The Year of the Sheep was a banner year for anti-corruption enforcement in China. Government-led investigations reached an all-time high, with high-profile probes in the telecom, airline, and securities industries all making headlines. 2015 was a significant year for anti-corruption legislative reform as well. Adopted in November 2015, the Ninth Amendment to the Chinese Criminal Code (“Ninth Amendment”) enhanced penalties for bribe-givers, extending criminal liability beyond improper payments to current and former government officials to those aimed at the relatives and close associates of both current and former government officials. The implementation of the Ninth Amendment marked the first time since 2011 when the Eighth Amendment to the Criminal Code criminalized improper payments to non-Chinese government officials (a provision frequently referred to as “China’s FCPA”), that Chinese anti-bribery law has undergone significant reform. And it appears that the Chinese government was only getting started.
In the Year of the Monkey, Chinese lawmakers have continued to strengthen anti-bribery laws through legislative amendments and judicial guidance. Proposed changes to China’s commercial anti-bribery law, the Anti-Unfair Competition Law (the “AUCL”) effectively broaden the scope of payments that fall within the AUCL’s ambit and impose new record-keeping obligations on business incentives. Interpretative guidance jointly issued by the Chinese Supreme Court and the Chinese Supreme Procuratorate brings outdated criminal bribery prosecution standards in line with current market conditions and clarifies ambiguous terminology. Together, these changes reflect the Chinese government’s effort to combat public and private sector graft from both enforcement as well as legislative angles.
2016 Interpretation Introduces New Monetary Thresholds for Official Bribery Crimes
Sentencing Standards Revised
From 1997 until the passage of the Ninth Amendment, government-related bribery crimes were defined by monetary thresholds. The Ninth Amendment abandoned these statutory minimums, replacing specific renminbi amounts with subjective qualifiers such as “large,” “great,” and “extremely great.” The shift allowed for greater judicial discretion, but also made sentencing decisions vulnerable to inconsistency.
Issued on April 18, 2016, the Judicial Interpretation Regarding the Application of Law in Anti-Corruption and Anti-Bribery Criminal Cases (the “2016 Interpretation”) reintroduces monetary thresholds, adjusted for inflation. Under the 1997 version of the Criminal Code, bribes as low as RMB5,000 (US$770) paid to government officials carried criminal penalties. The 2016 Interpretation raises the floor to RMB30,000 (US$4,600).
Definition of “Things of Value” Clarified
The Chinese Criminal Code defines bribery as the unlawful transfer of “things of value.” Previously, it was questionable whether certain intangible benefits (i.e., free services) as opposed tangible ones (i.e., cash and cash equivalents), were covered. Guidance issued by the Chinese Supreme Court and the Chinese Supreme Procuratorate in 2007 directed lower courts and procuratorates to broadly construe the law to cover both. Nevertheless, confusion persisted. The 2016 Interpretation seeks to settle the matter and combat quid pro quo exchanges of favors by clarifying that the definition of “things of value” extends to intangible but quantifiable benefits such as debt forgiveness, free services, club memberships, and sight-seeing tours.
Knowledge and Charitable Use Defenses Barred
The 2016 Interpretation closes two potential loopholes. The first change addresses the bribe recipient’s knowledge. Previously, government officials who learned after-the-fact that someone had made a payment to a family member or a close associate in connection with an official action could avoid liability by citing a lack of intent to accept the benefit. Under the 2016 Interpretation, lack of prior knowledge no longer constitutes a defense.
Second, the second change clarifies that a payment remains improper even if the recipient subsequently disposes of it. Previously, government officials could attempt to mitigate liability by using illicit funds for donation purposes or in connection with the performance of their public duties. The 2016 Interpretation also forecloses these defenses, resolving confusion among lower courts.
AUCL Draft Amendment
On February 25, 2016, the Legislative Affairs Office of the State Council released the AUCL Draft Amendment—the most significant change to the AUCL since its enactment in 1993—highlighting the Chinese government’s continued attempt to combat not only government-related but also commercial corruption.
