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When Commission Amounts to Bribery: Toyota Faces Sanctions in China

September 29, 2010

McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai.  This China Law Alert was authored by MWE China Law Offices lawyers Henry (Litong) Chen.

When an enterprise provides incentives to intermediaries for signing customers up to certain schemes so that they can purchase goods and services, considerable care needs to be taken in order to avoid accusations of ‘commercial bribery’.  Another case has recently arisen in Hongzhou, China, which should put businesses on guard.

Toyota is reportedly being investigated by the Chinese government for conducting commercial bribery in China.  According to the Xinhua News Agency on 21 September 2010 a subsidiary of Toyota in China is under investigation by the Administration for Industry and Commerce (AIC) in Jianggan District, Hongzhou City, for paying financing or service fees that allegedly amounted to ‘commercial bribery’.  Although the conduct is not corrupt in nature, it nevertheless may trigger administrative sanctions.  The AIC has commenced the investigation under the Anti-Unfair Competition Law (AUCL), which was introduced in 1993.

According to reports, Toyota Motor Finance (China) Co. Ltd. provides loans to consumers who buy Toyota cars.  Typical interest rates for a one-year term consumer loan with Toyota Finance is 10 per cent to 13 per cent.  This is reportedly much higher than the interest rates of loans offered by state-owned banks, which are less than 7 per cent.  For a loan of RMB 100,000, a consumer reportedly pays RMB 7,000 per year in interest to a state-owned bank.  If the same amount is borrowed from Toyota Finance, the interest would reportedly be RMB 10,000 to 13,000 per year.

If a car dealer signs a customer up for a Toyota Finance loan as part of the purchase of a Toyota car, Toyota Finance reportedly pays a fee to the car dealer.  This is called a processing fee or service fee.  Certain distributors of Toyota cars in Hongzhou, the 4S motor shops, reportedly had been recommending Toyota Finance loans to buyers of Toyota cars.  Once the consumer took out the loan with Toyota Finance, the 4S motor shops reportedly received a processing or service fee from Toyota Finance.

According to the notice issued by the AIC to Toyota Finance, a total sum of RMB 70,640.99 in processing or service fees was paid from August 2008 to April 2010 by Toyota Finance to three 4S motor shops.  During this period, Toyota Finance earned interest of RMB 757,609.23 by the extension of consumer loans to 49 customers.  The net profit, after the deduction of tax, was RMB 426,352.33.  As a result, the AIC is considering fining Toyota Finance RMB 140,000, with the profit obtained (RMB 426.352.33) potentially being forfeited to the state.

The AUCL poses substantial compliance risks for foreign (as well as domestic) businesses.  It seeks to regulate an array of practices that would impede competition in the market.  These range from passing off and misappropriating trade secrets to competition law provisions governing predatory pricing and tie-ins, and from administrative law provisions governing the abuse of administrative powers to provisions against bribery and unlawful discounts.  They also cover consumer protection provisions on misleading advertising and the organization of lotteries.

As for provisions against bribery, the AUCL provides a blanket prohibition on a wide range of ‘commercial bribery’ activities, which is when a company or enterprise uses something of value or employs other methods to induce its counterpart to buy or sell goods.  Commercial bribery is thus, from the perspective of the AIC, an impairment or distortion of competition in the market.

The Toyota Finance case is not an isolated one.  The dangers for a business in China are significant, as illustrated by the approach of a local AIC and the State Administration for Industry and Commerce (SAIC) in Henan, China.  Around 1997 some insurance companies paid processing fees (or commissions) to their insurance agents at a higher rate than that set by the state.  Henan Provincial AIC asked the SAIC if such commissions constituted commercial bribery.  The SAIC found that the commissions distorted competition in the insurance market and constituted commercial bribery.  It instructed the AIC to investigate and sanction this conduct in accordance with the AUCL and the Interim Regulations on Prohibiting Commercial Bribery.

This kind of commercial bribery is often difficult for non-Chinese lawyers to understand.  In the United States for example, commercial bribery is commonly viewed as a breach of fiduciary duty owed to a principal by its agent.  However, the above-mentioned commercial bribery under China’s AUCL involves no breach of fiduciary duty owed by an agent to his or her principal.

The conduct described above of an insurer, retailer or finance house might be referred to as ‘anti-competitive commercial bribery’.  It will be noted that this anti-competitive commercial bribery can occur between two businesses and does not necessarily need to be a payment or giving something of value to an individual for personal gain (as is normally the case with bribery), it can be a payment or transfer of value between two businesses that have no fiduciary or other duty owed between them or any duty owed to their respective customers.  It should also be noted that while the conduct might result in a simple fine or other administrative sanction, it nonetheless is classified as bribery with almost inevitable damage to the reputation of the business under investigation—this event in particular has been covered in almost all of the major paper and wire media in China.

The cases of Toyota Finance and others shows that considerable care needs to be taken in China when paying fees to intermediaries or when giving rebates or discounts.  Not only can they amount to abuse of a dominant position, but they can also be considered commercial bribery within the meaning of the Anti-Unfair Competition Law.