的“人头费”停车费“等费用定性处理问题的答复) issued by the SAIC to its Fujian Provincial Counterpart on June 22, 1999.