China’s Criminal Law Tackles Bribery of Foreign Officials

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Worth noting not only for domestic Chinese companies, but also for foreign-invested enterprises established within China

Jul. 30 – Billion-dollar investments by Chinese companies into developing countries within Asia, Africa and South America have made international headlines in recent years. However, with the growing overseas presence of Chinese firms, a new corporate management issue has been brought to the attention of the Chinese government concerning the bribery of foreign officials by Chinese companies.

In 2006, China’s then-Premier Wen Jiabao put forward clear expectations for Chinese companies doing business overseas, requiring them to:

  • Conform to international rules when running businesses overseas;
  • Win business through the proper bidding process for big projects;
  • Forbid inappropriate deals; and
  • Reject corruption and kickbacks.

To better address the corruption concerns in particular, China’s National People’s Congress passed an amendment of its Criminal Law (hereinafter referred to as the ‘Amendment’) on February 25, 2011, which tackles cross-border bribery for the first time.

The Amendment
The Amendment explicitly prohibits the payment of bribes to “foreign officials” and “officials of international public organizations” and adds the following language to Article 164 of China’s Criminal Law:

  • Whoever, for the purpose of seeking illegitimate commercial benefit, gives property to any foreign public official or official of an international public organization, shall be punished.

The Amendment contains no affirmative exceptions, exemptions or defenses, and violation of which may result in fines and imprisonment for up to 10 years.

According to the Interpretation of China’s Criminal Law, the Amendment was made under the following considerations:

Maintaining the normal economic order of the country and protecting the healthy development of the economy

The interpretation provides that paying bribes to a foreign public official or an official of an international public organization breaks the rules of fair market competition and affects the normal commercial order, and will therefore impose a negative effect on the economic development of the country, especially on the international economic transactions.

Carrying out the obligation under the “United Nations Convention against Corruption” to which China is a signatory

The “United Nations Convention against Corruption” requires its signatories to take necessary legislative measures to make bribery overseas a crime.

The Amendment has delivered a clear warning to the growing number of Chinese companies doing business overseas, and at the same time, has provided a legal basis for Chinese authorities to supervise companies’ overseas activities and to conduct thorough investigations when necessary. Therefore, Chinese companies shall be cautious when dealing with foreign state-owned enterprises and those companies which have close connections with foreign officials.

However, as China’s Criminal Law applies to all companies, enterprises, and institutions organized under the Chinese law, wholly foreign-owned enterprises, Sino-foreign joint ventures and representative offices established in China by foreign companies are also subject to the Amendment.

Such entities should be aware of the risks posed by the Amendment and adopt preventive measures to ensure full and complete compliance. Non-compliance by overseas entities may have a negative impact on their future coordination with the Chinese government, especially when they apply for approvals, licenses, and registrations with relevant authorities.

Due to the wide application scope of the Criminal Law, both Chinese companies and overseas companies should be aware of the potential criminal liability posed by the Amendment and, at the same time, constantly evaluate their practices and policies to ensure full compliance.

The most effective step in avoiding criminal liability under the Amendment is to establish a robust internal compliance program. An effective compliance program should cover all of the company’s critical functions, including top-level management personnel as well as the marketing, legal, finance and human resources staff. Meanwhile, it should also address business relations with third-party partners to avoid non-compliance.

A compliance program may require the implementation of the following:

  • Implementing due diligence reviews into all potential joint-venture partners, thereby minimizing the risk of doing business with a partner that is prone to engaging in bribery;
  • Conducting due diligence reviews of third-party relations, thereby ensuring that the company’s agents, suppliers and distributors behave properly in their dealings with the company;
  • Establishing well-run ethics guidelines and codes of conduct for international business;
  • Setting up a reporting and recording system for all dealings with foreign officials and officials of international public organizations;
  • Conducting compliance training for the company’s management personnnel and employees; and
  • Conducting regular reviews of the compliance program to ensure that all procedures and policies have been properly followed.

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