New law for China, while Hong Kong continues with high-profile actions

Eugene Chen and Mark Lin

For two years, Chinese legislative bodies teased the possibility of sweeping changes in the country’s Anti-Unfair Competition Law (AUCL). This long-awaited legislation finally took effect on 1 January 2018.

After dramatically varying drafts released in February 2016, February 2017, and September 2017, the Standing Committee of the National People’s Congress approved the revised AUCL on 4 November 2017. Earlier drafts suggested Chinese lawmakers were moving toward greater clarity and consistency with international standards of anti-corruption legislation. But later drafts moved in the opposite direction, causing confusion.

How Chinese authorities will react to the legislation remains open, particularly where it offers a new corporate strict liability offense and increased sanctions. With these incentives, regulators may have greater motivation to expand their enforcement efforts. Companies may find that despite positive legislative developments in the long term, the short-term environment may be rougher to navigate.

Redefined coverage of the anti-bribery rules

The original AUCL, enacted in 1993, is the core legislation that bans unfair competition. It includes conduct such as passing off, false advertising, and misuse of trade secrets. It’s also the hallmark law for China’s ban on commercial bribery.

The original bans a business operator from resorting to bribery to “sell or purchase commodities.” The new AUCL bans bribery of certain types of entities and individuals with the purpose of “seeking a business opportunity or competitive advantage.” This is a step in the right direction — away from “sales results,” and toward a bribe intent.

The new law also clarifies coverage; it restricts the offense to bribery of:

  • employees of a transaction counterparty;
  • an entity or individual entrusted by the transaction counterparty to handle relevant affairs; and
  • an entity or individual that uses its authority or impact to influence the transaction.

By limiting the recipients of bribes to the “employees of a transaction counterparty,” not the transaction counterparty itself, arguably, the new definition should limit the authorities’ ability to pursue transparent sales incentives offered to business counterparties — incentives such as sales-based rebates and discounts, or payments for prime display space. It may take time and several cases, however, to see how authorities interpret this new statutory language.

The new law also extends the coverage of commercial bribery to parties that are not directly involved in, but may otherwise have influence over, a transaction. However, the law is unclear about who “has influence over a transaction.”

It remains a question if this provision intends to include a party that is the transaction counterparty itself; that only acts as an intermediary to pass on bribes, but otherwise has no role in the transaction; that has the capability or potential to influence a transaction, but has not done so; or that only exercises remote or marginal influence over a transaction.

Again, in the short term, the new law may cause more confusion than clarity as authorities struggle to interpret its provisions. But on the face of it, China’s law is moving closer to that of its international counterparts.

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