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backGLOBALtalk April, 2005
Complying with PRC anti-bribery laws
A clarification of China's criminal and commercial antibribery statutes
The problem of corruption in China is evident to many who operate there. On one hand, foreign companies are competing in a country where the practice is pervasive. On the other hand, they are subject to laws in China and in their home countries that prohibit the bribery of Chinese officials. As foreign companies plant deeper roots in the mainland and expand business connections, being tainted by this crime becomes ever more likely—a danger exemplified by Lucent Technologies' troubles with its high-level China officers last year. It is imperative, then, that investors review PRC antibribery laws and renew precautionary efforts.
PRC anti-bribery law is a complex system. It is composed of two major parts, both of which apply to domestic and foreign entities equally. One part handles criminal offenses, which carry heavier punishments and are further split into two categories: the bribery of state functionaries and state-related units, and bribery as an economic crime. The other part covers commercial bribery—a type of unfair competition practice prohibited by the PRC Law Against Unfair Competition and the Interim Rules on Prohibition of Commercial Bribery. These two parts of the antibribery regime are not coordinated; they both overlap and fail to address some gray areas.
Foreign companies in China must also follow international laws and conventions. Two of the most important are the US Foreign Corrupt Practices Act (FCPA) and the Organization for Economic Cooperation and Development's (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Both prohibit the bribery of foreign officials. All companies registered in the United States are subject to the FCPA, and 35 nations—including all 30 member countries of the OECD—have ratified the OECD Convention and, by doing so, have obligated themselves to pass domestic legislation criminalizing bribery of foreign officials.
Bribing the state
The PRC Criminal Code defines one type of criminal bribery as bribery of state functionaries ( guojia gongzuo renyuan ) or state-related units ( guojia jiguan , guoyou gongsi , qiye , shiye danwei , and renmin tuanti ). This includes people who perform public services in the legislative, administrative, or judicial branches or the military; people who perform public services in state-owned enterprises (SOEs), institutions, or civil organizations; people assigned by the government or SOEs to non-state-owned enterprises, institutions, or civil organizations to perform public services (such as the deputy general manager of a joint venture who is sent by an SOE); and people who perform public services according to law, such as local representatives to the National People's Congress.
Thus, the term "state functionaries" applies not only to government officials, but also to the directors, managers, supervisors, accountants, and even the cashiers that work for SOEs. Not included, however, are SOE employees who perform labor services or technical services without government-related functions, such as computer engineers. The FCPA and OECD Convention offer slightly different definitions for foreign officials; they include officials and employees of public international organizations such as the International Monetary Fund.
The PRC Criminal Code also prohibits bribes to state-related units including legislative, administrative, and judicial offices and the military; SOEs and state-owned institutions such as universities and hospitals; and civil associations and federations such as the China Association for Science and Technology and the All-China Federation of Industry and Commerce. This provision would, for example, prohibit a pharmaceutical company from paying a hospital (a state-owned institution) to encourage sales of the company's drugs—a practice nevertheless common in China.
Intent is also a key hallmark of criminal bribery in China. The intent of bribes must be to seek improper benefits in the form of "illegal benefits" or "illegal assistance or preferential treatment" from state functionaries or state-related units. Thus, a company cannot give money or property to a Customs inspector, for instance, to obtain smuggling profits ("illegal benefit") or to a Beijing Olympics official to act in favor of the briber by handling a bid evaluation unlawfully ("illegal preferential treatment"). Notably, the PRC Criminal Code does not require that the briber actually gain any benefit or preferential treatment, but only that intent be present. The FCPA and the OECD Convention also require intent as an integral element of an act of criminal bribery.
Intent, however, becomes irrelevant if giving money or property to state functionaries and state-related units while "doing business" is expressly prohibited by other laws. (Though courts have discretion to decide what constitutes "doing business," this usually includes government procurement, contract signing, and construction project bidding, among other activities.) For example, PRC law explicitly prohibits a supplier from giving bribes to a buyer when obtaining or bidding for a government procurement contract. The legislative perspective here may be that, when contracts are on the table, gifts of money or property can only be aimed at improper benefit. If not expressly prohibited by other laws, then intent is considered when determining whether gift-giving constitutes bribery.
Criminal amounts of money and property
Under the PRC Criminal Code, bribes involve money and property. But "money and property" is an undefined term over which there has been controversy. Prior cases show that cash, stocks, securities, and in-kind gifts are considered "money and property," but incentives such as sex or school admission for relatives are not. There has also been longstanding debate among academics about whether quantifiable incentives such as meals, travel, and tuition payment should be considered bribes. Though these were not included when the PRC Criminal Code was amended in 1997, certain PRC courts have recognized such incentives as forms of bribery.
