HaoLiWen Note: “off the book giving” is in legal practice one of the criteria for determining whether certain commercial behaviors, like discounts, allowances, or commissions constitute commercial briberies. While this firm deems: (1) Book records will fail in terms of objectiveness and completeness as a legal criterion. Financial books are reflection of business behaviors with commercial essence. While the commercial essence should be the criterion for a conviction, books can only be prima facie evidence. (2) A proposed means of judging a commercial bribery: evaluate the validity of the consideration under which the benefit is given; failure on this may be the indicator of commercial bribery. A prima facie valid consideration should be scrutinized further on its commercial essence. (3) A court shall be careful in taking as commercial bribery transactions between Non-State-Owned entities unless the takings benefit only individual employees other than the entire business entity. Gifts and lower-than-cost sales will be more appropriately dealt within the domain of dumping.

This February, Legislative Affairs Office of State Council published the Anti-Unfair Competition Law of the People⊙s Republic of China (Revised Draft for Review, hereinafter “the Draft)). Contents involving commercial bribery were revised considerably, for example, certain commercial bribery conducts were formally defined and itemized in details. Despite all these, some issues persist.

I.Current Anti-Unfair Competition Law: Commercial Bribery not clearly defined 

The active Anti-Unfair-Competition Law gives no definition to Commercial Bribery. Instead separately in an Interim Regulations of the State Administration for Industry and Commerce on Prohibition of Commercial Bribery (hereinafter “Order No. 60”) and other regulatory documents the definition can be found. In addition, given the nature of frequenting business transactions, specific commercial bribery conducts are enumerated in different regulations.

(A). Definition of Commercial Bribery

According to Article 2 of the Order No.60, “the ‘commercial bribery’ means the act of an undertaking who bribes a counterpart entity or its individuals by giving property or other means with the purpose of selling or purchasing commodities.” It’s obvious the definition runs in circle itself, thus helpless to interpret “commercial bribery” in practice.

(B) Definitions Enumerated on Case-by-Case Basis

As shown above the in general definition of “commercial bribery” does not provide much pragmatic guidance. Going down to the level of specific conducts; SAIC in different normative documents specifies some of the embodiments:

  1. Kickbacks. “Covert off-book giving” is cited as one key element in nailing down a kickback as commercial bribery. Specifically It can be “off a financial book”, “transfer into other books”, or “falsification of books”.In a reply to an inquiry from its regional branch in 2000, SAIC further clarifies that “covert off-book giving” only applies to judgment on kickbacks as a commercial bribery, relieving other conduct types of the risk. [1].
  2. Discounts and commissions. After giving definitions to the two accounts, SAIC proceeds to state that discounts and commissions can be lawful if they are truthfully recorded, but lacking of which a commercial bribery may be identifies.
  3. Complimentary commodities. Giving complimentary commodities of other than small values is taken as commercial bribery.

On the one hand, a clear and unified definition of commercial bribery is absent and the enumerations are finite. These constitute a leaky system where in practice SAIC and its local branches often have excessive discretion to determine commercial bribery, sometimes going beyond reasonable boundaries. From time to time, certain conducts that are not cited in the enumeration may thereafter be identified as illegal; SAIC branches in different regions, or even different staff members in the same region, sometimes carry out inconsistent practices identifying commercial briberies. This brings lots of difficulties to undertakings trying to design corporate compliance policies and avoid legal risks.

II. The Draft: Definitions and Enumerations

(A) Definition of Commercial Bribery in the Draft

The definition of “commercial bribery” in theDraft does not draw a solidline between legitimate business operation and commercial bribery;this can be a fountain of unpredictability in law enforcement.

The Draft defines:“commercial bribery refers to situations where the undertaking(s) offers or promises to offer economic benefits to its counterpartyof the transactions or any third party having influenceover the transactions with the purpose of obtaining transactional opportunities or gaining competitive advantages. The conduct of offering or promising to offer economic benefits shall constitute commercial bribery, while deriving or consenting to derive economic benefits shall constitute "accepting commercial bribes”.

We see flaws in this definition as follows:

a) Purpose of obtaining business opportunities not an offense consideration

In market economy, seeking transaction opportunities or competitive advantages is the purpose of all competitive behaviors, which is also the object that all commercial entities will pursue. The business strategies adopted by commercial entities, such as price competition, quality improvement and cost reduction are all aimed for seeking transaction opportunities or competitive advantages. Thus, seeking transaction opportunities or competitive advantages in itself is normal market behavior, and should not be ragarded as constituent of commercial bribery.

b) Economic benefits giving not necessarily violate laws.

