Offering Gifts of Travel and Entertainment in China - What if the Recipient is a State Functionary
By Ariel Ye and James Rowland, King & Wood's Cross Border Litigation & Arbitration Group
Many foreign business operators report that they are concerned about the risks associated with entertaining their business partners in China, even when providing meals or offering to pay for travel and accommodation costs of a low value.
The Policy Environment
In the last decade, the percentage of corruption cases which Chinese authorities have investigated and which arise from international trade or involve foreign business entities is surprisingly high, accounting for almost two thirds of investigations that have resulted in a penalty. On June 22, 2008, the CPC Central Committee promulgated its 2008-2012 Work Plans for Establishing and Improving the System of Corruption Punishment and Prevention, which focus on the investigation and punishment of commercial bribery committed by foreign business entities operating in the PRC.
The Legal Framework
For many business operators, their counterparts in China may include "state functionaries". Article 93 of the PRC Criminal Law, amended on March 14, 1997, defines this concept broadly. It includes persons who hold office in state organs, employees of state-owned companies and others who perform official duties according to the law. Foreign companies supplying infrastructure, teaching materials and hospital equipment in the Chinese market are examples of，those which deal with state functionaries on a regular basis.
With this concept in mind, Article 389 of the PRC Criminal Law makes it a crime for an individual or unit to give "money or property" to a state functionary for the purpose of obtaining an undue advantage.
On November 20, 2008, the Supreme People's Court and the Supreme People's Procuratorate jointly issued their Opinion on Some Issues Concerning the Application of the Law in Criminal Commercial Bribery Cases ("Opinion"). In the Opinion, the concept of "property" in the crime of bribery under the PRC Criminal Law was clarified to include any "property interest" that can be quantified with a monetary value.
Payment or reimbursement of travelling expenses is certainly caught by the broader concept of "property interest" and so is the provision of meals. Strictly speaking, the provision of such benefits, even of a low value, could attract criminal liability, as long as the provider had the requisite intent to obtain an undue advantage.
In reality, there is a monetary threshold for criminal prosecution. According to the Threshold for Criminal Prosecution in Bribery Cases issued by the Supreme People's Procuratorate, the "property" offered as a bribe must be at least RMB10,000 for an individual or RMB200,000 for a unit, to justify criminal prosecution. However, these amounts may be taken cumulatively so that if meals or entertainment of a low value are provided on a regular basis (and for the purpose of obtaining an undue advantage), it will progressively attract criminal liability to the provider and eventually justify criminal prosecution.
However, according to Article 10 of the 2008 Opinion, prosecutors and judges must comprehensively analyze relevant information in addition to the value and purpose of giving a "property interest". The factors which they must consider include the past contacts between the provider and the recipient, whether provider and recipient are relatives or friends, the reason for and the occasion on which the "property interest" was given, whether the provider made any request in connection with the recipient's post, and whether the recipient actually rewarded the provider by using his or her post in a corrupt way. The purpose of this analysis is to differentiate, on the basis of the facts of the case, between legitimate gifts and bribes, both to state functionaries and otherwise.
Business operators in China are also prohibited from engaging in "commercial bribery" by giving money or property to another business unit or individual, or by any "other means", for the purpose of selling or purchasing goods. Business operators may be levied with an administrative penalty of between RMB10,000 and RMB200,000, if found to have engaged in commercial bribery.
The concept of "property" in Article 8 of the PRC Anti-Unfair Competition Law ("Anti-Unfair Competition Law"), which became effective as of December 1, 1993, is construed narrowly by the State Administration for Industry and Commerce ("SAIC"), the authority responsible for supervising the conduct of business operators in China. According to Article 2 of the Interim Rules for Prohibiting Commercial Bribery, issued by the SAIC on November 15, 1996 ("SAIC Interim Rules"), "property" under Article 8 of the Anti-Unfair Competition Law means cash and material objects. It does not include meals.
According to Article 2 of the SAIC Interim Rules, offering domestic or international tours (for the purpose of selling or purchasing goods) is an example of commercial bribery using "means other than paying in property". The term "other means" has an inclusive definition but in practice has not been interpreted by AICs to include meals.
There is an exception under the SAIC Interim Rules to the prohibition against business operators giving gifts of property to other business units or individuals as part of their trading activities – advertising gifts of a small value can be given, based on common commercial practice. In the spirit of this exception, the provision of low-cost meal treats and related hospitality is unlikely to trigger an investigation by the AIC if it is part of normal commercial practice. However, the provision of conspicuous or unusually expensive entertainment, such as a golf trip or a sightseeing tour, might attract attention.
AICs at or above county level have jurisdiction to supervise and examine cases of commercial bribery. If the activity constitutes a crime, they are required to transfer the case to judicial organs for further investigation and prosecution.
It is also important to note that disciplinary rules apply to state functionaries and other official personnel. The leaders of state-owned enterprises are prohibited in general from using their positions for personal gain and to the detriment of the enterprise which they serve. In particular, they must not accept personal gifts or any other items of value that ought rightfully to be awarded to the enterprise.
In addition, business counterparts who are members of the China Communist Party must abide by internal rules which prohibit them from accepting gifts or banqueting that might influence the impartial execution of their official duties. Those who accept invitations to meals which might unduly influence their official conduct are liable to punishment (such as a warning in serious cases or a more severe punishment in very serious cases) under Article 80 of the Communist Party Disciplinary Punishment Rules promulgated by the Central Anti-Commercial Bribery Taskforce under the Central Commission of Discipline Inspection of the China Communist Party on February 28,2004.
Likewise, persons who are civil servants are prohibited from using their post to seek personal gains for themselves or for others or for engaging in any activities for profit. They may be punished (including by warning, demerit, demotion or dismissal) and their eligibility for any wage rise, promotion or any other reward for good conduct as a civil servant will be suspended for the duration of the punishment.
Although the Communist Party Disciplinary Punishment Rules and the PRC Civil Servants Law will not apply to the provider of hospitality if the provider itself is not a party member or civil servant, providing paid hospitality or paying for the travel expenses of a person who is a party member or civil servant may be considered a type of "unfair competition activity" under the Central Leadership Group of the Anti-Commercial Bribery Administration's Opinion on Accurately Mastering the Policy in dealing with Commercial Bribery on May 28,2007("2007 Opinion").
In the 2007 Opinion, a distinction was made between "criminal commercial bribery activities", "unlawful activities attracting administrative penalties" and "unfair competition activities – those activities involving low amounts which are against business ethics or market rules". While "unfair competition activities" under the 2007 Opinion will not attract criminal or administrative liability, another business operator who is harmed by such activities may recover damages and its own costs of investigating the activity by bringing a lawsuit in the PRC People's Court under Article 20 of the Anti-Unfair Competition Law. Such public action could in turn result in an administrative investigation.
Conclusion
The purposes of China's laws against bribery are to prevent corruption and to safeguard fair competition. While the current policy is focused on the investigation and punishment of commercial bribery committed by foreign business entities operating in the PRC, it is clear that prosecutors and judges will attempt to differentiate between genuine gifts, reasonable commercial activity and actual bribes. Because the threshold for criminal prosecution is cumulative, compliance-oriented business operators will take a cautious approach to the provision of paid entertainment and travel opportunities to their business counterparts in China, even if each occasion is of a small value, and will audit their operations to eliminate the risk of forming corrupt intent. This might mean not extending invitations on some occasions or to some persons, even when local custom seems to condone it. Where legal compliance is part of the business operator's bottom line this decision will come naturally. Seeking specific legal advice in case of doubt is strongly encouraged.
