PRC criminal law to tackle bribery of foreign officials

The huge number of overseas acquisitions of oil, gas and mining assets by Chinese companies has led many legal scholars and officials in China to encourage the PRC government to build a domestic legal framework in order to tackle corruption of foreign officials by Chinese companies. This is seen as improving the country’s commercial reputation and “moralising” the behaviour of its companies. It reflects the spirit of the UK Bribery Act and the United States’ Foreign Corrupt Practices Act (FCPA). Supporters of this development include the Vice-President of China’s Supreme Court and many PRC University professors.

In response to these concerns, on 25 February 2011, the PRC National People’s Congress passed an amendment of the PRC Criminal Law setting out a clear prohibition on the payment of bribes to “foreign officials” and “officials of international public organisations” (the Amendment). The Amendment will come into effect on 1 May 2011.

Amidst recent allegations of bribes paid by Chinese companies to foreign officials to obtain mining or oil licences in certain markets, the Amendment is a welcome move by the PRC government, confirming its willingness to combat corruption both in its own territory and overseas, as evidenced by the increased prosecution and punishment of high-profile offenders¹.

However, to some extent the Amendment also stands aloof from the traditional Chinese culture of gift-giving. The PRC authorities will need to devote substantial resources to ensure that the Amendment is effectively implemented and enforced.

Footnote

1. For instance, in 2007, the execution of Zheng Xiaoyu, former head of the PRC State Food and Drug Administration and in 2009, the execution of Li Peiying, former chairman of China’s largest airport management company. More recently, in February 2011, Minister of Railways Liu Zhijun was removed from his post on accusations of corruption. In total, China punished 146,517 officials for corruption in 2010.

The Amendment consists solely of one additional sub-article to the PRC Criminal Law which reads as follows:

“whoever provides property to a foreign official or an official of an international public organisation for the purpose of seeking an improper commercial benefit, will be punished [in accordance with the provisions applicable to commercial bribery].”

An initial observation which can be made is that the Amendment has not been inserted into the “Graft and Bribery” chapter of the PRC Criminal Law which deals with corruption of public officials (where one may ordinarily expect it to be placed) but in the “Crimes against the Order of Socialist Market Economy” chapter, which deals with “commercial bribery”, i.e. the offence of actively bribing non-public officials.

While at first glance the placing of the Amendment in the PRC Criminal Law may appear surprising, it is consistent with China’s obligations under the United Nations Convention against Corruption to prosecute the bribery of foreign officials where the purpose of the bribe is to obtain an advantage in the conduct of international business (see footnote below). Moreover, by stating that the purpose of the bribe should be the receipt of “an improper commercial benefit”, the Amendment itself suggests that an offence will only be committed when the purpose of the bribe is of a commercial nature.

Both companies and individuals can be punished under the Amendment. In accordance with Articles 6 and 7 of the PRC Criminal Law, the Amendment will be applicable to PRC nationals both in the PRC and outside the PRC, and all PRC companies (and their managers) who carry business overseas (including Sino-foreign joint ventures, and wholly foreign-owned enterprises). If the offence is serious, individuals may face criminal detention of between three to ten years, while companies may receive fines, and managers directly responsible for an offence may also face criminal detention of up to ten years.

Unfortunately the Amendment provides little detail on the behaviour that will actually be prosecuted by PRC authorities, or the prosecution thresholds, potential affirmative defences and potential exemptions. In this regard, the one-sentence addition to the PRC Criminal Code compares rather unfavourably to the FCPA’s sixteen page counterpart or the UK Bribery Act. Implementing regulations may soon be passed which should provide guidance and greater legal certainty regarding the operation of the Amendment.

The passing of the Amendment also allows China to fulfil its obligations under international treaties, in particular the United Nations Convention against Corruption which it ratified in 2006. The wording of the Amendment is very close to the letter and spirit of Article 16.1 of the United Nations Convention against Corruption².

In addition, China has been engaged in discussions with the OECD Working Group on Bribery since 2006. It has been a member of the ADB/OECD Anti-Corruption Initiative for Asia-Pacific since 2005. The Amendment provides a clear sign of China’s commitment to enter the OECD and embraces its stance against corruption together with the international community.

