In January of 2017, The Compliance Reviews issued The Report on Corporate Compliance Management in China (2016) on the basis of the survey that ComplianceinChina.com conducted on Chinese corporate compliance management for the year of 2016. 

For the question, “what are your compliance duties on anti-bribery”, 394 selected Chinese anti-bribery law amounting to 48%, a 11% increase from the 37% from the 2015 survey.

Comparatively, 216 selected the FCPA amounting to 26%; in terms of the UK Bribery Act, 139 people made selections amounting to 17%.  Despite the dwarfed rankings, we believe the FCPA is still the most influential law for those on whom the FCPA is applicable, so is UK Bribery Act. It is worth mentioning that 72 people selected other laws, which could include Sapin II – the FCPA of French version.  In any event, we cannot deny that Chinese anti-bribery law is a very important compliance obligation for companies doing business in China.  This article endeavors to explain why.

There are two reasons, among many others, why Chinese law is the most important – it is complicated and penalties are becoming heavier.

There are two kinds of anti-bribery legislation, criminal and administrative, being:

I. Criminal law

The primary legal authority for criminal law is the Criminal Law of the People’s Republic of China (hereinafter as “Criminal Law”).  The criminal law addresses the bribery which is corruptive in nature or “corruptive bribery” as an artificial terminology in this report.  Corruptive bribery, in this report, is the bribery where the recipient of a bribe breaches his or her fiduciary duty owed to his or her employer or some other beneficiary. 

(1) crime of accepting bribes committed by non-state functionaries;

(2) crime of bribing non-state functionaries;

(3) crime of accepting bribes (by state functionaries);

(4) crime of accepting bribes committed by legal entities;

(5) crime of bribing (state-functionaries);

(6) crime of bribing legal entities;

(7) crime of introducing bribery;

(8) crime of bribing committed by legal entities;

(9) bribery crime of influence; and

(10) crime of bribing state functionaries of foreign countries or international organizations.

The criminal liability on the crimes of taking bribes includes imprisonment and confiscation of illegal proceeds.  The crime of taking bribes (by state functionaries), if serious enough, could trigger death penalty; the crime of taking bribes by non-state functionaries would not trigger death penalty, but a maximum imprisonment of no more than 15 years.

The crime of bribing (state-functionaries or non-state-functionaries) could trigger criminal liability of imprisonment and confiscation of illegal proceeds.  The liability of bribing state-functionaries could be more serious (including life imprisonment) than the liability of bribing non-state functionaries (with imprisonment of 10 years as the maximum imprisonment liability).

In 2014, GlaxoSmithKline (China) Investment Co., Ltd. (hereinafter referred as “GSK China”), a UK pharmaceuticals company’s Chinese subsidiary company, was imposed a criminal fine of RMB 3 billion (approximately US$ 490 million) after a Chinese court found it guilty of bribery – the drug giant paid out bribes to doctors in order to have their products promoted.  The court gave GSK China's former head, Mark Reilly, a suspended three-year prison sentence and deportation.  Other three GSK China executives for marketing, human resources and legal have also been given suspended jail sentences.   In the case, GSK China as well as its executives as bribers paid bribes to doctors as bribees to the effect that the doctors would abuse their capacity in prescribing the pharmaceuticals of GSK China only or in priority to patients.

Most corruptive bribery cases have individuals as the recipients of a bribe.  However, there are some exceptions where a State-owned entity (“SOE”) could be the recipients of a bribe.

The concerned crimes are the crime of accepting bribes committed by legal entities; and the crime of bribing legal entities.  As mentioned, for the two crimes, the legal entities that take bribes should be State-owned or State-affiliated.  For example, from1999 to 2002, a pharmaceutical company in Guangdong Province paid rebates to three State-owned hospitals (not individual doctors) which purchased the pharmaceuticals from this company.  The total amount of the rebates was RMB 2,020,127.54 (approximately US$ 330,000).  In the end, both the pharmaceutical company and the concerned executive were convicted for committing the Crime of Bribing Legal Entities.  The company was punished with a fine and the executive was imprisoned for two years.  Accordingly, the hospitals committed the Crime of Accepting Bribes Committed by Legal Entities.

For another example, from 2002 and 2006, two distributing companies were selling heart rhythms as well as some other medical devices to nine State-owned hospitals in Yunnan Province.  To incentivize the hospitals to purchase the medical devices, the two distributors gave rebates to the internal clinical departments of the hospitals (again not individual doctors).  It seems that the distributors were trying to hide the illegal nature of the rebates – the payments were made in the name of “x-ray compensation fee”.  The total fees accumulated to RMB 2,241,960 (approximately US$ 370,000).  The two distributing companies were nonetheless convicted for committing the Crime of Bribing Legal Entities, and received the punishment of a fine of RMB 200,000 (approximately US$33,000) each.  The concerned executive was convicted of imprisonment for 18 months with two-year reprieve.   Accordingly, the clinical departments committed the Crime of Accepting Bribes Committed by Legal Entities.

The reason why a State-owned unit could be punished for taking bribes is that the unit puts the money into the unit’s coffer other than truthfully books it as the official revenue of that unit.  Therefore, the bribe that a unit takes is also referred as “coffer money”.   Even if no individual of the unit pockets the money directly, the money would be nonetheless pocketed or used indirectly by all or some of the staff of the unit.  Therefore, “coffer money” is also called collective corruption.

