By Jacky Li at Pharmaceutical and Healthcare Practice Group
On November 4th 2017, the Standing Committee of the National People's Congress passed the revisions of the Anti-Unfair Competition Law (“2017 Anti-Unfair Competition Law”) 24 years after the Anti-Unfair Competition Law (“1993 Anti-Unfair Competition Law”) was promulgated and implemented in 1993. Having undergone the lengthy amending process in 2016 and 2017, which involves drafting, seeking for comments from public for two rounds, along with three drafted versions being widely discussed, the 2017 Anti-Unfair Competition Law will come into effect on January 1st 2018. Major changes include the commercial bribery clause, trade secret clause, false advertising clause, etc., with special attention being paid to commercial bribery, where the compliance risks are frequently associated with negative reputation damages and hefty monetary penalties. Our analysis and interpretation focuses on the commercial bribery clause under 2017 Anti-Unfair Competition Law, and the potential influence in anti-bribery enforcement, with the expectation for further discussion and mutual inspiration among the practice area.
Interpretation of Key Characteristics for Anti-Bribery Clause in 2017 Anti-Unfair Competition Law
1. Offering money or goods to the counterparty itself to a transaction may no longer be deemed as a commercial bribery regulated by 2017 Anti-Unfair Competition Law
Commercial bribery is a general concept in China for the act of offering bribes in exchange of illegitimate interests, which could result in administrative liability or criminal liability under the Chinese administrative laws and/or criminal laws, depending on the variance for the constitutive elements of the act. Compared with 1993 Anti-Unfair Competition Law, one major change for the anti-bribery clause in 2017 Anti-Unfair Competition Law, is that it adopts the method of listing all the possible scenarios of the statutory bribery-receiving parties, including; 1) “any employee of the counterparty to a transaction”; 2) “any entity or individual entrusted by the counterparty to a transaction to handle relevant affairs”; and 3) “any entity or individual that is likely to take advantage of powers or influence to affect a transaction”, thus excluding the counterparty itself as the bribery-receiving party to commercial bribery from the administrative enforcement perspective, which indeed topples the long-term practice in the past decades, but reflects the redirecting efforts towards the nature of commercial bribery, the infringement to the duty related integrity of a transaction counterparty’s employee or entrusted agents. Under the new rules, some business models which were deeply ingrained as typical commercial bribery such as; sales rewards to distributors implemented by tire manufacturers, bundling sales by means of sponsorship, donation or free placement of equipment in hospitals, entrance fee requested by supermarkets, and beer manufacturer’s rebates to restaurants calculated based on the quantity of bottle cap, etc., should be reevaluated, or put it in a more radical way, should not be deemed as a commercial bribery. Business models are ever-changing and could contain a kaleidoscope of variations in the real world’s commercial practice. It is possible that the abovementioned models, once being subject to certain changes, could still be considered as non-compliant even pursuant to the new rules. Of course, as with other new Chinese laws, the implementation of 2017 Anti-Unfair Competition Law is highly reliant on the interpretation of the courts, and more importantly, the administrative authority, e.g. how to define the scope of the “counterparty” and nature of a “transaction” as we elaborate on below.
- Analysis on the Interpretation for “Counterparty”
In view of the absence of a clear definition on “counterparty”, some interpretations or analysis on the 2017 Anti-Unfair Competition Law hold the view that only contractual parties would fall into the scope, namely, under some direct sales mode, the manufacturer and the purchasing party are considered to be counterparty to each other. As analyzed above, in response to the ever-changing business models, there will be no guarantee for a definite interpretation that would be immune from any challenges. For example, we all know that under the Two-Invoice Policy in the sales of medical devices, two-step transactions are involved, one is from the manufacturer to the distributor and the second is from the distributor to the ultimate buyer, the hospital. Pursuant to literal interpretation of the article, the ultimate buyer, the hospital, might not be deemed as a “counterparty” to the manufacturer. As a result, neither the manufacturer’s offering interests to the distributor nor the distributor’s offering interest to the hospital would be deemed as commercial bribery administrative violation since they are considered as different counterparties in two different transactions. However, according to some not uncommon expanding interpretation on “counterparty” which deems the manufacturer and the ultimate buyer, the hospital as counterparty to each other, whether the manufacturer’s offering interests to the distributor would be deemed as the violation remains unclear in view of the possibility that the distributor could be considered as “any entity or individual that is likely to take advantage of powers or influence to affect a transaction”.