According to the PRC Criminal Code, the bribes must actually be delivered to constitute a crime of bribery. Promising or offering to pay does not constitute a crime. The PRC code thus differs from the FCPA and the OECD Convention, which both state that an offer or promise to pay can constitute a crime even if no actual payment is made.
The Supreme People's Procuratorate has also adopted value thresholds for criminal bribery. For an individual who bribes state functionaries or state-related units, the value of the bribes must be ¥10,000 ($1,208) or above; for a unit, the value must be ¥200,000 ($24,154) or above. Nonetheless, even if the value of the bribes is less than the above figures, an act of bribery will also be considered criminal if one of the following criteria is met:
- The purpose of the bribe was to gain illegal benefit (bribes for "illegal assistance or preferential treatment" do not qualify);
- Bribes were paid to three or more state functionaries or three or more state-related units;
- Bribes were paid to Chinese Communist Party (CCP) leaders or government leaders, including judicial officials or officials that execute law; or CCP or government offices, including judicial or law-enforcement offices; or
- The bribe caused severe damage to national or social interests.
For example, a bribe of ¥8,000 ($966) paid by an individual to the chief executive of an SOE may not constitute a crime of bribery (although it may constitute commercial bribery, as discussed later). But such payment becomes a crime of bribery if it is paid to a judge.
There is one exception under the PRC Criminal Code that exempts an individual from criminal indictment for offering bribes to state functionaries: An individual shall not be held guilty if the bribes are given because of blackmail by state functionaries and no improper benefit has been gained. Regardless of duress, however, an individual will face criminal charges if he or she has gained improper benefit from bribes.
As mentioned before, the PRC Criminal Code also covers bribery as an economic crime. A separate section of the code prohibits any individual or unit from giving money and property to the staff members of non-state owned enterprises to gain improper benefits. The code also sets monetary thresholds for this crime: individuals who have paid a bribe of ¥10,000 or above, and units that have paid ¥200,000 or above, may be indicted.
The wages of criminal bribery
For an individual, criminal sentences range from short-term criminal detention to life imprisonment. A fine or confiscation of property may be imposed simultaneously. Guilty units face fines, and people directly in charge and other people directly responsible for the crime will face sentences under the criteria for individuals. Penalties for officials who accept bribes are much more severe.
An act of bribery is also subject to other laws and regulations. For instance, under the PRC legal regime of bidding or government procurement, if a briber wins the bid or procurement contract by giving bribes, the bid or contract will be invalid.
Tilting the playing field
Commercial bribery, as opposed to criminal bribery, is defined as business operators giving money or property or resorting to other means to sell or purchase goods and services. As mentioned above, bribery as an economic crime is also addressed in the PRC Criminal Code. Here, the two parts of the PRC antibribery system overlap, and the major difference is the magnitude of the crime. For example, a bidder's monetary gift to a project owner with an aim to win a public tender will constitute commercial bribery, unless the act is serious enough to trigger criminal offense charges, in which case it would then be treated as criminal bribery. In such circumstances, penalties both for commercial and criminal bribery would apply: in addition to criminal punishment, the bid would be declared void. The State Administration of Industry and Commerce (SAIC) has jurisdiction over acts of commercial bribery.
Commercial bribery is committed by businesses: any legal person, economic organization, or individual that sells goods or services for profit, regardless of whether it is domestic or foreign. Bribes given by employees to sell or purchase goods and services for the business will be attributed to the business.
Commercial bribes are defined more broadly—in the sense of what is forbidden—than criminal bribes. As in the PRC Criminal Code, gifts of money and property are prohibited, but "other means" to secure business are also covered. This includes any money or property given in the name of expenses for promotion, advertising, sponsorship, research, labor services, consultation, commissions, or reimbursement of various expenses. Other benefits, such as inappropriate travel under the pretext of an investigation tour or training course, are also forbidden. The law does not go so far as to include benefits that are difficult to measure in cash value, such as sex or school admission, into the commercial bribery definition.
Kickbacks, although common in China, are also explicitly banned. For commercial bribery, kickbacks are defined as a percentage of the commodity price given to a bribee in the form of cash, property, or other means without clear record in the business operator's legally established financial account, which includes omitting account entries, shifting payments to other accounts, or forging accounts. The law also prohibits a business operator from giving supplementary cash or in-kind gifts to its business partners in transactions.
