One person’s gift, another person’s bribe: The challenge of giving gifts in China, Part 1

by Dorsey & Whitney LLP
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It was the week before Chinese New Year. The financial year had ended weeks earlier and unpaid invoices had made a dent in the annual performance of the small family business.

For months, the foreign husband, a co-owner of the business, tried to reason with the clients, appealing to their better nature, reminding them of their earlier praise for the work done. When his appeals met with silence, he upped the ante. He sent stern emails, stating that he would get lawyers involved if the bills remained unpaid. When these emails went unanswered, his wife finally ran out of patience with her husband’s tactics and told him it was time to try the Chinese way; she knew better than him that a China problem required a China solution.

She purchased a batch of tablet devices, carefully wrapped them in red paper and delivered them to the children of the chairmen of the clients who had failed to pay.  Within a couple of days, last year’s unpaid bills had been paid and the husband and wife could truly celebrate the new year. There was no need for thank you notes or cards, no need for lawyer’s letters or telephone demands, no need to instruct debt collectors. No mention of the gifts was made by either side and it was not long before several of those clients were seeking support from the business on new projects.

Through this experience, the foreign husband learned what the “Chinese way” really means. This is not to say that Chinese clients have a monopoly on failing to pay professional fees, unfortunately, this can happen anywhere. The situation faced by this family business is, however, a reminder of how situational ethics affect the way things are done in China. “Situational ethics” has been described as a flexible standard of thought and behaviour that is based on the circumstances at hand, real or imagined, instead of being based on universal principles.

Situational ethics vs logical ethics

The husband, who was raised and educated within a Western logic and ethics context, found it difficult to understand that his wife’s way was the best means to a positive end. The wife, who was raised and educated with a strong understanding of traditional Chinese situational ethics, realised that she had a lot of leeway in what to regard as an acceptable or unacceptable solution to their problem.

As experts have explained, the Chinese preference for, and use of, situational ethics is a product of China’s past, when individuals did not have absolute rights that were protected either by law or even by custom (see the February issue of the AFN newsletter). Throughout Chinese history, individuals were subject to the arbitrary rule of their superiors, who included family members and government officials at all levels.

For the husband, logical argument and a satisfied customer should have translated into payment of the agreed professional fees. And if logic and reason could not prevail, surely the law would step in to solve the matter. But at what cost?

Considering “face” and cultivating social reciprocity

The wife knew that she needed to cultivate bao (“social reciprocity”) because, even if the law did provide a framework for business transactions, relationships of all kinds in China–business, personal, political–must be based on trade-offs of one kind or another. What if the husband did manage to obtain payment of the fees through sending out a lawyer’s letter or using the services of a debt collector? The relationship with the client would be harmed, perhaps irreparably. The wife knew it was far more effective to use the situation to further develop the relationship.

This is not an isolated event. Western business people’s perspectives of gift-giving are substantially determined by Western laws and corporate rules. Chinese views, however, are determined primarily by a complex and sophisticated social philosophy of relationships. Gift-giving is related to respect, mianzi (“face”), group membership, reciprocity, status and long-term relationships. The art of gift-giving is just one of the innumerable proprietary rules of interpersonal behaviour, the origins of which go back thousands of years and are central to Chinese culture.

The art of gift-giving

Gifts are given to give “face,” i.e., to show respect, to the recipient to and increase the “face,” i.e., raise the status, of the giver. Giving a gift is an act of friendship. It is a manifestation of renqing (“human feeling”). It is also a means of establishing trust. “Face,” and the desire to enhance the giver’s position in a social network, is central to the ritual. If the recipient accepts the gift, he is agreeing to a reciprocal obligation, which also enhances the giver’s status and power. In this way, reciprocity cultivates the self by defining the self in relation to the other, thereby building trust, cooperation and caring. Chinese gift-giving is, as experts have described, an art, bringing moral and cultural imperatives into the pursuit of social and instrumental ends.

Giving the tablets to the clients’ children was both an expression of human feeling and a show of respect for the chairmen themselves. When the gifts were accepted by the chairmen and their children, the chairmen also (finally) accepted the reciprocal obligation to pay the outstanding invoices. Payment of the outstanding invoices enhanced the wife’s status and power in the situation and built trust, to the extent that the clients had cause to seek further assistance from the family business.

In the Chinese context, this process makes moral and cultural sense. It is how business is done. To many Western participants in the Chinese market, the process is at best an annoying greasing of the wheels of business. At worst, it is a bribe.

What does the law say?