Furthermore, in the above situation, some analysis indicates the point that the hospital could also fall into the scope of “any entity or individual that is likely to take advantage of powers or influence to affect a transaction” since the hospital could not be purely considered as counterparty to a transaction that is possessed with independent properties and wills. They claim that public hospitals are categorized as institutional legal persons, with the function of public service, for which its properties and wills could not be independently separate from the public resources, and also serving as the extension of public authority and resources allocation. Therefore, considering the unfilled gaps as analyzed above, official clarification or interpretation from the authorities will be necessary before a comprehensive compliance review of a business model can be made to mitigate the potential legal risks while adapting the new regulations.
In addition, on August 21st 2017, the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of State Administration for Industry and Commerce (“AIC”) issued a notice regarding strengthening law enforcement in anti-unfair competition cases for the healthcare industry, which specifies that bundling sales of medical device and medical consumable materials under the guise of leasing, donation, and free placement from manufacturer to its counterparty are strictly prohibited. Whilst the different interpretations and related controversies roused during the implementation process of this notice are still fermenting, the promulgation of 2017 Anti-Unfair Competition Law poses further uncertainty to this notice, with the latest enforcement trend being questioned and even challenged in some very new cases. Though there are some signs that AIC authorities in various cities are indeed taking actions in accordance with this notice, we tend to believe that there will be a “wait-and-see period” for the commercial bribery enforcement in those controversial aspects before the internal alignment being reached within the authorities from both administrative and criminal channels.
- Analysis on Potential Criminal Liability
Setting aside the analysis above on administrative liability, from another controversial but more serious angle, improper interests being offered to a counterparty in a business transaction would still be highly risky. Pursuant to article 391 or PRC Criminal Law, the crime of offering bribes to a unit is referred as “whoever, for the purpose of securing illegitimate benefits, gives money or property to a State organ, State-owned company, enterprise, institution or people's organization or, in economic activities, violates State regulations by giving rebates or service charges of various descriptions shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and where a unit commits the crime mentioned in the preceding paragraph, it shall be fined, and the persons who are directly in charge and the other persons who are directly responsible for the offence shall be punished in accordance with the provisions of the preceding paragraph.” However, if the receiving party is a private entity (not an individual), no criminal offense would be charged under the PRC Criminal Law.
The legislative spirit lies in that entities including State organ, State-owned company, enterprise, public institution or people's organization bear the public interests and are empowered with public functions, and transferring interests to those entities might end up leading to the loss of State-owned assets and therefore, be possessed of social harmfulness and criminal illegality. And for the “commercial bribery act” to private entities, it feels closer to the autonomy in contractual agreements which aims to protect the parties with equal status in the free market. The fundamental issue here is about the legal interests which need to be protected according to relevant anti-commercial bribery legal provisions (whether it is the duty related integrity of the entrusted party, or the fair competition in the market). As pointed out above, the purpose of criminal legislation and administrative legislation in protecting the legal interests are reaching unanimity, which is to forbid taking advantage of duty related authority to seek for illegitimate interests and sacrifice the interests of the others, regardless of whether it is the interests of a company, the State or the public.
To make a further comparison, for commercial bribery to private entities, it might constitute the administrative violation, but not the criminal offense before the revisions of Anti-Unfair Competition Law, while it seems to be exempt from both administrative and criminal liabilities after the revisions (some would say that it reflects the general trend of total de-penalizing “commercial bribery act” to private business entities). On the other hand, interestingly, commercial bribery to State-owned entities might constitute both an administrative violation and a criminal offense of offering bribes to a unit before the revision, but will only be subject to criminal liability from 2018. (Please find the chart below for easy reference.)