The commercial antibribery laws have limited scope. To constitute an act of commercial bribery, the briber must have a business purpose—to sell or purchase goods or services. This creates gray areas that are not addressed by either the PRC criminal regime or commercial bribery system. For example, an act of bribery not constituting a crime under the PRC Criminal Code can also escape charges of commercial bribery if it is not associated with the sale or purchase of goods or services. For instance, a foreign investor may give ¥4,000 ($483) to a local official to facilitate approval procedures. This act does not constitute a crime nor does it contravene rules against commercial bribery because it neither reaches the value threshold (¥10,000) nor has any business purpose related to the sale or purchase of goods or services.
There are two exceptions to commercial bribery. One exception is that businesses are allowed to give discounts to their partners or give commissions to intermediaries if such discounts or commissions are recorded in their financial accounts. A note of caution is necessary, though, as proper recording of transactions does not automatically protect the payer from all charges of commercial bribery. SAIC has pursued charges of commercial bribery against businesses on the grounds that the discounts or commissions (despite being recorded) made the business environment less fair. The second exception allows for advertisement gifts of small value to be given in accordance with commercial practice.
For commercial bribery, violators must pay a ¥10,000-¥200,000 fine, depending on the seriousness of the offense, and relinquish all illegal income generated from the bribery.
Complying with the law
Despite the similarities between the PRC antibribery law and the FCPA and OECD Convention, anyone operating in China will notice that the PRC antibribery law has been neither strictly nor consistently enforced. For example, in 2003, Peng Muyu, the past head of Yunnan's former Department of Foreign Trade and Economic Cooperation, was tried and sentenced for accepting bribes from a shareholder of a large multinational retail company's China subsidiary. However, this company was left unharmed, and, in fact, was not even investigated by the People's Procuratorate regarding its involvement. Another example is the recent, widely publicized Lucent case. Although Lucent filed a report to the relevant US authority according to the FCPA for improper acts in China and four of its top executives in its Chinese operations were removed, the PRC government chose not to investigate Lucent's China division.
Yet the Chinese government has expressed its determination to strengthen antibribery efforts. At the end of 2003, the CCP issued provisional regulations on internal party controls, and China signed the United Nations Convention Against Corruption. A brief checklist of items that may assist multinational corporations in complying with the PRC antibribery system follows.
- Compliance program Developing a formal, written compliance program has many advantages, one of which is to make the company and its employees more aware of the relevant laws, thus helping to avoid violations.
- Training programs for employees Employees should receive periodic training on PRC antibribery law compliance; the training should use hypothetical cases that they may actually face.
- Documenting tasks Foreign companies in China should carefully define and accurately document the role and responsibilities of employees, with periodic reviews to ensure compliance.
- Thorough due diligence of Chinese partners Because many Chinese enterprises may be accustomed to giving bribes to obtain business, foreign investors should check Chinese partners to find out whether they use bribery.
To stay clear of PRC and home-country antibribery laws, foreign companies should consult their legal advisors and act with extreme prudence when giving any benefits to state functionaries. This should even be true of language in contracts that offer non-monetary benefits to government officials. For example, Chinese subsidiaries of foreign companies have been known to include provisions in contracts for sending government officials overseas for "training." This usually does not trigger bribery claims under the PRC Criminal Code as no money or property is directly offered (although it may elicit charges of commercial bribery under the broader definition of commercial bribes). Complying with FCPA stipulations is another matter, though it can still be done if certain criteria are met. Companies must have clear, legitimate reasons for conducting the training overseas, such as a lack of comparable programs in China, as well as for sending these particular individuals (for example, engineers sent for scientific training). Also, the business purpose and the absence of corrupt intentions must be clear.
Operating successfully in China requires a great deal of localization, but foreign companies—when it comes to the practice of bribery—cannot afford to "do as the Romans do," or even turn a blind eye, as they need to comply with both local- and home-country corruption laws.
In observing local antibribery laws, foreign companies are advised to take note of some important characteristics of the PRC system: certain payments to units, as opposed to individuals, are also covered by the PRC definition of bribery; and acts of commercial bribery by local employees will be attributed to the company even if management was unaware of the practices.
The confluence of China's increasing efforts to reduce corruption within its borders and renewed focus on the practices of foreign companies operating in China brought on by recent FCPA-related cases means that companies must be especially careful to avoid the appearance of impropriety. Foreign companies must ensure that their PRC subsidiaries step up risk management so that they can offer more than just a plea of ignorance.
Source: The US-China Business Council - GAI
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