By Harry Liu, Sam Li, Olivia Xia  King & Wood Mallesons’ Dispute Resolution group

On 4 November 2017, the Anti-Unfair Competition Law Amendment (“AUCLA”) was ratified by the Thirtieth Meeting of the Standing Committee of the Twelfth National People’s Congress after three rounds of review[1]. It will come into effect on 1 January 2018. It has greatly improved the Anti-Unfair Competition Law (“AUCL”) which was enacted back in 1993.

Commercial bribery, as an integral concern of the AUCL, has been in the spotlight during the amendment process.

Changes in the Recipient of Commercial Bribery

Section 1 of Article 8 of the AUCL states that:

“A business operator shall not offer bribes in the form of property or by other means for the purpose of selling or purchasing products. If a business operator secretly pays kickbacks to the entity or individual people of the counterparty without record-keeping, the business operator shall be penalized for offering bribes; and the recipient shall be penalized for accepting bribes.”

So, under the AUCL, commercial bribery referred to bribery from a business operator to an entity or individual of a counterparty. [2] Bribery can be in the form of property or by other means, for the purpose of selling or purchasing products.  Therefore, prior to the AUCLA, recipients of commercial bribery included both “entities and individuals of the counterparty”.

The AUCLA has broadened the scope of recipients to include:

  • employees of the counterparty;
  • entities or individuals entrusted by the counterparty to handle relevant matters;
  • entities or individuals who may use their position and power or influence to impact the transaction.

The AUCLA extends recipients of bribes to include third parties. This recognizes the long-term practice of the Administration of Industry and Commerce (“AIC”).  The biggest change under the AUCLA is the exclusion of “counterparty to the transaction” from recipients of bribes specified in Section 1 of Article 7 under AUCLA. This completely overturns the traditional definition of commercial bribery.

For many years, the focus of an AIC investigation was on whether a business operator had given benefits to an entity as a “counterparty to the transaction”. The exclusion of “counterparty to the transaction” from the recipients of bribes specified in Section 1 of Article 7 under AUCLA basically means that giving benefits to a counterparty such as a discount, rebate, promotion, sponsorship or gift will not fall within the scope of commercial bribery. Market practice which the AIC possibly viewed as commercial bribery in the past, such as:

  • a pharmaceutical enterprise providing sponsorship or gifting medical equipment to hospitals with which it has direct business dealings for the sales of consumables ;
  • a tire enterprise providing sales incentives to its distributor;
  • a beer supplier giving store refrigerators as a gift or rebate based on beer bottle caps;

basically will not fall under the AUCLA’s definition of commercial bribery, provided that it is properly recorded in the books.

State-Owned Enterprises and Private Enterprises Standing on Equal Ground

It is notable that there is no difference between a state-owned and private-owned “counterparty to the transaction”.  The Anti-Unfair Competition Law (Second Draft Amendment for Review) (“Second Draft”) had four categories of recipients: (i) employees of the counterparty; (ii) entities or individuals entrusted by the counterparty to handle relevant matters; (iii) government agencies, state-owned companies and enterprises, public utilities, people’s organizations, or state functionaries; (iv) other entities or individuals who may use state functionaries’ position and power to influence the transaction.  In the Second Draft, “government agencies, state-owned companies and enterprises, public utilities, people’s organizations, or state functionaries” could be a “third party who may influence the transaction,” or a “counterparty to the transaction.” The Second Draft did not include private-owned entities as counterparties.

During the third review of the Anti-Unfair Competition Law Draft Amendment,[3] some members of the Standing Committee thought all players should be equal in the market and it would be improper to single out only state owned entities as possible recipients of commercial bribes; some members suggested that since the two types of recipients in Article 7[4] can both use their position and power or influence to impact a transaction, they should be combined.[5] The New Anti-Unfair Competition Law ultimately does not list “government agencies, state-owned companies and enterprises, public utilities, people’s organizations” separately as a category of recipients of bribes in Section 1 of Article 7 under AUCLA.  Therefore, a literal interpretation of the text of the relevant provisions[6], leads to the conclusion that counterparties, whether state or private-owned, cannot be recipients of commercial bribes.

Requirements of Booking Expressly Remained

The AUCLA removes the prohibition on secretly paying kickbacks without record-keeping in the AUCL.

“If a business operator secretly pays kickbacks to the entity or individual people of the counterparty without record-keeping, the business operator shall be penalized for offering bribes; and the recipient shall be penalized for accepting bribes”

This mitigates commercial bribery exposure potentially generated by poor record-keeping.  However, the AUCLA retains certain requirements of record-keeping under the following provision:

“A business operator during the transaction, may expressly offer discounts to the counterparty of the transaction, or pay commissions to a middleman. A business operator who offers discounts to the counterparty of the transaction or pays commissions to a middleman must record such payments authentically. The business operator who accepts such discounts or commissions should record such receipt authentically too.”

The possible consequences and penalties for failure in such booking requirements need the clarification from legislative interpretation or by agencies in the future.

[1] For detailed analysis of the first and second reviews of the amendment to the Anti-Unfair Competition Law, please see Harry Liu, Qian Liu, Sam Li: Fighting Corruption to the End in the Name of People (http://www.kwm.com/zh/cn/knowledge/insights/forecast-on-the-trend-of-commercial-bribery-law-enforcement-20170517), Harry Liu, Sam Li, Olivia Xia: An Observation of Anti-Commercial Bribery Legislation from the Perspective of the Latest Draft Amendment to the PRC Anti-Unfair Competition Law (https://www.chinalawinsight.com/2017/09/articles/dispute-resolution/%E4%BB%8E%E5%8F%8D%E4%B8%8D%E6%AD%A3%E5%BD%93%E7%AB%9E%E4%BA%89%E6%B3%95%E6%9C%80%E6%96%B0%E8%8D%89%E6%A1%88%E7%9C%8B%E5%95%86%E4%B8%9A%E8%B4%BF%E8%B5%82%E7%AB%8B%E6%B3%95/) . An Observation of Anti-Commercial Bribery Legislation from the Perspective of the Latest Draft Amendment to the PRC Anti-Unfair Competition Law was reprinted on China Industry & Commerce News dated September 21, 2017.

[2] See a further clarified definition in Article 2 under the Interim Provisions on Banning Commercial Bribery of the State Administration for Industry and Commerce.

[3] With regard to Section 1(iii) under Article 7 of the Second Draft Amendment “government agencies, state-owned companies and enterprises, public utilities, people’s organizations, or state functionaries” and Section 1(iv) thereunder “other entities or individuals who may use state functionaries’ position and power to influence the transaction”

[4] See Section 1(iii)  and Section 1(iv) in Article 7.

[5] See National Congress Law Committee Report of the Review Results of the Anti-Unfair Competition Law of the People’s Republic of China Draft Amendment, NPC.gov.cn, November 4, 2017, http://www.npc.gov.cn/npc/xinwen/2017-11/04/content_2031358.htm.

[6] There exists a different opinion that, “government agencies, state-owned companies and enterprises, public utilities, people’s organizations” as the counterparty of the transaction are still among the recipients of commercial bribery under the New Anti-Unfair Competition Law. In other words, such type of recipients are not excluded from the New Anti-Unfair Competition Law. “Entities or individuals who may use their position and power or influence to impact the transaction” specified in Section 1(iii) under Article 7 of the New Anti-Unfair Competition Law could refer to both third parties and  “government agencies, state-owned companies and enterprises, public utilities, people’s organizations” as the counterparty of the transaction.