New Anti-Unfair Competition Law Amended Applicable Scope of Commercial Bribery

On 4 November 2017, the Standing Committee of the National People’s Congress (“NPC”) adopted the amended Anti-Unfair Competition Law of the People’s Republic of China (“New AUCL”), which will go into effect on 1 January 2018. At that time, the Anti-Unfair Competition Law (“Original AUCL”) will be retired after approximately 25 years of implementation.

The New AUCL consists of five chapters: General Provisions, Unfair Competitive Behavior, Investigations into Suspected Unfair Competitive Behavior, Legal Liabilities and Supplementary Provisions. The New AUCL revises a number of aspects of the Original AUCL, including (a) an expanded definition of business operator to include “non-profit” business operators; (b) amended definitions of acts of confusion, commercial bribery, false publicity, trade secret infringement, prize sales and commercial defamation; (c) new provisions on the regulation of unfair Internet competition; (d) eliminating prohibitions on unfair competition for public utilities, abuse of administrative powers, dumping, tie-in sales, and bid-rigging; and (e) strengthening the investigation powers of enforcement agencies and penalties for violations. 

This article will analyze provisions on commercial bribery (which is a highlight of the New AUCL), and provide compliance advice for business operators.

1. Excluding Transaction Counterparties from the Scope of Commercial Bribery Recipients

Article 7.1 of the New AUCL explicitly provides that bribe-taking entities include three categories of entities or individuals, i.e., (1) employees of the counterparty; (2) an entity or individual entrusted with the relevant affairs by the counterparty; and (3) an entity or individual that influences a transaction using its authority or influence. The “counterparty” itself, however, does not fall within any of the three categories of bribe-taking entities. Literally, this means that under the New AUCL, benefits offered by a business operator to its counterparty in a transaction will generally no longer be treated as commercial bribery so long as the benefits are truthfully recorded in the account book. This amendment is consistent with relevant rules under PRC Criminal Law and marks a major breakthrough in China’s administrative enforcement against commercial bribery, because exchanges of benefits between companies have historically come under close scrutiny by the State Administration for Industry and Commerce (“SAIC”) and local AICs in their crackdown against commercial bribery. In practice, there are a large number of improper interventions against the legitimate exchange of benefits and cost allocation between enterprises.

This amendment is quite positive, because companies that offer “rewards, sponsorships, or economic benefits to business counterparts generally will not be deemed as engaging in bribery under the New AUCL, as long as the benefits are given to a company and not its employees. However, it must be advised that this does not mean that all financial arrangements between companies would not be considered commercial bribery under the New AML. We still need to continue closely following the interpretation and enforcement of Article 7 in practice.

2. Benefits Offered to State-owned/Public Entities would Likely Constitute Commercial Bribery

Article 7 of the second draft of the AUCL published by the NPC for public comments (“Second Draft”) provided that bribe-taking entities include four categories of entities or individuals: (a) employees of the counterparty; (b) entities or individuals entrusted with relevant affairs by the counterparty; and (c) state organs, state-owned companies and enterprises, public institutions or people’s groups, or state functionaries; or (d) any other entities or individuals that may take advantage of the positions of state functionaries to influence transactions. It is clear that the Second Draft didn’t exclude all kinds of “counterparties” from bribe-taking entities. Instead, a state-owned/public entity can be a statutory bribe-taking entity. 

In the third round of legislative review, according to the review report of the NPC, the members of the NPC standing committee did not suggest removing  state-owned/public entities from the scope of the bribe-taking entities, but rather suggested combining categories (c) and (d) above into one category, i.e., entities and individuals that influence a transaction using authority or influence.

Based on the above information, we understand that although the New AUCL does not explicitly list “state organs, state-owned companies and enterprises, public institutions or people's groups” as a category of bribe-taking entities, it seems that the NPC does not intend to exclude such state-owned/public entities from the scope of commercial bribery recipients. Therefore, benefits offered to such state-owned/public entities would still likely constitute commercial bribery. We suggest that companies exercise caution when dealing with state-owned/public entities, and await further interpretation from the competent authorities.

3. Recommendations when Offering Benefits to Private Companies

As mentioned above, the benefits offered to private companies generally will not be deemed as commercial bribery under the New AUCL. Nevertheless, we still have the following recommendations:

• Discounts paid to private companies should be in an express manner and truthfully recorded in account books. Article 7.1 of the New AUCL does not provide that the “transaction counterparty” will be a bribe-taking entity, while Article 7.2 of the New AUCL provides that “a business operator may pay discounts for the relevant transaction counterparty in an express manner; a business operator shall truthfully credit relevant amounts into account books if it pays discounts to transaction counterparties”. It is unclear under the New AUCL whether it would constitute commercial bribery if discounts to a counterparty are not paid in an express manner or not truthfully recorded. If that would not constitute commercial bribery, it is hard to justify why this provision is included under Article 7, an article specifically regulating commercial bribery. If that would constitute commercial bribery, Article 7.2 would be logically contradictory to Article 7.1. While this open issue will be subject to the relevant authorities’ further interpretation, we recommend fully complying with Article 7.2 at this stage when business operators offer discounts or commissions to their counterparties (including private companies).
• Closely focus on interpretation and enforcement of the New AUCL from legislative and enforcement authorities. There has not been any official guidance on how to determine who would be “the entity or individual entrusted with the relevant affairs by the counterparty” and “the entity or individual that influences a transaction using its authority or influence”, and on what constitutes “trust relationship” and “influences on a transaction”. In a recent news report, we noticed that an SAIC official interpreted Article 7 broadly and commented that the counterparties in Article 7 should refer to actual counterparties; a contractual party may not be the actual counterparty in a transaction. This means that the benefits offered to a private contractual counterparty would still constitute commercial bribery under circumstances where this contractual counterparty is entrusted by the actual counterparty. Such interpretation increases uncertainties in enforcement of Article 7. Therefore, we advise business operators to stay cautious, consider such uncertainties and closely follow interpretation and enforcement from competent authorities.

As one of the fundamental laws for the market competition, the New AUCL will certainly exert significant impact on the business behavior and compliance obligations of all market players. We recommend business operators closely follow any effects the New AUCL may have on your business, especially the types of behavior which could constitute commercial bribery, and promptly seek advice from Chinese legal counsel to avoid violating provisions on commercial bribery and other kinds of behaviors prohibited by the New AUCL. Moreover, business operators should closely monitor law enforcement practices of the AICs to mitigate their legal risks.