By King & Wood Mallesons’ International Dispute Resolution Group
In recent years, several large multinational pharmaceutical companies have been found to be in violation of the Anti-Unfair Competition Law. Compliance in the area of commercial bribery is increasingly a focus of the Chinese authorities. Most recently, pharmaceutical companies have been punished in China for commercial bribery. Not only the companies, but also individual employees who have violated Chinese law, are being charged and prosecuted.
The State Administration of Industry and Commerce, as well as the administrative agencies of industry and commerce at lower levels, are primarily responsible for the enforcement of the anti-commercial bribery laws. The focus has been enforcement of the Anti-Unfair Competition Law and the Interim Provisions on Prohibition of Commercial Bribery (“Interim Provisions”).
Under Article 2 of the Interim Provisions, the definition of “bribery” as adopted by the administrative agencies for industry and commerce is “the act of bribing by a business operator of another entity or individual by using property or other means with the purpose of selling or purchasing commodities”. The definition of “property” in the regulation encompasses cash and tangible goods, including property paid to a counterparty of a third party by a business operator under the guise of promotion costs, publicity expense, contributions, research costs, remuneration, consulting fees and commissions, or by reimbursing fees, in order to sell or purchase commodities. “Other means” are the methods by which the party may provide benefits other than tangible property, such as overseas or domestic travel. In addition, the Interim Provisions expressly provide that kickbacks given “to another entity or individual in secret and off the books” constitutes commercial bribery. The expression “secretly and off the books” applies when a business operator fails to clearly and accurately record kickbacks in its accounts, which accounts should accurately reflect the production, operation, income, and expenditure of the company in accordance with proper financial and accounting systems. This includes a failure to record kickbacks, falsified transfers to other financial accounts, or any other fraudulent accounting intended to hide the true nature of the transaction. Foreign companies may have some experience with similar regulation of listed companies under the books and records provisions of the U.S. Foreign Corrupt Practices Act.
In the criminal context, commercial bribery is defined more broadly. The administrative agencies for industry and commerce do not strictly limit the scope of what may be deemed to be commercial bribery. Instead, they look to the essence of commercial bribery, and prohibit a business operator from trading through the use of improper benefits. A party commits bribery where for the purposes of winning business, it engages in unfair competition with respect to quality, price, services, or other means. It does not matter if the business operator offers the inducement to another party, or a related party offers the inducement as an agent of the business operator. Nor does it matter if the offer or benefits are recorded in the company’s accounts. When conducting commercial bribery investigations, the administrative agencies for industry and commerce usually consider two factors: whether incentives were given; and whether the incentives resulted in business. The administrative agencies for industry and commerce will consider other factors as well, such as the nature of the business, the identity of the operator, the details in the accounting records, payments made, accounting of those payments, reasonableness of the payments, reasons for the payments, and the position of the company in the market and its sales volume, to name a few.
Because the law does not specify criteria for determining commercial bribery, the local administrative agencies for industry and commerce do not apply a set standard in practice. They have relatively large discretion in enforcement, which is challenging for enterprises in managing commercial bribery risk. In managing commercial bribery risk, companies should consider:
(1) If a company engages in promotional activities by giving preferential treatment to another party, the company must comply with certain requirements. For example, it must explicitly record the activities (such as execution of a contract which expressly identifies the discounts and rebates), and it must accurately record the activities in its accounts. The company should insure that the accounting records transparently reflect the business activities. For instance, discounts and rebates should not be recorded in the accounts as transportation expenses, warehouse costs, inventory price differentials, or other misleading entries. In addition, when grouping commodities, certain consumables and ancillary equipment should be recorded individually as sales revenue, and should not be grouped together. “Catch-all” accounting entries should also be avoided because they may reflect multiple transactions and may not clearly identify the nature of the transaction, e.g. “miscellaneous fees”. Lawful payments or benefits should be given to companies and never to the individual employees of other companies.
(2) Benefits must be provided only for reasonable commercial purposes, rather than for unfair competitive advantage. The purpose of providing the benefit or preferential treatment should correspond to the reasonable value of services and products. Obtaining a certain market share or market opportunity should not be condition for providing preferential treatment. Also the company should never use the benefit or incentive as a means to prohibit another company from purchasing the products or services of competitors.
Assessing whether an act constitutes commercial bribery requires a relatively complicated legal analysis. Multinational companies need to pay attention to China’s often evolving judicial environment and developments in accounting and tax regulations. They also need to understand that regionally in China, the administrations of industry and commerce may vary in their interpretation and application of the law. They should be aware that acceptable business practices in other countries may give rise to commercial bribery risk in China. Therefore, multinational companies operating in China should take precautions and be prepared in the event that questions are asked. For instance, companies should be knowledgeable about the process that administrative and judicial agencies have adopted in investigating other entities in the same industry. Such information is often available on the official websites of courts and administrative agencies of industry and commerce.