In September 2014, the Changsha Intermediate People’s Court in China issued a judgment imposing a RMB 3 billion fine on GSK (China) Investment Co., Ltd. for offering bribes to non-state functionaries. Five senior executives of the company were sentenced to prison terms of two to three years (with suspended sentences of three to four years). This was the first time since China’s ‘Reform and Opening Up’ in 1978 where a multinational corporation has been found guilty of criminal charges for offering commercial bribes in China. Since 2013, the Chinese government has taken numerous actions aimed at combating commercial bribery, indicating a much firmer approach to enforcement of anti-corruption laws in China.
Businesses operating in China should be mindful of the complex regulatory regime and the associated compliance risks, especially when dealing with third parties or seeking new business opportunities. A well drafted and implemented compliance program is essential for properly identifying and mitigating this risk.
Actions Initiated by the Communist Party at the National Level
Implementation of an Anti-Corruption Campaign
At the end of 2012, the newly elected Central Committee of the Communist Party of China (CPC) vowed“to implement deterrent, preventative and monitoring mechanisms to ensure that potential offenders dare not, can not or find it difficult to commit corruption.” Subsequently the Chinese Central Government has produced detailed action plans to implement this hardline anti-corruption policy.
On 27 August 2013, at a meeting presided over by Xi Jingping, General Secretary of the CPC Central Committee, the CPC approved the 2013-2017 Work Plan for Establishing and Improving the System for Punishing and Preventing Corruption, signalling that China is prepared to wage a long-term campaign against corruption within the CPC.
On 12 November 2013, the CPC passed the Decision on Major Issues Concerning Comprehensively Deepening Reforms during the third plenary session of the Eighteenth Central Committee of the CPC, seeking “to improve the laws and regulations on combatting corruption and promoting integrity.”
On 23 October 2014, the CPC passed the Decision on Major Issues Concerning Comprehensively Advancing the Rule of Law during the fourth session of the Eighteenth Central Committee of the CPC, declaring a commitment “to speed up national anti-corruption legislation, enhance corruption punishment and prevention, and establish effective mechanisms to deter corruption.”
These guidelines are understood to be the unified framework for implementation of the anti-corruption campaign deployed by the highest level of government in China.
Intensive Supervision by CPC Central Inspection Teams
From May 2013 until the end of 2014, the Central Committee of the CPC dispatched five rounds of Central Inspection Teams (CIT) to inspect the conduct of CPC members in certain major industrial sectors, including energy, finance, food, education, manufacturing and telecommunications, and ensure their compliance with anti-corruption rules and legislation. The CIT inspections resulted in formal investigations of six government officials at the provincial or ministerial level, due in part to assistance from whistle-blowers. Given the CPC’s express commitment to thwarting corruption, the CIT inspections can be expected to continue on a regular basis in 2015.
Latest Amendments to China’s Criminal Law to Combat Commercial Bribery
In the past, Chinese law focused on preventing and penalizing those to accept, rather than offer, bribes. It was also possible to avoid criminal conviction or penalties for bribery altogether if the offender assisted in the investigation. This is no longer the case. Today, the Chinese judicial organs are strengthening legislation and enforcement of laws which prohibit the offering of a bribe. Pursuant to the Central Government’s anti-corruption policy, a number of important amendments aimed at combating corruption were proposed in the Ninth Amendment to the Criminal Law of the PRC (Draft) (Draft Amendment), which was published on 3 November 2014.
One of the most important changes proposed is increased punishment for those who offer bribes, including an increase in monetary penalties, fewer available mitigating factors for reduced sentencing, and a ban on working in certain sectors for a certain period of time. If the Draft Amendment is passed, cooperation during an investigation will no longer be a mitigating factor to avoid conviction or penalty for offering or accepting a bribe.
The Draft Amendment also removes the minimum monetary threshold required for bribery to constitute a crime, substantially expanding applicability of the law. The Draft Amendment imposes a range of penalties which are divided into three general categories: (1) crimes involving a “relatively large monetary amount,” (2) crimes involving a “large monetary amount” and a “gross violation” of the law, and (3) crimes involving a “very large monetary amount” and a “very gross violation” of the law.
Further, the Draft Amendment includes additional categories of conduct which constitute criminal bribery. For example, offering a bribe to the relative or close associate of a state functionary for the purpose of receiving an illegal benefit or assistance from the state functionary constitutes criminal bribery. The Draft Amendment targets state functionaries who not only “directly” but also those who “indirectly” accept bribes.
Enhanced Penalties for Offering Bribes in Certain Sectors
The Chinese government is also aiming to combat corruption in key sectors that are more susceptible to bribery. For example, on 25 December 2014 the National Health and Family Planning Commission (NHFPC) issued the Provisions on the Establishment of Adverse Records of Commercial Bribery in the Medicine Procurement and Sales Sector, aimed at improving the recording and tracking of commercial bribery in the medical and pharmaceutical industry. Compared to mechanisms currently in place, the new provisions enhance the NHFPC’s ability to record and track bribery through the following procedures:
First, adverse findings and records released by provincial health and family planning administrations will be published on the NHFPC’s official website to raise greater public awareness.