As much as gift-giving rituals are a pervasive aspect of China’s cultural and business landscape, Chinese law adopts a stance that is, at least according to its letter, not particularly accommodating.

Commercial bribery

China’s Criminal Law and Anti-Unfair Competition Law prohibit the giving and acceptance of bribes between businesses in a purely commercial context.

The Criminal Law makes it a crime to “give to the employee of a company, enterprise, or other unit [organisation] any property for the purpose to obtain improper benefits”, and for the “employee of a company, enterprise, or other unit to abuse its position to solicit the property of another or to unlawfully accept the property of another so that such other person may obtain a benefit”.

“Property” covers property-like benefits that can be calculated in monetary value, such as membership cards, gift cards with monetary value (see below) and travel expenses. “Improper benefits” has a vague interpretation: it refers to any benefits in violation of laws, regulations or policies, or those that require the recipient to provide aid or convenience in violation of laws, regulations, policies or industry norms.

China’s Anti-Unfair Competition Law contains commercial bribery prohibitions different in scope to those under the Criminal Law. For instance, under the provisions of the Anti-Unfair Competition Law, “property” means cash or tangible property, including marketing fees, promotion fees, sponsorship fees, research fees, service fees, consultation fees, commissions and reimbursements. The commercial bribery prohibitions under the Anti-Unfair Competition Law also cover offering travel inside or outside China and other benefits besides property.

An opinion by China’s Anti-Commercial Bribery Task Force (a commercial bribery enforcement taskforce) states that “commercial activity which violates the principles of fair competition by means such as giving or receiving property or other benefits to provide or receive business opportunity or other economic benefit” would be deemed commercial bribery. The allegedly unfair conduct need not, therefore, take place strictly within a sales-purchase transaction, and need not be an obvious or substantial benefit. Put simply, anything that might disrupt fair competition might constitute commercial bribery.

Gift cards

In 2011 and 2012, China adopted regulations that require the registration of purchases of gift cards where the amount exceeds certain limits.

The card issuer must record the account name and number from which the wire transfer of payment has been made. This registration requirement is aimed at providing for more efficient enforcement of improper gift-giving as well as creating a deterrent against gifts given in the form of prepaid cards in place of cash.

These regulations are intended generally to prevent money laundering, arbitrage, tax evasion and bribery by using prepaid gift cards offered by non-financial companies, i.e., entities that are not predominantly engaged in the financial industry and thus are not subject to China’s financial regulators.

The regulations require a purchaser, which can be either an individual or an entity, to register its true identity with the gift card issuer if the card value exceeds RMB10,000 (US$1,620) in a one-time purchase. Payments for gift cards are required to be made by means of wire transfer, as opposed to cash, if the card value exceeds RMB5,000 (US$810) in a one-time purchase by a company or organisation, or RMB50,000 (approximately US$8,100) by any individual.

No “culture” defence

Foreign companies doing business in and with China must be sure to put in place anti-corruption and compliance programs that address the legal realities in China and the other jurisdictions in which they operate. Neither Chinese, UK, US nor international law grants a “culture” defence, so it will continue to be a fundamental challenge for management to ensure that they and their colleagues are upholding the law and ensuring that bribes are not being packaged as gifts, and, equally, that genuine gifts are not misconstrued as bribes. Keeping gifts within reasonable thresholds and restricting them to times of traditional gift-giving  will go a long way to establish them as bona fide gifts.

So, was the wife’s gift-giving perfectly acceptable in the eyes of the law? There is no doubt that the tablets fell within the definition of “property”. It is less clear as to whether or not the giving of the tablets was for an “improper benefit”. Despite the vague interpretation of improper benefit under Chinese law, it is quite likely that the wife would be able to establish that there was no improper benefit, and so no violation of the Criminal Law.

It is unlikely that the  giving of the tablets constituted a breach of the Anti-Unfair Competition Law. That said, there is a substantial risk that the gift-giving could be deemed to be disrupting fair competition through engaging in a commercial activity aimed at receiving a business opportunity or other economic benefit. If China’s Anti-Commercial Bribery Task Force came knocking, the wife would have a lot of explaining to do to show that the gift-giving was not a commercial activity, but rather a simple act of friendship, and that the gift-giving was not aimed at disrupting fair competition.

In the next issue of the AFN newsletter we will look at the gift-giving rules that apply to PRC Government officials. With penalties for officials as severe as death by firing squad, businesses need to ensure gifts given to give “face,” i.e., to show respect, to the recipient to and increase the “face,” i.e., raise the status, of the giver are well within the bounds of what is legally acceptable and can be proved to be so.   

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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