Footnote

2. Under Article 16.1 of the United Nations Convention against Corruption, “each State Party shall adopt such legislative and other measures as may be necessary to establish as a criminal offence, when committed intentionally or the promise, offering or giving to a foreign public official or an official of a public international organization, directly indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties, in order to obtain or retain business or other undue advantage in relation to the conduct of international business.”

In practice, a number of Chinese companies (such as China Mobile, CNOOC, PetroChina and Sinopec) were already subject to the UK Bribery Act by reason of their activities in the United Kingdom and/or to the FCPA by reason of their status as issuers of US securities. In addition, either as members of China’s Communist Party or as employees of state-owned enterprises, managers conducting business in the name of PRC state-owned enterprises are also subject to very stringent internal regulations on bribery and gift-giving and for these people, therefore, the Amendment merely comes as a confirmation of these duties.

However, the Amendment will empower the Chinese authorities to exercise greater vigilance in monitoring the overseas activities of all PRC companies and PRC nationals when carrying on business outside of China. Unlike the UK Serious Fraud Office or the US Department of Justice, whose ability to investigate Chinese companies is somewhat limited given their location, Chinese authorities will be able to conduct thorough investigations in China when they suspect that an offence may have been committed. Chinese companies are therefore advised to take all necessary measures to ensure they comply with their obligations under the Amendment not only to prevent the risk of criminal sanctions but also to limit the reputational damage resulting from a bribery investigation.

PRC companies will need to adopt processes and compliance systems similar to their Western counterparts to ensure that they and their overseas subsidiaries conduct business in accordance with their obligations under the Amendment. In practice, larger PRC companies have already started to make improvements. An increasing number of foreign companies have noted that PRC companies are paying greater attention to corruption issues in their domestic and overseas business.

For those companies which need to develop their policies and procedures or which still have to put in place compliance and reporting systems, ensuring compliance with the Amendment will involve taking a number of steps. These include:

1. carrying out an assessment to gain an understanding of both the internal and external risk the company faces;
2. using this risk analysis to develop codes of conduct for international business and internal “best practice” guidelines on gift-giving, hospitality and entertainment and other sensitive activities (purchasing, dealings with authorities, etc.);
3. ensuring top level commitment from the company’s board and other management;
4. conducting regular training on such internal rules and engaging with the employees on the necessity of conducting business in a non-questionable way in accordance with the company’s codes of conduct, policies and procedures;
5. creating a centralised compliance department in charge of supervising the effective implementation of the internal regulations and the ongoing monitoring of the same as well as providing assistance to local teams faced with bribery “requests” by foreign officials or other ethical dilemmas;
6. establishing reporting and recording obligations of all dealings with foreign officials and officials of international public organisations;
7. completing due diligence on entering into and managing international business relationships;
8. ensuring that the company’s partners, agents, and suppliers are aware of the internal rules and behave accordingly in their dealings with the company;
9. auditing of anti-corruption policies and procedures.

Because of the continuing development of global anti bribery laws it is becoming increasingly important for corporations to adopt anti corruption policies and protocols. Not only will these assist to protect corporations, they will also assist with ongoing business operations. There is an increasing trend towards corporations looking more favourably towards doing business with those who have in place appropriate anti-corruption policies. This also extends to mergers and acquisitions which raises an additional ‘angle’ so far as due diligence is concerned. Therefore it is becoming more of a commercial imperative for corporations to adopt appropriate anti-corruption policies and protocols.

As regulators world-wide increasingly exercise extraterritorial jurisdiction and adopt a joined-up approach to tackle corruption, companies can no longer deal with these issues on a country-by-country basis. As a leader in anti-corruption compliance and corporate integrity, our Business Ethics and Anti-Corruption Group operates throughout our international network. Norton Rose has advised many international organisations across multiple industry sectors and geographic regions on all matters relating to compliance and regulation, fraud and corporate governance. We engage closely with a range of external bodies in this field, with whom we have collaborated on a range of initiatives. We have a wealth of expertise and professionals who are able to advise on bribery and compliance issues.