For example, offering improper benefits to public hospitals might be determined as an administrative violation under 1993 Anti-Unfair Competition Law, or the crime of offering bribes to a unit (in multiple similar cases, offering bribes to doctors constitutes the crime of offering bribes to non-State functionary, offering bribes to the head of a public hospital or the head of pharmacy department of a public hospital constitutes the crime of offering bribes or the crime of offering bribes by a unit, and offering bribes to public hospitals or drug and device department of a public hospital constitutes the crime of offering bribes to a unit). However, since “offering bribes” to public hospitals will no longer be an administrative violation from 2018, criminalization will be the only option for the enforcement authorities to regulate such activity when reaching the criminal threshold. It is our concern that such allocation of administrative and criminal responsibilities, in practice, will end up having the opposite effect of de-penalizing the normal and harmless practice of offering proper interests to the business counterparty. In other words, for some inappropriate interests offering activities to business counterparties which could be regulated through administrative law perspective in the past, might be escalated and under direct scrutiny from criminal law perspective. (The general threshold for the crime of offering bribes to a unit is accumulatively RMB 200,000). In many of these cases, distributors, as an entity, are registered in the name of one person but under the substantial control of another person. Both the distributors and its actual control person will be charged for the crime of offering bribes to a unit for offering bribes to a public hospital, whilst the head of such hospital may be prosecuted as the responsible person for the crime of taking bribes by a unit. Whether the people's procuratorate will also list the public hospital as a defendant will not be a determining factor in establishing the case against the head of such hospital for the crime of taking bribes by a unit. We will pay close attention to this issue and would urge for wisdom imbedded resolution after the 2017 Anti-Unfair Competition Law is implemented. (And based on exactly such consideration, some people hold the view that offering bribes to State-owned entities like public hospitals still can be punished from administrative perspective by interpreting the hospital as “any entity or individual that is likely to take advantage of powers or influence to affect a transaction”.)
2. Offering money or goods to influential third party being officially subject to the administrative liability
It has always been a disputed issue for AIC when dealing with potential commercial bribery cases where an influential third party to the business transaction, such as the travel agency of an association for the organization of a conference, organizer of a centralized procurement, etc., is involved as the bribery-receiving party. Although the 1993 Anti-Unfair Competition Law did not specifically include an influential third party into the category of bribery-receiving party, it has been confirmed by State AIC in 1999 in its reply to AIC of Fujian province (although without binding legal effect) regarding the determination on whether payments made by shops to travel agencies would constitute commercial bribery. In which State AIC wrote that interests to a third party that is closely related to the transaction would be deemed as bribes, as long as the payment is made for the purpose of obtaining business, and has impact on the fair competition. The widely-acknowledged and commonly adopted practice is that such a case would be established as long as the third party is potentially able to influence the counterparty, and subsequently raises the negative impact of restricting competition.
This issue has been well addressed in the 2017 Anti-Unfair Competition Law in which the parties that would be qualified as bribery-receiving party are listed in detail. “Any entity or individual that is likely to take advantage of powers or influence to affect a transaction” is officially regulated in addition to the employee of the counterparty and its entrusted agent. This seems to be a natural move for the legislator considering that the Ninth Amendment to PRC Criminal Law, which came into effect in 2015, has already adopted the similar approach in classifying the influential parties into the category of a bribery-receiving party.
3. The requirement being kept for expressly booking discount in the financial account
The sweeping prohibition on secretly off-the-book rebate in the 1993 Anti-Unfair Competition Law, stipulated as “a business operator who offers off-the-book rebate in secret to the other party, a unit or an individual, shall be deemed and punished as offering bribes; and any unit or individual that accepts off-the-book rebate in secret shall be deemed and punished as taking bribes” has been removed in 2017 Anti-Unfair Competition Law, which intends to exclude the circumstances whereby proper rebates are deemed as bribery due to the inaccurate accounting treatment. Nevertheless, the requirement for expressly booking discount in the financial account has been kept in the 2017 Anti-Unfair Competition Law, stating that “business operators may expressly give a discount to the counterparty or pay a commission to the middleman of a transaction in carrying out transaction activities, and shall truthfully enter the discount or commission in their accounts if they do so, while the business operators that accept such discount or commission shall also enter the discount or commission into their accounts.” It should be noted that even if secretly off-the-book rebates no longer fall within the scope of commercial bribery, PRC Drug Control Law prohibits the act of secretly off-the-book rebates, for which the violation will still be subject to administrative liability .