Second, the records will cover both administrative penalties and criminal convictions for bribery.
Third, medical and health institutions are now required to sign a pledge agreeing not to engage in bribery when purchasing drugs, medical equipment, and supplies from pharmaceutical companies, medical product distributors, and their agents. Medical and health institutions are also required to submit a list of pharmaceutical companies, medical product distributors, and agents that offer bribes to their staff.
The new provisions also impose harsher administrative penalties for bribery. Once a company has been listed in the record as having committed bribery, it may not conduct business in the province in which the bribery occurred for two years. Its compliance rating in other provinces is also lowered. If a company is listed two times in five years, it will be banned from doing business in China altogether.
As of November 2014, 26 provinces, regions, and municipalities have promulgated detailed measures to implement a system for recording commercial bribery in the medical and pharmaceutical industry. This “black list” is seen as an effective tool to combat commercial bribery and may soon be adopted in other sectors as well.
Enhanced Enforcement Actions to Combat Commercial Bribery
The Chinese government has also initiated a sweeping campaign to implement and enforce new policies and regulations aimed at curbing commercial bribery in China. Notable actions include:
Establishment of a New Anti-Corruption Bureau in China
In early November 2014, the Central Government approved the establishment of a new anti-corruption bureau. The new bureau is empowered to break through institutional barriers when prosecuting suspected bribery, which will facilitate the investigation and prosecution of corruption and bribery cases. The head of the bureau will be a designated member of the Supervisory Committee.
Strengthened Enforcement Aimed at the Offering of Bribes
Together with the above changes in law and policy, the Chinese judicial organs have also increased their enforcement of criminal laws which prohibit the offering of bribe. The GSK case is a perfect example where both the company and the individuals charged with offering bribes did not escape punishment despite cooperating with the investigation.
Nationwide investigations into allegations of bribery have also increased substantially. From January to November 2014, the procuratorate officially investigated 7,449 individuals and companies nationwide suspected of offering bribes to state functionaries, a 37.9 percent increase over the number of investigations conducted the previous year. The procuratorate targeted six types of cases which involved offering a bribe, two of which are particularly relevant for commercial actors: (1) where the amount offered is “especially large,” illegal profits are “especially high,” or where multiple offers of bribes are made; and (2) where the offered bribe involves certain sectors, including food and drug, environmental, finance and securities, education, production safety, and large-scale infrastructure project sectors.
The People’s Supreme Procuratorate has also established a nationwide database to record and track those who commit the crime of offering a bribe. Once included in the database, the information will not be modified or removed unless proven erroneous. The database is accessible to the general public, thus creating an irreversible adverse reputational impact on companies and individuals who offer bribes.
Enhancing International Cooperation Against Corruption
The Chinese government has not limited its anti-corruption campaign to domestic measures and has actively sought international cooperation to combat corruption in China. At the APEC Summit held in Beijing in November 2014, China took the opportunity to enhance international cooperation in this area. During the summit, 21 APEC members made an anti-corruption proclamation and set up a transnational network for anti-corruption enforcement.
Additionally, in 2014, the Chinese Ministry of Public Security launched the “Fox Hunt Operation” to trace and apprehend economic fugitives globally. By the end of 2014, 680 fugitives were captured in 69 countries, 4.5 times more than those captured in 2013. Of these, 49 were suspected of criminal bribery involving Chinese state functionaries and captured in 17 countries and special administrative regions, among which 11 were state functionaries suspected of accepting bribes, and the other 31 were individuals suspected of offering bribes to state functionaries.
Collaboration between the People’s Procuratorate Offices and the Central Commission for Discipline Inspection in Anti-Corruption Enforcement
The Central Commission for Discipline Inspection (CCDI) is an organization within the CPC responsible for investigating and enforcing penalties, such as disqualification from CPC membership, for alleged corruption. The CCDI may not, however, determine whether a CPC member is guilty of a crime or subject to criminal penalties for bribery, both of which must be decided by a PRC court.
Since 2013, the CCDI has improved collaboration with the procuratorate to take action against CPC members involved in corruption. When the CCDI investigates a
CPC member suspected of corruption, and that member is believed to have violated PRC criminal law, the case will commonly be referred to the procuratorate for criminal investigation and potential prosecution.In 2014, the CCDI transferred nearly 50 cases to the procuratorate. The CCDI can be expected to continue to investigate and transfer cases to the procuratorate and become an important player in combating commercial bribery in China.
The above developments highlight China’s determination to enhance regulations and enforcement action to combat commercial bribery and corruption. To safeguard successful business operations in China, domestic and foreign companies should carefully review their anti-bribery policies, update compliance procedures and implement risk control mechanisms.