A Broader Definition of Commercial Bribery
The AUCL currently prohibits businesses from committing bribery in their commercial dealings through payments of cash, cash equivalents, or other channels. The law seeks to prohibit off-book deals, while exempting bona fide discounts and commissions that are accurately recorded in corporate books and records. The Draft Amendment to the Anti-Unfair Competition Law (the “AUCL Draft Amendment”) would broaden the scope of commercial bribery by penalizing a bribe giver who “provides, or promises to provide, economic benefits” to business counterparts in order to “acquire a business opportunity or to gain a competitive advantage.” For the recipient, “accepting or agreeing to accept an economic benefit” would constitute a violation of the law. Accordingly, the AUCL Draft Amendment extends liability to agreements regarding improper payments between business operators, regardless of whether the transfer is actually carried out.
Third Parties Come under Scrutiny
Further, the AUCL Draft Amendment would not only prohibit providing improper benefits directly to business partners, but also to third parties who are in a position to “exert influence” on a transaction. Take, for example, a company (“Contractor”) responding to a tender offer issued by potential client (“Landlord”). Contractor secretly pays Landlord’s largest tenant (“Tenant”) to recommend Contractor to Landlord, with the result that Contractor wins the tender. Under the AUCL Draft Amendment, Tenant may be liable as a third party bribe recipient. This new provision broadens the scope of prohibited activity by targeting indirect payments, which are harder to detect than business-to-business kickbacks.
Tighter Record Keeping Requirements
The AUCL currently requires that businesses providing rebates, discounts, and commissions accurately record these payments in their books and records. The AUCL Draft Amendment would extend this obligation by requiring that legitimate economic benefits not only be accurately recorded in corporate accounts, but also reflected in the relevant business agreements.
Vicarious Liability for Acts of Employees
In addition to these proposed changes, the AUCL Draft Amendment would establish vicarious corporate liability for employees who engage in commercial bribery. While existing law already permits employers to be held accountable for the actions of their employees, the AUCL Draft Amendment removes ambiguity as to corporate liability for employees who use improper benefits to secure business opportunities or a competitive advantage. Addressing perennial business concerns about “rogue employees” acting independently without the employer’s knowledge, the AUCL Draft Amendment provides that a corporation would not be held liable for an employee’s misconduct where the bribe represents a purely “personal” benefit.
Increased Penalties for Wrongdoers and Facilitators
Under current law, businesses that engage in commercial bribery are subject to a fine of RMB10,000 to RMB200,000 (US$1,500 to US$30,700) and confiscation of illegal gains. The AUCL Draft Amendment would increase the fine to 10% to 30% of the wrongdoer’s illegal revenue (on top of any disgorgement). The AUCL Draft Amendment would also impose a fine of RMB100,000 to RMB1,000,000 (US$15,400 to US$154,000) on third parties who facilitate improper business arrangements through the provision of production, sales, warehousing, transportation, network, technical support, advertising, or payment services. The fine would apply whether the third party knew or should have known of the wrongdoing.
While these new and proposed rules and regulations are primarily aimed at domestic government officials and businesses, in recent years Chinese authorities have shown a willingness to enforce domestic anti-bribery laws against foreign nationals and companies within their borders. It is therefore important that multinational corporations operating in China review their compliance policies to ensure that they encompass payments to the family members and close associates of both current and former Chinese officials. Multinationals should also pay special attention when providing free or discounted services to government customers to ensure that they do not create even the appearance of a quid pro quo arrangement. Finally, multinationals should review their sales policies to ensure that rebates, discounts, and other incentives offered to business partners are not only accurately recorded in corporate books and records but are also reflected in the relevant transaction agreements. As always, companies operating in China should pay close attention to the role of third parties in their transactions and ensure that they are subject to the appropriate level of due diligence. With no end in sight to China’s anti-corruption campaign, the Year of the Monkey promises to be a busy one for legislative reform.