Moreover, it is worth mentioning that the accurate accounting treatment would be considered as a compulsory requirement especially for those US listed companies, which will also be regulated by the accounting provisions of Foreign Corrupt Practices Act.
4. Exemption for entities with strict limitations
Unlike Criminal Law, only the business operator instead of its individual employee would be imposed with administrative liability under Anti-Unfair Competition Law and therefore, companies under investigation for commercial bribery always attempt to segregate an individual’s act from the entity’s will to avoid the punishment. Notably, the second version of the revised draft for Anti-Unfair Competition Law, published in early 2017, seemed to echo with this approach and proposed that if the business operator is able to prove the violation is an employee’s personal conduct, it might be exempted from the legal liability. However, in the final version of 2017 Anti-Unfair Competition Law, the condition for the exemption is further restricted to “the bribery committed by an employee of a business operator shall be deemed as the practice by the business operator itself, unless otherwise proven by the business operator with evidence that such bribery is not related to efforts of seeking a transaction opportunity or competitive advantage for the business operator.”.
Although the administrative authorities are supposed to take the burden of proof for specific administrative acts, such as administrative punishment pursuant to PRC Administrative Procedure Law, the 2017 Anti-Unfair Competition Law seems to have reversed the burden of proof towards the business operator. Whilst the system is considered to be fairly rigorous, it seems to have brought real challenges for the business operator to collect and argue if employee’s bribery act is not related to efforts of seeking a transaction opportunity or competitive advantage for the entity, even under the circumstances where the entity gives no instruction and is totally ignorant of the commercial bribery.
It seems to be a relief that in a recent press conference for the 2017 Anti-Unfair Competition Law, the head of the Competition Law Enforcement Bureau of State AIC specified on this point that the condition of “proven by the business operator with evidence that such bribery is not related to efforts of seeking a transaction opportunity or competitive advantage for the business operator” refers to the circumstances where the business operator has set up measures that are legitimate, in compliance and reasonable, and has adopted effective inspection on the implementation. In practice, some big companies’ existing compliance projects and preventative measures such as providing regular compliance trainings and requiring employees’ written compliance commitment letter, could be qualified as the abovementioned measures and the legal liabilities might be partially or entirely exempted. We would strongly recommend that business operators to continue the efforts in this regard.
5. Monetary fine being symbolically increased in parallel with the revocation of business license being newly added
Under 2013 Anti-Unfair Competition Law, the administrative punishment only includes monetary penalty, namely fine (RMB200,000 as maximum) and confiscation of illegal gains. In practice, the amount of illegal gains, which could easily add up to millions, would be much more of a headache to the company compared with the amount of fine for RMB200,000 as maximum. The 2017 Anti-Unfair Competition Law symbolically raises the amount of fine from RMB200,000 to RMB3 million, while keeping the confiscation of illegal gains. In addition, the consequence for the revocation of business license under serious circumstance is newly added, which appears to be a bigger concern for companies since it would directly impact the business operation in China. However, the determination of what constitutes a serious circumstance needs to be clarified by the relevant authorities before it can be consistently implemented.
Conclusion and Recommendation
Upon the abovementioned analysis, there remain multiple controversial expressions that need to be clarified and various challenges arising from practical concerns such as the inconsistency of law enforcement caliber, to be solved before the 2017 Anti-Unfair Competition Law is well implemented. For business operators under this evolving legal trend, our recommendation is to take the relatively conservative approach in compliance practice in order to mitigate the legal risks, instead of reckless changing of business models in pursuit of commercial interests. Whilst continuously upgrading the internal compliance mechanism against commercial bribery, keeping special attention and sensitivity on the enforcement and implementation will also be necessary to ensure the smooth transition of the “wait and see” period, and to pave the way towards the prosperity of the company in a sustainable way.
Appendix: Comparison for the Two Versions of Anti-Bribery Clause
