September 29, 2010<\/p>\n
McDermott Will & Emery has a strategic alliance with<\/em> MWE China Law Offices<\/span><\/em><\/a>, a separate law firm based in Shanghai.\u00a0 This <\/em> China Law Alert was authored by MWE China Law Offices lawyers\u00a0Henry (Litong) Chen<\/span><\/a>.<\/em><\/p>\n 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 \u2018commercial bribery\u2019.\u00a0 Another case has recently arisen in Hongzhou, China, which should put businesses on guard.<\/p>\n Toyota is reportedly being investigated by the Chinese government for conducting commercial bribery in China.\u00a0 According to the Xinhua News Agency<\/a> 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 \u2018commercial bribery\u2019.\u00a0 Although the conduct is not corrupt in nature, it nevertheless may trigger administrative sanctions.\u00a0 The AIC has commenced the investigation under the Anti-Unfair Competition Law (AUCL), which was introduced in 1993.<\/p>\n According to reports, Toyota Motor Finance (China) Co. Ltd. provides loans to consumers who buy Toyota cars.\u00a0 Typical interest rates for a one-year term consumer loan with Toyota Finance is 10 per cent to 13 per cent.\u00a0 This is reportedly much higher than the interest rates of loans offered by state-owned banks, which are less than 7 per cent.\u00a0 For a loan of RMB 100,000, a consumer reportedly pays RMB 7,000 per year in interest to a state-owned bank.\u00a0 If the same amount is borrowed from Toyota Finance, the interest would reportedly be RMB 10,000 to 13,000 per year.<\/p>\n 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.\u00a0 This is called a processing fee or service fee.\u00a0 Certain distributors of Toyota cars in Hongzhou, the 4S motor shops, reportedly had been recommending Toyota Finance loans to buyers of Toyota cars.\u00a0 Once the consumer took out the loan with Toyota Finance, the 4S motor shops reportedly received a processing or service fee from Toyota Finance.<\/p>\n 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.\u00a0 During this period, Toyota Finance earned interest of RMB 757,609.23 by the extension of consumer loans to 49 customers.\u00a0 The net profit, after the deduction of tax, was RMB 426,352.33.\u00a0 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.<\/p>\n The AUCL poses substantial compliance risks for foreign (as well as domestic) businesses.\u00a0 It seeks to regulate an array of practices that would impede competition in the market.\u00a0 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.\u00a0 They also cover consumer protection provisions on misleading advertising and the organization of lotteries.<\/p>\n As for provisions against bribery, the AUCL provides a blanket prohibition on a wide range of \u2018commercial bribery\u2019 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.\u00a0 Commercial bribery is thus, from the perspective of the AIC, an impairment or distortion of competition in the market.<\/p>\n The Toyota Finance case is not an isolated one.\u00a0 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.\u00a0 Around 1997 some insurance companies paid processing fees (or commissions) to their insurance agents at a higher rate than that set by the state.\u00a0 Henan Provincial AIC asked the SAIC if such commissions constituted commercial bribery. \u00a0The SAIC found that the commissions distorted competition in the insurance market and constituted commercial bribery. \u00a0It instructed the AIC to investigate and sanction this conduct in accordance with the AUCL and the Interim Regulations on Prohibiting Commercial Bribery.<\/p>\n This kind of commercial bribery is often difficult for non-Chinese lawyers to understand. \u00a0In the United States for example, commercial bribery is commonly viewed as a breach of fiduciary duty owed to a principal by its agent.\u00a0 However, the above-mentioned commercial bribery under China\u2019s AUCL involves no breach of fiduciary duty owed by an agent to his or her principal.<\/em><\/strong><\/p>\n The conduct described above of an insurer, retailer or finance house might be referred to as \u2018anti-competitive commercial bribery\u2019.\u00a0 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.\u00a0 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\u2014this\u00a0event\u00a0in particular has been covered in almost all of the\u00a0major paper and wire media in China<\/a>.<\/p>\n 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.\u00a0 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.<\/p>\n","protected":false},"excerpt":{"rendered":" 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.\u00a0 This China Law Alert was authored by … Continue reading
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