II. Administrative law

The primary legal authority for administrative law is the Anti-Unfair Competition Law of the People’s Public of China (hereinafter as “AUCL”) and its implementation regulations: the Interim Rules on Prohibiting Commercial Bribery (hereinafter referred to as “Commercial Bribery Rules”).  Administrative law addresses a bribery which is anticompetitive in nature or “anti-competitive bribery” as an artificial terminology in this report.  The law is to “to safeguard the healthy development of the socialist market economy, encourage and protect fair market competition, prohibit unfair competition, safeguard the legal rights and interests of businesses.”

For the commercial bribery under the AUCL, the offense involves the free functioning market competition that the AUCL was formulated to protect.  Therefore, the AUCL provides for a blanket prohibition on a wide range of commercial bribery activities, by which a company or enterprise may use valuables or other methods to induce its counterparty to buy or sell goods. Commercial bribery is thus conducted with competition disordered and impaired, which might be better illustrated by the following inquiry and answer between a local AIC and the State Administration for Industry and Commerce (SAIC).

Some insurance companies pay procedural fees (or commissions) to their insurance agents at a higher rate than that set by the State. Henan Provincial AIC asked the SAIC if such commissions constituted commercial bribery. The SAIC found that the commissions infringed upon competition in the insurance market and constituted commercial bribery. It instructed the AIC to investigate and punish this action in accordance with the AUCL and the Interim Regulations on Prohibiting Commercial Bribery.

For another example, in 2010, Toyota Motor Finance (China) Co., Ltd. (hereinafter referred as “Toyota Finance”) was investigated by a Chinese administrative government agency for conducting commercial bribery in China.  Certain distributors of Toyota cars in Hangzhou city, the 4s motor shops, reportedly had been recommending Toyota Finance loans to buyers of Toyota cars.  Once the consumer took out the loan with Toyota Finance, the 4s motor shops reportedly received a processing or service fee from Toyota Finance.  The fee was regarded as a bribe. 

As you may see from the case on Toyota Finance, Toyota Finance was investigated (and later punished with a fine), under the administrative law regime, for giving some bribes to some 4s shops.  In other words, the recipients of bribes in this case are usually corporate entities.  The law that is applicable is not criminal law; it is administrative law instead.  The liability thus is administrative other than criminal in nature.

The administrative liability includes confiscation of illegal proceeds and a fine of from RMB 10,000 (US$ 1,540) to RMB 200,000 (US$ 30,770).

III. China is changing its administrative law to curb commercial bribery

China is changing AUCL that could reshape how commercial bribery in China is interpreted and enforced.

Specifically, the Draft Amendments would (1) more precisely define commercial bribery, including liability for bribes paid through third parties, (2) clearly include vicarious liability for employers for the actions of their employees, and (3) significantly increase penalties for commercial bribery for companies and for those facilitating or turning a blind eye to bribes.

(1)   Commercial Bribes Paid Via Third Parties Prohibited

The Draft Amendments also 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.”  The term “economic benefits” is undefined, but this provision would appear to significantly increase the scope of liability for bribes paid via third parties.  This change parallels recent amendments to China’s Criminal Law that became effective in November 2015.

(2)   Vicarious Liability for Acts of Employees

The existing AUCL is silent on vicarious liability for acts of employees, although interpretive regulations in 1996 provided for such liability.

The Draft Amendments would codify and clarify the scope of vicarious liability: “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, unless there is evidence providing that what the employee has done is his or her individual action”, which provides the safe harbor to a business operator in maintenance of a robust compliance management system.  There is then another question: what compliance management system is robust.  

As you may know, International Organization for Standardization adopted ISO19600 Compliance Management System – Guidelines to guide an organization to set up a robust compliance management system.  Chinese government is in the process of adopting this international standard into a China national standard.  The companies and enterprises that intend to manage well their bribery risks (as well as some other compliance risks under the AUCL) should consider building its safe harbor in line with this international and China national standard.

(3)   Penalties Are to Be Heavier

The current AUCL provides for fines of RMB 10,000 to RMB 200,000 (about US $1,500 to $30,000) or confiscation of illegal income attributable to the commercial bribes.  The Draft Amendments would modify those provisions to impose fines of between 10 percent and 30 percent of a business operator’s illegally obtained business revenue.

The Draft Amendments also would impose fines of RMB 10,000 to RMB 1 million (about $1500 to $150,000) on others that knew or should have known that bribery was occurring but still provided certain facilitation or support (such as in production, sales, warehousing, transportation, network services, technical support, advertising, payment and settlement, or other services).

The Draft Amendments suggest that cooperation credit is available in some cases; simultaneously, more severe penalties are imposed for non-cooperation.

The amendment to the old administrative law would greatly impact multinational companies (as well as domestic companies) doing business in China.  The amended AUCL could come into force sometime during 2017. 

In conclusion, the complication of Chinese anti-bribery law and the increasingly heavy penalties are making Chinese anti-bribery law more and more important as a compliance obligation.  It is very important not to underperform the compliance of this very important anti-bribery law.

*The author Henry Chen, the Editor in Chief of The Compliance Review (www.compliance.reviews), is licensed to practice law in China and the New York State of the U.S. Henry Chen is a representative of China Delegation to negotiate over ISO19600 Compliance Management System - Guidelines, and the Vice Director of the Working Committee on China national standard Compliance Management System.  Henry Chen is the author of the book Commercial Bribery Risk Management in China. If you have any questions, please contact Henry Chen at chenlitong@hotmail.com