Say in the case of commissioning agents, business transactions, undertaking(s)pay commissions to agents and the latter help with introducing business opportunities and promoting transactions. These are legitimate business pattern of a commissioning agent. On the side of the paying undertaking(s), they choose to pay extra to secure a transaction; it is also a normal business behavior in itself.

Analysis in a) and b) above reveals the vague distinctionbetween normal transactions and commercial bribery, this can throw in limbo companies’reasonable expectations and legitimate business interests.

c) Valid transactionalconsiderationis the key factor

We take that the crux of commercial bribery is the validityof the transactional considerations paid. A justified consideration in law means no violation of legal provisions; while commercially it means the consideration paid can be understood to have commercial essence. For instance, payment of advertisement fee to promote a company’s products or service is not illegal ifit is based on real business case, which validates the commercial essence. Similarly, if acompany requires purchasers to displayitsproduct/equipment in an exhibition and pays for it, then the behavior in itself is not illegal, because the equipment is indeed displayed in an exhibition and thus has commercial essence.

Another example, a company provides for freea batch of equipment to a potential customer with the purpose of enabling the counterparty to familiarize themselves with the equipment, thus paving the way for large-scale cooperation in the future. The conduct, if not constitutes dumping in terms of competition law, is not illegal. This sales strategy is part of market competition, which in itself should not be treated as commercial bribery.

Therefore, the definition of commercial bribery in the Draft should incorporate the validityof consideration, measuring its legality and commercial essence.

(B) Enumeration of commercial bribery in the draft

Compared with its active version and Order No. 60, there is a new classification of commercial bribery conducts in theDraft:

a) A. Gaining benefits for units, departments or individuals in providing public service or relying on public service.

This refers to government departments, institutions, or public utilitiesmaking use of their authority and power to seek transaction opportunities for certain commercial entities, to the detriment of the right to fair competition of other commercial entities. A real life case for example, a housing fund management department in Shzhou City used its authority to compel others to purchase insurance from an appointed insurance company, which in turn paid back in the name of procedure fees [2]. Another example, a school from Inner Mongolia took “agency fees” from an insurance company, and compelled students to pay premiums [3]. To include the public sectorsin the classification is a progress of this revision. Public sectors (including government agencies, institutions, and water, electricity and other utilities) may have the risk of “benefiting oneself at the expense of public interests”. If these organizations take advantage of their powers and influence in business activities, ordinary undertakings are unable to compete fairly on products, quality of services or price. However, we still hold that entities as the subject of bribery should be limited to public sectors only, not commercial entities. This will be further investigated below.

b) Failure of truthfully recording economic benefit giving between undertakings in contracts and accounting documents.

Financial accounting principle requires economic substance (business essence) to be the precondition of keeping an authentic record, which is a true reflection of the true costs and interests. If negligence leads to untruthful recording, the existence of business essence should be a due defense against a commercial bribery allegation.While authenticity of accounting documents isan important aspect to consider whenidentifying business essence, it’s never a replacement of criteriaof business essence.

For example, if one undertaking obtains benefit in kind from a supplier and does not truthfully record it, the law enforcement agencies may presume such benefit does not reflect real transaction between undertakings. If the said benefit in kind is enjoyed by some employees instead of bring interests to the undertaking as a whole, the reasoning then takes us to the conclusion that the benefits in kind does not reflect business essence between the two entities. When authentic record is not truthfully maintained, law enforcement authorities should allow companies the opportunity to prove the existence, if at all, of real transactions, undertakings benefiting rather thanindividuals, and subsequently the presence of business essence which mayavoid a commercial bribery allegation. Keeping truthful records is a finance issue, and rights of defense or counterevidence should be given before a commercial bribery is found. It would be too arbitraryif not the case.

Conversely, an authentically kept account does not relieve a commercial bribery if the commercial essence of the transaction indicates otherwise.

Therefore, keeping a faithful record of the account should not be considered as adecisive factor to determine whether a certain behavior constitutes commercial bribery.

c) Offering or promising to offer economic benefits to a third party having influenceover the transaction, therefor jeopardizing the legitimate rights of other undertakings or consumers.Compared with A and B, this type of commercial briberysomewhat falls into the domain of competition law, considering the factors of influencing transactions through third party, and damages to other players and consumers.Then the question is: whether paying commission constitutes commercial bribery? In accordance with the wordings of the Draft, the answer is likely to be yes.

