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Anti-Bribery Laws in China 2010 Annual Meeting October 28-30 Chicago

Michelle Gon Principal Baker & McKenzie, Shanghai Please note: The contents of this presentation are intended to provide a general guide to the subject matter only, and should not be treated as a substitute for specific advice concerning an individual situation.

Anti-Bribery Laws in China

Anti-Bribery in China: Policy

Concerns of the Chinese Leaders Top down approach On Sep. 13, 2007, the National Corruption Prevention Bureau (the “NCPB”) was established. On Apr. 23, 2009, Provisions on Public Reports was issued by the Supreme People's Procuratorate: ¾ ¾ ¾ ¾

Encourage whistleblowers to report corruption activities of any government officials; Ways of reporting: Visit, letters, phone calls, faxes or online (jubao.spp.gov.cn) Rewards: Provide protections to the whistleblowers and their relatives

Please note: The contents of this presentation are intended to provide a general guide to the subject matter only, and should not be treated as a substitute for specific advice concerning an individual situation.

Anti-Bribery Laws in China

Anti-Bribery Policy (cont’d) On Sep. 1, 2009, the Supreme People’s Procuratorate decided to expand scope of the input and inquiry about crimes of offering bribes to: ¾ Cancel the limitation only for bribes in: construction, finance, medical, education and government purchasing areas.

Anti-Bribery Laws in China

China Anti-bribery Laws & Regulations Criminal Law Anti-Unfair Competition Law Other regulatory measure: ¾

Party disciplinary rules

Anti-Bribery Laws in China

Criminal Law Effective Date: October 1,1997 Goal: prohibits giving and receiving property “in order to obtain improper benefit.” Wrongful activities : ¾ Official bribery - “Working personnel of the State” ¾ Non-official bribery - “Personnel of state organizations not engaged in public services” or “Working personnel of private companies or enterprises”

Anti-Bribery Laws in China

Criminal Law (cont’d) Official bribery criteria: ¾ ¾

a member of the working personnel of the state is involved Standard of placing a case: – Individual: – Receiver: an offer of property in excess RMB5,000 (about US$735) – Donor: an offer of property in excess RMB10,000 (about US$1,470) – Corporate entity: – Receiver/ Donor: an offer of property in excess RMB100,000 (about US$14,700) to RMB200,000 (about US$29,400) depending on the seriousness of the offense in return for an improper benefit, or for the assistance to obtain an improper benefit

Anti-Bribery Laws in China

Criminal Law (cont’d) Official bribery penalties: ¾

Individuals – Receiver: From criminal detention up to death penalty, and fine or confiscation of personal properties, according to the bribery values. – Donor: From criminal detention up to life imprisonment and confiscation of personal properties, according to the bribery values.

Company – Receiver: Fine; for the responsible persons from criminal detention up to death penalty, and fine or confiscation of personal properties, according to the bribery values. – Donor: Fine; for the responsible persons from criminal detention up to life imprisonment and confiscation of personal properties, according to the bribery values.

Anti-Bribery Laws in China

Criminal Law (cont’d)

Non-official bribery criteria: ¾ ¾

The same as official bribery Difference: a member of the working personnel of a company or other nongovernmental official is involved

Penalties: ¾

Individual: – Receiver: criminal detention or imprisonment up to 20 years and confiscation of personal properties according to the bribery values – Donor: Fine; from criminal detention up to 10 year of imprisonment, according to the bribery values Corporate: – Receiver: a fine; for the responsible persons may be criminal detention up to 20 years of imprisonment, according to the bribery values. – Donor: a fine (no statutory guidance, likely a multiple of the illegal income/profit generated); for the responsible persons may be criminal detention up to 10 years of imprisonment, according to the bribery values.

Anti-Bribery Laws in China

China Anti-Bribery: Enforcement Cases “Land Grandma” Luo Yaping (罗亚平)

Former director of Liaoning Fushun Land and Resources Bureau.

Alleged bribery amount is around RMB145 million (about US$21.32 million)

Judicial investigation of Shenyang Intermediate People’s Court started from January 2009, and the case is now pending in court.

Anti-Bribery Laws in China

China Anti-Bribery: Enforcement Cases Pi Qiansheng （皮黔生）

Former director of the Standing Committee of Tianjin Binhai New District Management Committee

Alleged bribery amount is around RMB 7.55 million (about US$1.11 million)

Judicial investigation of Shenyang City Intermediate People’s Court started from June 2009

Judgment made on August 13: sentenced to death, suspended for two years of implementation deprivation of political rights for life, confiscation of all personal property.

Anti-Bribery Laws in China Date

Name

Position

Offence

Penalty

08/05/2009

Kang Rixin

General Manager of China National Nuclear Corporation

Alleged bribery amount: RMB1.8billion (US$265million)

“Disciplinary dismissal” by CPC Central Discipline Inspection Commission ; transfer to judicial department for legal proceedings

12/30/2009

Zheng Shaodong

Former Minister Assistant of Ministry of PublicSafety

Bribery amount: RMB8.26million (US$1.23million)

Death with a two-year reprieve Confiscation of personal properties

07/15/2009

Chen Tonghai

Former Chairman of Sinopec

Bribery amount: RMB195million (US$28.7million)

Death with a two-year reprieve Confiscation of personal properties

02/27/2009

Jiang Yong

Former Director of Chongqing Planning Bureau

Bribery amount: RMB17.9million (US$2.63million)

Death with a two-year reprieve Confiscation of personal properties

11/20/2008

Zeng Jinchun

Former Vice Party Secretary of Chenzhou city, Hunan Province

Bribery amount: RMB 31.5million (US$4.6million)

