[co-author: Runyu Liu]
Pending proposals to amend China's Anti-Unfair Competition Law (AUCL) may further blur the line between antitrust and anti-corruption offenses under China's enigmatic "counterparty bribery" rules.
The AUCL, first enacted in 1993, establishes basic administrative offenses involving a wide range of anticompetitive, unfair, and deceptive practices – including commercial bribery.[1] The AUCL originally provided that “business operators shall not sell or purchase goods by offering bribes with money or other means. Where a business operator secretly pays kickbacks to the counterparty [emphasis added], be it an entity or individual, off the books, the business operator shall be punished for offering bribes.” The Criminal Law likewise subjected serious cases of bribing counterparties to imprisonment and fines.[2]
Barring bribery of counterparties (as opposed to their employees and agents) is anomalous. In most jurisdictions, commercial bribery offenses entail the offer, payment, or promise of benefits for the purpose of improperly interfering with or influencing the recipient's performance of legal duties owed to third parties. Most bribe recipients are natural persons – individual employees or civil servants owing duties to employers or governments – or entities acting as fiduciaries.
Background
Because the AUCL's original definition of “commercial bribery” contained no “interference with duty” element and expressly included “kickbacks” to “entities” (as opposed to individuals) – including “counterparties” – Chinese regulators and courts often have construed the provision of rebates, marketing support, complimentary equipment, and accessories (or other incentives) to downstream distributors or customers as such. Although the AUCL explicitly permits rebates and discounts that are properly booked by both parties, appropriately documented payments nonetheless have been deemed bribes in some cases, based on a perception that they were unfair to competitors or consumers.
For example, in 2016, five foreign tire manufacturers were fined for downstream retailer incentive programs deemed commercial bribery. In effect, the AUCL's rules against commercial bribery of counterparty entities are sometimes used to address conduct regulated elsewhere through antitrust rules.
China overhauled the AUCL in 2017, revising the commercial bribery rules to provide that “business operators shall not use money or other means to bribe the following entities or individuals to seek trade opportunities and competition advantages: (1) employees of trade counterparties; (2) entities or individuals authorized by trade counterparties for matters; (3) units and individuals that exploit authority or influence to create an impact on the transaction.” This reformulation seemingly focused on improper incentives to employees and agents while deleting the reference to bribery of “counterparties,” and it hinted at potential convergence with foreign anti-bribery and anti-corruption regimes.
The Chinese Criminal Code, however, did not change.
How the AUCL applies to various sectors
Concerns about improper incentives for counterparties (as opposed to their personnel) likewise resonate in pharmaceutical sector regulations. According to Article 88 of China’s Drug Administration Law (2019 revision), product marketing authorization holders, pharmaceutical manufacturers, pharmaceutical distributors, and medical institutions are prohibited from offering or accepting rebates or other improper benefits in the purchase or sale of drugs. Although the term “counterparty to a transaction” is not directly used in this provision, it clearly prohibits medical institutions from accepting unfair benefits. In relevant administrative enforcement cases, enforcement agencies have also used this provision as the basis for charging hospitals and other medical institutions for accepting improper benefits (ie, rebates) from suppliers. Several recent administrative enforcement actions treated the provision of improper benefits to pharmacies or medical institutions (in addition to their staff) as "commercial bribes."[3]
In 2022, the Chinese State Administration of Market Regulation (SAMR) proposed amending the AUCL to restore the explicit prohibition of bribing “the counterparty in the transaction or its employees.”[4] Although this proposal has not been enacted, the SAMR continues to pursue “counterparty bribery” cases. For example, one case involved a marketing agreement between an auto insurance company and a car dealership through which the car dealership would offer additional services and benefits to purchasers on condition that they also purchased coverage from the insurer. In exchange, the car dealership received a percentage of the premiums. Because the SAMR viewed this practice as “commercial bribery” by the insurer of the car dealership, the insurer was required to disgorge CNY94,500 of unlawful income and fined CNY100,000.[5] Framing this practice as “entity bribery” bypassed the need to consider market power and efficiencies under vertical agreement and abuse of dominance rules of China's Anti-Monopoly Law.