As mentioned earlier, the key to determine a commercial bribery is whether the considerationpaid can be justified. So, if the economic benefits offered to a third party for facilitating transactions is improper, then such action constitutes commercial bribery; if the consideration paid is commercial commission, then it does not constitute commercial bribery. Therefore, the rule shall weigh more on the justification of the economic benefits than damages to the interests of other undertakings or consumers. In the meanwhile, we should also recognize there are “wears and tears” in a competitive market, damages and losses are part of competition;law does not provide remedy in this respect.

III. Employee or Undertaking, who is liable.

According to Article 7 (3) of the draft revision, “where an employee seeks transaction opportunities or competitive advantages for his/herundertaking through commercial bribery, theviolations shall be deemed as being committed by the undertakings. If there is evidence supporting that the employees accepted bribes against the interests of the undertaking, such conducts shall not be deemed as violations committed by the undertaking”.

(A) Undertaking assumes administrative responsibility for bribery committed by employees

The article stipulates that bribery committed by the offering employees is deemed as violations committed by the undertakings, leaving the latter no room to defend themselves. But the bribery taking employees’ company has the defense. It is worth noting that this is the provisions of administrative law. In criminal law, there is a different set of standards to identify corporate crime.

(B) Is a commercial bribery likely between business organizations?

Unlike withpublic servicesectors and State-Owned enterprises, there is no jurisprudential ground of commercial bribery between corporations or business organizations. Companies as independent market entities are bound to contract freely, and their market activities shall be intervened only under legitimate causes. Why couldn’t corporations be allowed to give complimentary commodities? As far as competitive environment is concerned, to freely negotiate the transaction terms between corporations is the given nature of market competition, which would surely affect the interests (no trading opportunities) of or even cause damages (such as bankruptcy) to competitors. These is what market economy is about.

In practice, employees offer or take briberies, subject the employers’ interests to personal benefits. But then a company can be identified as committing commercial bribery only because failing to record in the books truthfully the rebates fromits trading counterparts. The justification here is not quite compelling. Looking backward, the current Anti-Unfair Competition Law was promulgated in early 1990s, when China started its transition from a planned economy to a market economy, and a time of shortage of all goods. A double-track pricing system was then established, ie. the co-existence of a planned pricing system, and an unplanned pricing (market pricing) systemfor certain products. Needless to say, the planned mechanism offers lower prices. At that time, theState-Owned enterprises are the major players with inherited advantages, and private enterprises disadvantaged. That’s a circumstance where private enterprises somehow had to offer extra benefits to State-Owned enterprises to get precious supplies.State-Owned enterprises then gain extra benefits selling at planned prices to private companies which finally made big profit out of the price differences. At last the state interests are sacrificed. It was in this context that business organizationwas listed as the subject of bribe taker. However, the dual pricing systemhad already faded away, and the once shortage economy now a surplus or even overcapacityone. It is impossible now a corporation would accept bribery to the detriment of its own interests. In short, the ground for regulating commercial bribery between companies has long since collapsed.

IV . Summary

Putting commercial bribery under the rein of anti-unfair competition law is of distinct Chinese characteristics, which finds its root in plannedeconomy to market economy transition, dual pricing system thereof, and the consequential public sectorsintervention in business activities. However, now that market economy becomes the mainstream and the dual pricing system is long gone, the regulation on commercial bribery should also keep pace with the times.

Currently, transactions between enterprises become increasingly active and competition omnipresent. In the game of commercial competition, various new business models and competition approaches are invented, and law should not paly the role of obstacles.It is hard to comprehend that commercial bribery could happenbetween ordinary commercial entities. Public domain may be the case;In private sectors,it is incompatible with free market competition principles. There used to be a government regulation on “play the market” in the context of planned economy where a person can be punished for making profit out of selling at non-planned price, the regulation was abolished for its incompatibility with market economy. Commercial bribery between free market entities shall follow the case.

In terms of the constitution of commercial bribery,validityof considerations paid should be the key yardstick. Accounting issues like “off the book” should not be key elements in recognizing a commercial bribery, instead the commercial essence should be considered. The tests of commercial essence can be whether the interests offered end up in the hands of the counterpart companyas an entity or its individual employees. If the former, no commercial bribery exists; if the latter, a commercial bribery may be found. In the latter case, the offering companyshould bear administrative responsibility of commercial bribery, while the receiving company can have the defense in the case of employee(s) being the offender(s).