e. Duty to Supervise Business Partners
Generally speaking, a unit shall only be responsible under Chinese law for its own acts, rather than for the acts of other entities. However, in some specific circumstances, a unit may have an obligation to supervise the legitimacy of the acts of its business partners. This obligation might be established under the theory of accomplice liability under Chinese law, which includes co-conspiracy and accessory liability.
Under China’s criminal law, the mens rea of accomplice crimes is a joint intention of offenders. Usually it is easy to confirm whether there is a joint intention in co-conspiracy, whereas guilt of accessory crimes is more complicated in that the mens rea for the accessory crime includes both a direct and an indirect intention.
If a unit has a direct intention of abetting, assisting, or aiding its fellow business partners in committing crimes, the unit shall be regarded as an accomplice. For example, when a unit is fully aware that its fellow business partners will offer illegitimate benefits to participants of promotional or academic meetings and still provides any sort of assistance to these partners, including for example by providing unreasonable amounts of sales expenses, such unit shall be held guilty of bribe-offering as an accessory.
“Implied intention” refers to cases where a unit overlooks, connives at, or acquiesces to potential bribery acts of business partners. For example, if a producer has realized that kickbacks happen at a high rate in its industry and still gives its distributors or marketing companies a huge sales expense without strict supervision and/or audition, the producer might be deemed as having an implied intention of bribery.
Thus, it is highly recommended for units to diligently supervise their business partners in order to mitigate the risk of being liable for any bribery crimes committed by their partners. It is highly risky to enter into contracts with counterparties without conducting any due diligence regarding bribery, especially in industries with a high rate of bribery. Further, anti-bribery compliance controls regarding third-party business partners could be established through contractual clauses (for instance, by inserting anti-bribery provisions, termination rights, and audit rights into contracts), through conducting and updating compliance due diligence, or through obtaining annual compliance reports regarding third parties. In addition, it is hard to explain or defend unreasonable commissions or other remuneration for third parties that is associated with sales performance or unfairly huge sales expenses. Therefore, commissions and sales expenses must be limited to reasonable and justifiable amounts.
Those performing the duty of supervising third parties cannot be totally satisfied with paper measures. Strict implementation and continued improvement are necessary for performing this duty. It is suggested to assign the tasks of enforcement of such duty to specific senior executives who have sufficient authority and position. It is important to adopt enhanced measures to deal with significant changes in the business environment or judicial practice. For instance, when bribery criminals in the same industry as business partners are revealed, it is necessary to immediately examine the business partners’ practice to prevent similar criminal conduct. If any business partner is involved with bribery criminals, it is highly risky to renew contracts with such business partner.
In summary, a unit may be held criminally liable for failing to supervise its business partners under the theory of accomplice. If a unit adopts sufficient anti-bribery measures and strictly executes them, it may avoid the risk of being involved in bribery conduct committed by its business partners.
B. Anti-Unfair Competition Law
The stated purpose of the Anti-Unfair Competition Law is “to encourage and protect fair market competition and prohibit unfair competition.” In practice, both the Anti-Unfair Competition Law and the Interim Provisions aim to regulate commercial bribery, in addition to the various anti-corruption provisions of Chinese law discussed in detail above.
- Definition and Application
According to Article 8 of the Anti-Unfair Competition Law, “business operators shall not use money or properties or other methods to bribe others in order to sell or purchase commodities.” Article 8 of the Interim Provisions accordingly defines commercial bribery as “a business operator’s bribery to the other entity or individual with money and property or by other means in order to sell or purchase commodities.” Under the Anti-Unfair Competition Law, in practice, the acts of the employees in a business entity may be regarded as the acts of the said entity, similar to the discussion in the previous section regarding unit criminal liability.
Administrative liability for commercial bribery may arise when the “bribery” occurs via “cash, property or other means,” the purpose is to purchase or sell goods, and fair competition is impaired. To clearly understand which behavior gives rise to administrative sanctions for commercial bribery, one could ask the following four questions:
(1) Is there a business operator (a person or an entity)?
(2) Is there something of value given by the business operator?
(3) Is the purpose to seek to consummate a commercial transaction?
(4) Did such act infringe upon fair competition?
The first two questions are easy to answer. The presence of a business operator (either a person or an entity) and the provision of “value” are easily ascertained. The third question seems also fairly easy to answer under some situations, such as when the intended recipient is a current or prospective commercial transaction partner. If the intended recipient is a current or prospective commercial transaction partner, as a general matter, one can move on to answer the fourth question, i.e., whether fair competition has been infringed. However, if the intended recipient is not a current or prospective commercial transaction partner, for example, the recipient is a charity or a consumer in a restaurant who orders a distributor’s beverage product, the answer seems unclear and the analysis incomplete. This is because the “value” need not be directly given to the person or entity with which one seeks to do business. For example, a charity might not be a commercial transaction partner of a business entity that makes a “charitable contribution.” Yet a “charitable contribution” to that charity could still give rise to administrative sanctions for commercial bribery, if a person connected with the charity could be influenced to act and thus engage in a commercial transaction that it would not have otherwise entered into but for the “contribution.” Likewise, beer distributors, who pay a “promotional fee” of cash to waiters in a restaurant who promote that distributor’s beer, were subject to sanctions for commercial bribery because, by giving cash to waiters, a distributor marginalizes other competitors and effectively decreases competition. In practice, the fourth question as to whether fair competition was infringed is usually guided by the value of the benefit provided. Although there is no bright-line statutory or regulatory threshold amount, as a practical matter Administration of Industry and Commerce (AIC) does not view competition as being impaired unless the value given reaches a certain amount, such as at least “approximately RMB1,000 Yuan” per person or entity as informally explained by some local AICs. Moreover, the value given and received is cumulative, so repeatedly inviting someone to a certain sporting event will eventually no longer be viewed as a reasonable amount. However, buying meals for a client will not generally give rise to administrative sanctions for commercial bribery. Other relevant factors include the scope, frequency, and duration of the alleged “bribery.”
