Amended AUCL a game changer for China business

By Yao Rao, HHP Attorneys-At-Law

Anti-bribery legislation is always a big concern for Chinese market players. On 4 November, 2017, the Standing Committee of the National People’s Congress (NPC) adopted the amended and restated Anti-unfair Competition Law (new AUCL), which will come into force as of 1 January 2018. This is the first revision to the existing AUCL since its implementation in 1993. Under the new AUCL, legal provisions on commercial bribery have been significantly revised.

Yao RaoPartnerHHP Attorneys-At-Law
Yao Rao
HHP Attorneys-At-Law

According to paragraph 1 of article 7 of the new AUCL, a business undertaking is prohibited from bribing any of the following entities or individuals by giving cash or property, or taking other means for the purpose of seeking transaction opportunities or competitive advantages:

(1) employees of a transaction counterparty;
(2) entities or individuals entrusted by a transaction counterparty to handle relevant affairs; and
(3) other entities or individuals who take advantage of their position, or power, or influence, to impact transactions.

Compared with the existing AUCL, the new AUCL clarifies the scope of recipients of commercial bribery, with exclusion of the transaction counterparty, which completely changes the traditional definition of commercial bribery in China. In the long-term practice of the State Administration of Industry and Commerce, the main authority combating commercial bribery in China, payments such as discounts, rebates or gifts (for instance, free equipment placement) to a transaction counterparty may be deemed as commercial bribery, which has been controversial for two decades. After the new AUCL comes into effect, offering benefits to a transaction counterparty for seeking business opportunities or competitive advantages will no longer be deemed as prohibited commercial bribery.

This legal change under the new AUCL will have profound implications for business activities. Take medical devices and consumable suppliers as an example. To make their products more competitive, the suppliers usually agree to freely provide related equipment to their customers if their customers purchase a certain quantity of medical consumables. According to the existing AUCL, the said free equipment placement exposes the counterparty to the risk of being punished since it is highly likely to constitute commercial bribery. However, this business model will be permissible after the new AUCL is in force, for the reason that the free equipment is provided by the supplier to its customer, which is the counterparty to the transaction, instead of any third party.

Nevertheless, we still expect the SAIC to provide clearer guidance on this issue. Multinational companies in China are advised to take prudential consideration before offering benefits to transaction counterparties, especially with respect to a transaction with any governmental authorities, state-owned enterprises and public Institutions. Offering benefits to the said transaction counterparties may constitute a crime and be charged under Chinese criminal law where illegal interests are involved.

Despite the above-mentioned re-definition of commercial bribery in the new AUCL, the legal requirement that any discounts provided to the transaction counterparty must be recorded accurately and authentically remains unchanged. To be specific, according to paragraph 2 of article 7 of the new AUCL, with respect to a transaction, a business undertaking may provide discounts to the transaction counterparty in an explicit manner, or pay commissions to an agent; in this case, both the business undertaking and the counterparty/agent must accurately and authentically record these discounts into account books.

Paragraph 3 of article 7 of the new AUCL further clarifies that the acts of bribery committed by an employee of a business undertaking must be deemed as the acts of the business undertaking itself, unless the business undertaking has evidence to prove that such acts of the employee are irrelevant to the purpose of seeking transaction opportunities or competitive advantages for the business undertaking. Given this, it is advisable for business undertakings to tighten up their internal management to avoid legal liabilities for commercial bribery.

The new AUCL significantly increases the penalties on business undertakings conducting commercial bribery, compared to the existing AUCL. According to article 19 of the new AUCL, with respect to a business undertaking who offers bribes to others, in violation of article 7, its illegal gains must be confiscated, and a fine not less than RMB100,000 (US$15,000) up to RMB3 million must be imposed. Furthermore, under more severe circumstances, the authorities have the power to revoke the business licence of the business undertaking.

Given the above-mentioned changes in the Anti-unfair Competition Law, it can be predicted that lower-level anti-bribery regulations and rules will be significantly amended to adapt the new AUCL. And it remains to be seen how the governmental authorities will adjust their anti-bribery practices to implement the new law. These changes will substantially affect business dealings in China.

Yao Rao is a partner at HHP Attorneys-At-Law in Shanghai

HHP Attorneys-At-Law

12F, 21st Century Tower, 210 Century Avenue

Pudong New Area Shanghai 200120, China

Contact details:

Tel: +86-21-5047 3330

Fax: +86-21-5047 0264