Case Report: Notice of Administrative Penalty Hearing Procedures

Issuing Body: Hangzhou Administration of Industry and Commerce
Issuing Date: September 20, 2010

In an administrative case that appears to expand the meaning of "commercial bribery" under China's Anti-Unfair Competition Law and the related Provisional Regulations on the Prohibition of Commercial Bribery, the local administration of industry and commerce in Hangzhou, the capital of Zhejiang Province (the Hangzhou AIC), found that Toyota Motor Finance (China) Co., Ltd. (Toyota Finance), a car finance subsidiary of the Japanese auto giant, illegally offered rebates to car dealers who steered business to Toyota Finance. Its Notice of Administrative Penalty Hearing Procedures (Penalty Notice), issued for the case on September 20, 2010, has drawn significant interest, as this is the first AIC-initiated commercial bribery case involving multinationals in China that has been reported by the press.

Facts of the Case

According to the Penalty Notice:

• Toyota Finance offered a rebate of 4.5 percent of interest earnings to three Hangzhou car dealers who steered customers exclusively to take loans from Toyota Finance from August 2008 to April 2010;
• Its interest rate was 10 to 13 percent, significantly higher than the average rate of less than 7 percent at major state-owned commercial banks;
• Its rebate practice was found to have constituted commercial bribery punishable by confiscation of all illegal earnings (RMB426,352) and imposition of a fine of RMB140,000;
• In accordance with applicable administrative regulations, Toyota Finance was afforded an opportunity to defend itself at an evidentiary hearing.

Toyota Finance attended the evidentiary hearing on October 18, 2010, and argued in its defense that all rebates and commissions were recorded properly on its accounting books and thus were in compliance with applicable anti-unfair competition laws and regulations. It appears that no final conclusion was reached at the hearing.

Analysis of the Case

Under current PRC laws and regulations, "commercial bribery" is generally defined as a commission or other type of payment given by one business operator to a counterparty (or the counterparty's employees) that is not recorded on accounting books. Article 8 of the PRC Anti-Unfair Competition Law, which was enacted in 1993, thus stipulates: "A business operator shall not offer commercial briberies in the form of money, valuables or other means for the purpose of selling or purchasing goods." Article 7 of the Provisional Regulations on the Prohibition of Commercial Bribery, which were enacted in 1996, says further, "A business operator may, in an express manner, provide a commission to the agent in sales and purchases. The commission provided to the agent should be truly recorded on the accounting books by the business operator; the commission received should be truly recorded on the accounting books by the agent." Typically, if a commission has been paid, and if that payment is disclosed in the contract and recorded in the company's books, such payments have not been considered commercial bribery.

There is some evidence, however, that local AIC branches are now being encouraged to interpret and implement those provisions in a more extensive way, which may subject payments made to third parties—especially rebates and commissions—to commercial bribery accusations. For example, the Notice on Further Strengthening the Administration of Sales of Automobiles and Quality of Automobile Components, which was issued jointly by the State Administration of Industry and Commerce, Ministry of Traffic and Transportation, and General Administration of Quality Supervision, Inspection and Quarantine on July 26, 2010—two months before the Hangzhou AIC's Toyota ruling—requires local AICs to "severely crack down on car dealers that receive so-called ‘rebates' and ‘commissions' or other commercial briberies from financial services companies, security companies, and insurance companies during the process of helping consumers dealing with cars loans, cars insurance and other services." That July 2010 notice is considered one of the driving forces of the Toyota Finance case.

In addition, the Anti-Unfair Competition Law is in the process of being amended. The scope of what is considered commercial bribery is reportedly enlarged and expanded in the draft amendments.

Conclusion

Although it appears that the Toyota Finance case has not yet been finally resolved, it may point to a need for foreign investors to look more closely at and enhance their internal commercial bribery control systems, making sure at the very least that each payment, whether to a third party or counterparty, is properly recorded. Foreign investors might also want to prepare for upcoming developments in both the implementation and/or legislation of commercial bribery laws and regulations in China.