By: Alan Zhou | Matthew Ma
On December 30, 2015, the State Administration for Industry and Commerce (“SAIC”) passed Order No. 83 and promulgated the Interim Administrative Measures for the List of Dishonest Enterprises Committing Grave Illegalities (the “Measures”). According to the SAIC’s press release, the Measures, to become effective on April 1, 2016, is the state ministry’s first measure to utilize a blacklist for regulatory purposes. This article briefly discusses the Measures’ background, conditions for listing, sanctions, and impact.
I. Background
The Measures was formulated for the purpose of enforcing the Interim Regulation on Enterprise Information Disclosure, enhancing regulation of dishonest enterprises committing grave illegalities, encouraging enterprise integrity and self-discipline, increasing societal supervision, and setting out rules to manage the List of Dishonest Enterprises Committing Grave Illegalities (the “Blacklist”).
Under the Measures, when an enterprise commits a grave violation of industry and commerce administrative laws, rules or regulations, the competent Administration for Industry and Commerce (“AIC”) may add the enterprise to the Blacklist, implement credit constraint and joint sanction with other governmental authorities, and publish the violation in the Enterprise Credit Information Publicity System. As a system created by the Interim Regulation on Enterprise Information Disclosure, establishment and enforcement of the Blacklist conform to other regulatory requirements of the State Council.
In 21 provisions, the Measures stipulates the purpose and basis of its formulation, the definition of dishonest enterprise committing grave illegalities, jurisdiction within the AIC, conditions and procedures for blacklisting, conditions and procedures for removal from the list, sanctions, remedies, etc.
II. Conditions for Blacklisting
The Measures lists ten conditions for which an enterprise may be blacklisted by the AIC:
(1) The enterprise has been listed in the List of Enterprise With Abnormal Business Operation for three consecutive years without fulfilling relevant obligations;
(2) The enterprise has its registration revoked because it has previously obtained modified registration or deregistration by submitting false materials or by other fraudulent means in concealment of material facts;
(3) The enterprise has planned or conducted a pyramid scheme or has been subject to administrative sanctions on three or more occasions within two years for aiding a pyramid scheme;
(4) The enterprise has been subject to administrative sanctions on three or more occasions within two years for direct sales in violation of relevant laws and regulations;
(5) The enterprise has been subject to administrative sanctions on three or more occasions within two years for unfair competition;
(6) The enterprise has been subject to administrative sanctions on three or more occasions within two years for causing physical injury to consumers with its goods or services;
(7) The enterprise has been subject to administrative sanctions on three or more occasions within two years for publication of false advertisements, or has caused physical injury or highly adverse social impact due to the publication of false advertisements;
(8) The enterprise has been subject to administrative sanctions on two or more occasions within five years due to trademark infringement;
(9) The enterprise has been ordered to suspend its business activity as a trademark agent;
(10) The enterprise violated other laws, administrative regulations and department rules promulgated by the SAIC.
It is noteworthy that in condition 5, enterprise engaging in various activities of unfair competition may be blacklisted by the AIC. Under the Anti-Unfair Competition Law, unfair competition activities includes commercial bribery; counterfeiting a registered trademark of another person; false advertisement; infringement of another person’s trade secret; bundle sale, and etc. Once an enterprise has been imposed to administrative sanction on three or more occasions within two years for engaging in unfair competition, it may be blacklisted. In addition, in condition 7, the enterprise engaged in false advertisement may be blacklisted. Under Advertising Law, an advertisement falling under any of the following categories is considered a false advertisement: the product or service being advertised does not exist; the product or service appeared in the advertisement is untrue; providing fabricated materials as proof; the product or service’s effect is fabricated, etc. If the enterprise engaging in such false advertisement has been subject to administrative sanctions on three or more occasions within two years or has caused physical injury or other highly adverse social impact, it will be blacklisted.
III. General Sanctions
Under the Measures, the AIC may impose standard sanctions on blacklisted enterprises, including:
(1) Prioritizing inspection and supervision of the enterprise;
(2) Prohibiting the enterprise’s legal representatives and person in charge from holding office in other enterprises;
(3) Rejecting the enterprise’s application to be publicly listed as an enterprise that “honors contracts and upholds integrity;” and
(4) Withholding award of relevant honors and titles.
The AIC may enter information surrounding the blacklisting into the enterprise’s public record and publish the record in the Enterprise Credit Information Publicity System. In addition, the AIC may share the information with other state authorities and impose joint sanctions on the enterprise.
IV. Impact of Joint Sanctions on the Enterprise
On November 10, 2015, the SAIC announced nine typical cases in which joint sanction was imposed. By limiting or enjoining access of enterprises with abnormal business operation or other dishonest activities in areas of bank loans, government procurement, project bidding, assignment of land use right, grant of honorary titles, etc., the cases represent the governmental authorities’ joint success in regulating and supervising enterprise credit.
To enforce and perfect the joint sanction mechanism, 38 departments including the National Development and Reform Commission, SAICAIC Supreme People’s Court, Ministry of Public Security, Ministry of Justice, Ministry of Industry and Information Technology, and Ministry of Finance, signed the Memorandum of Collaborative Supervision and Joint Sanction on Dishonest Enterprises (the “Memorandum”) on September 14, 2015, which was then published on November 10, 2015. The Memorandum relates to 30 areas including safe production, food and drugs, web services, films, and publications. After establishment of the blacklist system, the AIC can limit blacklisted enterprises’ market entry and the legal representative’s qualifications. It may also collaborate with other departments to limit blacklisted enterprises’ engagement in internet information services, financing and credit extension, participation in government procurement, high level of consumption, acquisition of government-supplied land, participation in project bidding, etc. Promulgation of the Measures reflects the State Department’s further efforts to establish the blacklist system in department rules. In combination with the Memorandum, the Measures significantly contributes to the implementation of credit constraint on dishonest enterprises, constructing a credit supervision frame and joint sanction mechanism with the motto “violation in one area, limitations in all areas.”
In addition, the Measures further enforces the Interim Regulation on Enterprise Information Disclosure and Interim Measures on the Administration of List of Enterprises with Abnormal Business Operations, effective on October 1, 2014. The Measures allows governmental authorities to exchange information through the Enterprise Credit Information Publicity System and impose joint sanction. It also permits establishment of information exchange mechanism between the SAIC and other governmental authorities, in which the SAIC regularly provides blacklist information to other governmental authorities. Other governmental authorities, having received the information, may then impose limitations or bans on the blacklisted enterprise in its authorization and supervision process.
From the enterprise’s perspective, the Measures imposes heightened demand on business credit. Enterprises should take careful measures in their daily business activity to ensure full compliance with industry and commerce administrative laws and regulations, since a violation and subsequent blacklisting may lead to joint sanction by multiple governmental authorities, which seriously impairs the enterprise’s business operation. Pharmaceutical and medical device enterprises, for example, may face joint sanction for violating industry and commerce administrative laws and regulations. Under the Regulation on Establishment of Bad Record for Commercial Bribery in Purchase and Sale of Pharmaceutical Drugs, potential sanctions include a two-year ban, forbidding province-leveled public medical institutions from purchasing the enterprise’s products and point deduction from the enterprise’s products during bidding and purchasing evaluation.
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