Since there is no general bright line that demarcates bribery from normal promotional and marketing activity, business operators will have to manage the risk on a case-by-case basis. However, the core issue that a business operator should check internally is whether the “value” that the business wishes to provide to a customer or potential customer would be viewed by an AIC as infringing on fair competition. SAIC or local AICs will impose sanctions if it considers that an entity has “marketed” or “hosted” or “entertained” with the purpose of influencing the recipients’ actions such that the ability of competitors fairly to compete on quality, price or service has been impaired.
SAIC regularly issues guidance which local AICs follow to investigate and penalize commercial bribery. Important guidance issued by SAIC includes the Gong Shang Gong Zi [1999] No.170 Reply to the Issue of Classification and Dealing with “Per Capita Fees” or “Parking Fees” Received by Travel Agencies or Guides from Marketplaces published on June 22, 1999 (Reply 170). In Reply 170, the SAIC clearly interprets Article 8 of the Anti-Unfair Competition Law as permitting administrative liability for commercial bribery to be found whenever one gives something of value to seek a commercial transaction and the ability of competitors to fairly compete on quality, price, or service is impaired. Reply 170 makes clear that commercial bribery is subject to administrative sanctions regardless of the identity of the receiver and regardless of whether the transaction was properly entered into the appropriate books and records. The rule established in Reply 170 reflects the actual approach taken by SAIC and local AICs to impose administrative sanctions on commercial bribery in today’s China.[1]
The PRC laws do not proscribe business entertainment. Rather, in laws and practice, the proscription is against giving things of value for the purpose of obtaining business and, by so doing, infringing on competitors’ ability to compete based on quality, price or service. - “Money”, “Property”, and “Benefits”
The term “Money” is equivalent to currency. The term “Property” refers to anything with quantifiable monetary value and, pursuant to the Commercial Bribery Opinion, includes “property interest” for criminal violations (but not in the context of administrative violations). The term “Property interest” means benefit or value that can be calculated in monetary value in addition to money and property. “Property Interest” includes benefits such as providing home decorations, “member cards” containing stored value, tokens or tickets containing stored value, exempting or forgiving debt, gambling, certain loan structures, and providing free labor service or free travel.
The value of “property interest” is calculated as the money actually paid, whether or not all of the interest is actually used. For example, if a person accepts a debit bankcard, the total amount deposited on the bankcard will be treated as the amount of the bribe, irrespective of whether the money on the card is withdrawn or used. If a person who accepts a credit bankcard uses the card and the party giving the bankcard pays the bill, the amount used and paid will be treated as the amount of the bribe.
“By other means” refers to any means used to provide value or benefits, other than giving money or property. In many reported cases of commercial bribery, payments disguised as promotional fees, publicity fees, sponsorship fees, scientific research fees, service fees, consulting fees, reimbursements of expenses, or payments of commissions were deemed to be “by other means.” Further examples include providing domestic or international tours, exploratory trips, or lavish or expensive entertainment, often under the guise of a seminar. Entertainment, including inviting people to recreational activities, and providing or reimbursing travel or lodging is viewed as “by other means.”
Due to the wide range of benefits that may be regarded as commercial bribery, quite a number of “business practices” that historically were likely considered to be customary are today deemed to be commercial bribery by AICs. For example, the dealer of Budweiser Beer once provided “admission fees” and “exclusive fees” to a hotel aiming to exclude other brands of beers to be sold in the hotel. This, however, has been determined as commercial bribery by the Chinese administrative agency.
Therefore, careful legal analysis is necessary before deciding whether an act is a lawful business practice or commercial bribery. Additionally, in practice the administrative agency has considerable discretion in interpreting commercial bribery. It is not uncommon for an administrative agency to determine that certain business acts that seem reasonable and customary are commercial bribery in the eyes of the agency. Given this vague boundary between commercial bribery and lawful business practices, some of the most common business practices are discussed in detail below.
(to be continued)
[1].According to the Law of the People’s Republic of China on Administrative Penalty, adopted at the Fourth Session of the Eighth National People’s Congress on 17 March 1996, effective 1 October 1996 (PRC Administrative Penalty Law), guidance cannot be the legal basis for administrative penalty and a party cannot be administratively sanctioned on the sole basis of normative rules expressed in guidance.