Death penalty Confiscation of personal properties

07/09/2008

Chen Chaoxian

Former Chief Executive of Changning District, Shanghai

Bribery amount: RMB3.12million (US$0.45million)

13 years imprisonment

04/11/2008

Chen Liangyu

Former Party Secretary of Shanghai

Bribery amount: RMB2.39million (US$0.35million) and other non-bribery offences

18 years imprisonment Fine: RMB300,000

06/22/2007

Zheng Xiaoyu

Former Director of State Food and Drug Administration

Bribery amount: RMB6.50million (US$0.95million)

Death penalty Confiscation of personal properties

Anti-Bribery Laws in China

Anti-Unfair Competition Law

Effective Date: September 2, 1993 Goal: promote free and fair competition Wrongful activities : ¾ ¾ ¾ ¾ ¾

Commercial bribery False advertising Misappropriation of trade secret Below cost sales Sales with attached prizes

Dispraise reputation of competitors

Penalty: Economic; Administrative; Serious offense which may also be subject to criminal investigation.

Anti-Bribery Laws in China

Anti-Unfair Competition Law (cont’d)

Prohibits commercial bribery including: ¾ ¾ ¾

Giving valuables or utilizing other methods to bribe entities or individuals for the purpose of selling or purchasing goods Receiving or demanding valuables in the course of selling or purchasing by business operations Serious offense which may also be subject to criminal investigation

This may have impact on the local operation, especially on promotional activities.

Penalties: ¾

a fine of more than RMB10,000 (about US$1,470) but less than RMB200,000 (about US$29,400) depending on the circumstances, confiscation of illegal income

Anti-Bribery Laws in China

Anti-Unfair Competition Law -Implementation “commercial bribe” may be in the form of: ¾ ¾

¾ ¾

cash and gifts; payments in the false name of promotion costs, advertisement expense, contributions, research costs, remuneration, consulting fees and commissions; reimbursement of various kinds of fees; or provision of benefits other than property, such as overseas and domestic travels.

Anti-Bribery Laws in China

Anti-Unfair Competition Law - Implementation

National and local Administration of Commerce and Industry (“AIC”): ¾

Investigation authority – AIC has the authority to start investigation anytime; – Legal procedures have to be followed: – Onsite investigation: at least two investigators – Show law enforcer identification

Enforcement authority – Fines and disgorgement of improper benefit can be made according to the investigation result – Written notice needs to be issued by AIC for any penalty imposed – Facts, causes and reasoning for penalty shall be informed – If fines over RMB30,000 (about US$4,400), the company will have the right to request for a hearing

Anti-Bribery Laws in China

Commonly Seen Procurement Fraud From the Buyer’s side ¾ ¾ ¾ ¾ ¾ ¾ ¾

Kickback, kickback and kickback; Conflict of interests: Source from relatives and friends; Self-dealing; Not select the best supplier in town due to corruption; Affect the quality control process; Leaking of IPRs; Leaking of similar products or minor defective products

Anti-Bribery Laws in China

Commonly Seen Procurement Fraud From the Seller’s Side ¾ ¾ ¾ ¾ ¾ ¾ ¾

Meeting the demand for bribes from the procurement team would increase the costs; Paying bribery may incur anti-bribery and FCPA problems; May lose the account; May damage the reputation; Leaking of the client’s IPRs, designs, trade secret,…; Leaking of its own IPRs or trade secret,…; Leaking of defective products from back door

Anti-Bribery Laws in China

Procurement fraud is very difficult to enforce From the buyer’s side ¾ ¾ ¾ ¾ ¾

A challenge to the Internal Audit and Compliance team; Money or benefit received by the corruptive employees does not reflect in the books and accounts; Communication on demand for payment or receipt of bribe does not channel through the company’s email system; The payment may be in cash or other forms of benefit and the recipients may be third parties; The whistleblower usually does not provide concrete evidence

Anti-Bribery Laws in China

Best Practices in Preventing Procurement Fraud Conducted by Employees and Third Parties From the Buyer’s side ¾ ¾ ¾ ¾ ¾ ¾ ¾

Cannot have one procurement team to deal with one or a few suppliers; Independent suppliers screening, selection and renew process; Internal Audit team’s Audit rights and random visit; Supplier’s training and certification; Supplier’s hot line and reporting channel; How to ensure that the Supplier can safeguard the entrusted IPRs and no leaking of the licensed products manufactured by the supplier

Anti-Bribery Laws in China

Best Practices: FCPA Due Diligence on third parties

Non-M&A related Due Diligence on: ¾ Suppliers ¾ JV partners ¾ Distributors ¾ Agents ¾ Consultants Are they qualified? What are their deliverables? Any bench marking reference on the fees? Any creditable references? Any review of their performance before renewal of the agreements? Will they be willing to sign compliance certificate? Develop remedial measures / FCPA Compliance Program

Anti-Bribery Laws in China

Best Practices in Preventing Procurement Fraud Conducted by Employees and Third Parties From the Seller’s side ¾ ¾ ¾ ¾ ¾

Clean practice makes more profit; Be aware of the legal implication; Protection of the IPRs; Safeguard the customer’s IPRs including trade secret; Safeguard its own IPRs including trade secret

Thank you! Michelle Gon Baker & McKenzie LLP Unit 1601, Jin Mao Tower 88 Century Boulevard, Pudong Shanghai 200121, PRC E: michelle.gon@bakermckenzie.com T: +86 21 6105 8599 F: +86 21 5047 0020