The first half of 2018 saw a number of significant changes to the Chinese anti-corruption regime, including amendments to the Anti-Unfair Competition Law and formation of new anti-corruption regulatory bodies. Amidst an anti-corruption campaign in China that continues to gain traction, companies operating in the country should continually evaluate whether current business models run afoul of the latest regulations. This article discusses several of these key changes to the anti-corruption landscape and the implications for multinational corporations operating in China.
1. Revamped Anti-Unfair Competition Law
Last year, the Standing Committee of the National People’s Congress passed revisions to the Anti-Unfair Competition Law (AUCL), the primary legislation that regulates commercial bribery by individuals and entities in China. This revised AUCL (the Amended AUCL), which came into force on 1 January 2018, represents the first time the AUCL has been revised since its introduction in 1993. The Amended AUCL makes a number of significant changes, but we have limited our discussion to the three amendments relating to anti-corruption that may have significant implications for companies operating in China.
A. Broadened definition of ‘commercial bribery’
Expanded purposes of commercial bribery
While article 8 of the 1993 AUCL limited commercial bribery to bribing “by offering money or goods or by any other means, in selling or purchasing commodities”(emphasis added), article 7 of the Amended AUCL now prohibits bribery “by offering money or goods or by any other means . . . in order to seek a transaction opportunity or competitive advantage” (emphasis added).
Expanding on the differences between the 1993 AUCL and the Amended AUCL, the Director of the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration for Industry and Commerce (SAIC), Yang Hong Can, explained, during an interview on 9 November 2017, that ‘competitive advantage’ refers to “obtaining an unfair competitive advantage in business activities through the offering of property or other means to induce the bribe recipient to commit acts that violate the integrity of the recipient’s official duties or business ethics”.
This effectively expands the circumstances in which conduct may be found to constitute bribery. For example, whereas paying a tax bureau official in order to reduce one’s tax liability may not have previously fallen within the ambit of ‘commercial bribery’ under the 1993 AUCL, the same act would certainly give the party offering the bribe a competitive advantage and so could potentially violate the Amended AUCL.
B. Regulator of corruption in public sector – National Supervision Commission
Whereas the SAMR is authorised to investigate private sector corruption, the National Supervision Commission (NSC) was formed in March 2018 to investigate corruption in the public sector, merging the anti-graft functions of the police, prosecutors, and other supervision departments, with the Central Commission for Discipline Inspection (CCDI). This new regulatory body extends the CCDI’s investigative scope, which previously covered only corruption by Chinese Communist Party members, to managers and heads of state-owned enterprises, as well as public health care, scientific research, and educational institutions.
The NSC also wields extensive investigatory powers that mirror those held by the CCDI, including the power to obtain and collate evidence from relevant individuals and entities, and to seize property, documents, and data relevant to the suspected misconduct. Perhaps most controversial is the NSC’s power to detain and question suspected bribe-givers and bribe-recipients for a period of up to six months without access to an attorney.
According to the NSC’s internal statistics, during the first half of 2018, over 240,000 public officials were disciplined, including 28 ministers and provincial officials, and over 1,500 bureau-level officials.
3. Implications for companies operating in China
With the roll-out of the Amended AUCL and the newly formed regulatory bodies charged with enforcing it, all current signs point to even more aggressive anti-corruption enforcement under President Xi Jinping’s ‘tigers and flies’ initiative in the years to come.
The Amended AUCL’s inclusion of “entities or individuals entrusted by transaction counterparties to handle relevant matters” reflects China’s recognition of third party intermediaries as common conduits for improper payments, mirroring the enforcement trends of the U.S. Department of Justice and UK Serious Fraud Office. In a country where the use of third parties is ubiquitous (be it distributors, resellers, agents, or consultants), companies should continue to carefully review their relationships with third parties on a periodic basis to ensure they are offering legitimate bona fide services, and not acting as intermediaries for potential corrupt payments.
To avoid liability under the AUCL for the corrupt acts of ‘rogue employees’, companies should also review existing compliance policies and procedures to ensure that they represent “reasonable” and “effective” measures for detecting and combatting any potential corruption. While there is no one-size-fits-all compliance programme, companies should take a risks-based approach, conducting periodic audits to identify potential risk areas and designing appropriate procedures to minimise those risks.
While time will tell how AUCL enforcement will differ under the newly formed SAMR and NSC, the consolidation of the various regulatory bodies into these super agencies will certainly streamline enforcement procedures and harmonise enforcement objectives by decreasing the inefficiencies of the prior regime, under which the jurisdictions, rules, definitions, and objectives of different bureaus investigating the same companies or facts often clashed. These agencies are now able to dedicate their full range of resources to a common objective.
For example, on 24 May 2018, the SAMR announced the launch of a five-month nationwide initiative from May to October 2018 to crack down on unfair competition, focusing on areas of “strong social concern”, including “pharmaceuticals (and medical devices), public enterprises and institutions, and other industries and fields that are closely related to people's livelihood”. The SAMR described this as a “key initiative” to “fully implement the spirit of the 19th National Congress of the People’s Republic of China” and to “further promote the implementation of the [Amended AUCL]”.
A recent administrative sanction imposed by the Shanghai Qingpu Administration for Market Regulation (SQAMR) is illustrative. On 19 July 2018, the SQAMR issued a penalty notice and a fine of RMB 150,000 to a Shanghai-based medical device company, Lepu Medical Technology (Shanghai) Co., Ltd. (Lepu Medical), in connection with paying speaker fees to medical experts to give presentations at a satellite meeting convened by the company during a broader symposium. Specifically, the SQAMR found that Lepu Medical had engaged in commercial bribery under article 7, section 1(iii) of the Amended AUCL by: (1) preparing the PowerPoint presentations on behalf of the speakers, and including in the presentations information about the company’s products, and (2) paying speaker fees to the experts, and recording them as sales expenses; and that these actions had unduly influenced the experts with the goal of gaining an unfair competitive advantage.
Similarly, the NSC has also pointed to the food and health care industries as sectors on which it intended to focus its attention. In an announcement made on 14 May 2018, the NSC stated that it would implement “specific steps” to fight corruption in Shanghai’s health care system, calling the receipt of bribes by medical personnel by medical personnel a “chronic disease”. Further, following the recently reported scandal regarding the production of hundreds of thousands of defective children’s vaccines, the NSC has also launched an official investigation into Wu Zhen, the former deputy director of the China Food and Drug Administration.
Companies in the life sciences industry should continue to closely monitor potential risk areas historically associated with corruption (including gifts, meals and entertainment, charitable donations, payments to medical associations, sponsorships, grants, speaker fees, and interactions with distributors), and to implement reasonable controls to mitigate those risks.
The changes in the first half of 2018 reinforce China’s commitment to its ongoing anti-corruption campaign. With the formation of new super agencies wielding a wide range of investigatory powers and charged with enforcing broader anti-bribery legislation under the Amended AUCL, companies operating in China would be well-advised to remain vigilant in monitoring business operations and evaluating existing policies and procedures to reduce the risk of running afoul of Chinese anti-corruption regulations.
Client Alert 2018-176