There has been extensive discussion within the business community as to whether the recent Rio Tinto decision has any implications for the way in which foreign businesses conduct their negotiations in mainland China, particularly in relation to the areas of bribery and dealing with State and trade secrets.

The Rio Tinto decision

Although the decision has been widely reported in the media, the actual proceedings in the Shanghai No 1 Intermediate People's Court were largely closed. No written judgment has been released to date and given the nature of some of the charges (ie. relating to trade secrets) it is unlikely that one will ever be. Trade secrets aside, Chinese courts do not routinely publish detailed reasons for decisions (in the way in which common law jurisdictions do). This means that there are real limitations on what can be usefully said about the proceedings itself.

The basic decision is that four Rio Tinto executives were sentenced to imprisonment for accepting bribes and stealing trade secrets from State owned Chinese steel mills. The bribes were reportedly in relation to ensuring that certain privately owned steel mills in China had adequate supplies of iron ore to meet their production demands. The trade secrets aspect of this case is, as we mentioned, almost completely unknown.

State secrets

The PRC law on State secrets is vague (both in its scope and application). It is therefore an area that should be approached with some caution particularly when a company requests and obtains documents from the Government or State Owned Enterprises ("SOEs") which may touch upon PRC State economic and social development, science or technology or defence interests.

The law

The PRC Law on Guarding State Secrets ("the State Secrets Law") defines a State secret to be any matter which has a "bearing on State security and national interests and, as specified by legal procedure, are entrusted to a limited number of people for a given period of time."

Some key points to understand about this law are as follows:

  1. The unlawful obtaining or possession of State secrets is a criminal offence and carries heavy penalties ranging from a maximum penalty of life imprisonment to 10 years imprisonment to 5 years deprivation of political rights or 3 years public surveillance.
  2. The State Secrets Law sets out some seven types of information which are State secrets1. It is important to note that two types of protected information are "secrets in national economic and social development" and "secrets concerning science and technology", each of which are readily capable of extending to the types of information usually passed between parties in commercial negotiations.
  3. The Ministry of State Security of China is responsible for the administration of State secrets. However, the classification of information as State secrets can occur at all levels of government (including SOEs).

Managing the risk

Here is a link to a useful set of questions that foreign companies may ask themselves before and during negotiations in China.

Trade Secrets

The law on trade secrets is contained in the PRC Criminal Law and the PRC Anti-Unfair Competition Law. The Criminal Law criminalises obtaining trade secrets by improper means which cause "significant losses" to the rightful owner.

Some key points to understand about this law are as follows:

  1. The Criminal Law defines "trade secrets"(????) (sometimes translated as "commercial secrets") as "technical information and operational information that are unknown to the public, can bring economic benefits to their rightful owner, are functional, and are kept as secrets by their rightful owner."
  2. Criminal liability arises where the relevant unlawful act causes "significant losses". There is no definition of "significant losses" but it is clear from the penalties that it must cause more than RMB 500,000 in losses to the party whose trade secrets have been infringed.
  3. If the unlawful act causes losses of RMB 500,000 or more then the penalty is up to 3 years imprisonment, criminal detention and/or a fine. If the act causes losses of RMB 2,500,000 or more then the penalty is between 3 and 7 years imprisonment and a fine.

Managing the risk

Our practical tips on trade secrets are not too dissimilar from those in respect of State secrets. The aim of both is to ascertain whether or not there is a risk that you are dealing with State or trade secrets (or there is scope that your counterparty will allege that you were dealing with them). Here is the link.

Bribery

Most foreign companies will be well aware that they are required to comply with local laws in relation to corruption. Others will also have to comply with the US Foreign Corrupt Practices Act and other anti-corruption legislation of their home state.

UK companies and those foreign companies which carry on a business in the UK will now have to deal with the new UK Bribery Act (which received Royal Assent on 8 April 2010). Here is a link to our previous e-bulletin on the UK Bribery Act.

The law

The laws on commercial bribery are contained in the Criminal Law, the Criminal Procedural Law and Anti-Unfair Competition Law of the PRC, as well as a number of notices and other opinions issued by the Supreme People's Court and Supreme People's Procuratorate.

In summary, the laws on commercial bribery prohibit anyone, including foreign individuals and companies, from giving bribes to functionaries of both private and State owned entities in China. They also, of course, prohibit the taking of such bribes.

The maximum penalty for individuals who commit the offence of giving bribes is life imprisonment. Companies which commit bribery may be fined and the person in charge and other personnel who are directly responsible for the bribe shall also bear criminal responsibility. The maximum penalty for those directly responsible is five years imprisonment.

Managing the risk

There are a number of strategies that companies can deploy to deal with bribery risks. Many companies will already have some, or indeed all, of the ones set out in linked document as part of their compliance and risk handbooks. Here is a link to some of the main anti-bribery strategies.

Conclusion

  1. If there are any doubts as to whether or not something is in fact a State secret, then the advice of local counsel should be sought as to the status of the information or document, and if necessary, the sign off from the relevant Ministry of State Security should be obtained.
  2. While trade secrets are, generally speaking, going to be easier to identify and control than State secrets, if there is any doubt as to whether or not something is one, the most sensible thing to do is to clarify the position with your counterparty and record the agreed position. Once the status of the document has been determined, then you can adopt the appropriate measures to safeguard the information.
  3. It is important to let staff, agents and others know that your company will not tolerate corruption. This important message should then be backed up with appropriate measures to both prevent and detect bribery in the conduct of your operations in China.