Where the AUCL stands now
In December 2024, the Standing Committee of China’s National People's Congress deliberated on revising the AUCL and published updated amendments for public comment.[6] The Standing Committee's draft would prohibit not only the payment of bribers to the designated categories of recipients, but also their acceptance of bribes.[7] Significantly, the Standing Committee's draft omits the SAMR's proposal to restore the rules against bribing “the counterparty in the transaction.”
It remains to be seen whether the finalized amendments to the AUCL will constrain future “counterparty bribery” charges in China. The latent risk of “counterparty bribery” charges can frustrate conventional anti-bribery and antitrust compliance strategies, as properly documented promotional benefits for direct customers and distributors are not necessarily safe. Due diligence on prospective business partners or acquisition targets may be complicated by the need to distinguish past penalties for conventional commercial bribery (a red flag for corruption risks) from “counterparty bribery” actions.
This article is adapted from an article previously published in Competition Policy International (CPI).
[1] Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa (《中华人民共和国反不正当竞争法》) [Anti-Unfair Competition Law of the People's Republic of China] (amended by the Standing Commission of the National People’s Congress on April 23, 2019 with immediate effect), https://www.samr.gov.cn/zw/zfxxgk/fdzdgknr/fgs/art/2023/art_3737890d856a4e44a8ea07c50c90c116.html (Ch.).
[2] Zhong Hua Ren Min Gong He Guo Xing Fa (《中华人民共和国刑法》[The Criminal Law of the PRC ] (latest amendment by the Standing Committee of the National People’s Congress, Dec 29, 2023,2019 with immediate effect), https://fgw.sh.gov.cn/cmsres/cb/cba3dfde07c1437c9c55f9ec15f91e11/51e0f21bda99e0b7e33eaa22e4cc9f4e.pdf (Ch.), Art. 164.
[3] See Wenzhou Lucheng District Minicipal Administration for Market Regulation Administrative Penalty Decision [2024] No. 976 at 全文页; Dalian Lvshunkou District Minicipal Administration for Market Regulation Administrative Penalty Decision [2023] No. 114 at 全文页.
[4] Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa (Xiu Ding Cao An Zheng Qiu Yi Jian Gao) （《中华人民共和国反不正当竞争法（修订草案征求意见稿）》 ）[Draft Revisions to the Anti Unfair Competition Law of the People’s Republic of China (Draft for Public Comments)] (released by SAMR, Nov.27, 2022), https://www.gov.cn/hudong/2022-11/27/content_5729081.htm (Ch.). (emphasis added).
[5] SAMR published five typical cases of commercial bribery violating the AUCL at the Media Press section of its websites (released by SAMR, Nov.18, 2022) at https://www.samr.gov.cn/xw/mtjj/art/2023/art_b160ae639a1f4486882560bb7d8b1e3a.html.
[6] Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa (Xiu Ding Cao An) （《中华人民共和国反不正当竞争法（修订草案）》）[The Anti Unfair Competition Law of the People’s Republic of China (NPC Draft Amendment)] (released by the Standing Committee of the National People's Congress, Dec.21, 2024), the text is available at: http://www.npc.gov.cn/flcaw/userIndex.html?lid=ff808181927f0e7b0193fcb2fb3a74e1 (Ch.).
[7] Article 8 of the NPC Draft Amendment provides: “A business shall not seek transaction opportunities or competitive edges by bribing the following entities or individuals with property or by any other means:
(1) An employee of the other party to a transaction.
(2) The entity or individual authorized by the other party to a transaction to handle relevant affairs.
(3) An entity or an individual that uses power or influence to affect a transaction.
The entities and individuals specified in the preceding paragraph shall not accept bribes in the course of the transaction.
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