Circular on Regulating the Administration of Commercial Monetary Deposit Cards

Issuing Body: State Council
Issuing Date: May 23, 2011
Effective Date: May 23, 2011

China's State Council is again taking steps to curtail money-laundering and corruption, issuing regulations that restrict the sale of medium- and large-denomination monetary deposit (gift) cards, particularly blank cards and cards registered in the purchaser's name. The State Council released the Circular on Regulating the Administration of Commercial Monetary Deposit Cards (Deposit Card Regulations) on May 23, 2011. The new rules, which affect cards worth as little as RMB1,000, went into effect immediately.

Under the Deposit Card Regulations, an issuer of monetary deposit (gift) cards is required to undertake the following actions to prevent money-laundering and bribery:

1.      The issuer shall register the name of any buyer who purchases blank monetary deposit cards with accumulated value of RMB10,000 or more, or any monetary deposit cards bearing the name of the buyer;

2.      Wire transfer payment is required if any entity purchases monetary deposit cards with a value of RMB5,000 or more, or if an individual purchases monetary deposit cards with a value of RMB50,000 or more (cash transactions are prohibited); and

3.      The face value of blank monetary deposit cards shall not exceed RMB1,000, and the face value of monetary deposit cards bearing the name of the purchaser shall not exceed RMB5,000.

In addition, government officials are prohibited from receiving monetary deposit cards. If they do so, such actions will be deemed as accepting bribes.

These changes reflect a trend companies should not overlook. Since 2010, we have noticed that more local Administrations of Industry and Commerce (AICs), the regulatory body of commerce, have been taking aggressive actions against companies in connection with marketing practices, alleging that the companies have committed commercial bribery in business dealings, especially in industries related to pharmaceuticals, medical devices, health care, construction, real estate, mining and natural resources, government procurements, telecommunications, financing, and utilities. Third-party payments have also become a focus of recent AIC investigations.

In the past, the payment of third-party (finder's) commissions was likely permissible if all of the following conditions had been met:

1. The payment was disclosed in contract documents;

The payment was duly recorded in the accounting books of both the payor and the finder, and the payor received official tax receipts for such payments; and

2. The finder was an agency duly authorized to engage in such business services.

However, AICs have recently taken an aggressive position, concluding that even if these conditions are met, a company may still commit commercial bribery. The AICs' focus now shifts to whether the giving of something of value may generate business opportunities for or preferential treatments to the payor and preclude competitors from opportunities or similar treatment if they fail to provide benefits to the relevant parties.

As a result, some practices that were questionable but common in the past should be avoided in order to minimize the risks of AIC challenges:

• Payments to a third-party agent in the name of "labor fees," "consulting fees," "processing fees," and the like, if the third party did not actually provide relevant agency services in return for such payments; or if the third party used its unique position with the buyer to influence which products or services the buyer would purchase in exchange for payments from the payor (provider of products or services)
• Discounts or rebates paid to a third-party agent instead of the actual buyer
• Sponsorship that is conditioned upon the purchase of products, has an effect on the price of the products purchased, or is coerced by the person receiving payment
• Giveaway products in sales to any business entity, except: (1) products bearing the seller's logo that are of insignificant value, and which are provided in accordance with market practice; and (2) spare parts or ancillary components

Conclusion

While tightening anti-bribery efforts is a welcome sign and a step towards developing a market that is fairer, more efficient, and has greater integrity, China has not yet revised its relevant laws and regulations to provide clear guidance on anti-bribery issues, which may lead to confusion about what market practices are allowed. As a result, local AICs may exercise their discretion in investigating and determining whether a particular market practice would constitute commercial bribery, taking a position that may be beyond the letter of the law. Challenging AIC findings and decisions is in practice difficult, and the best strategy for multinational companies is to take a conservative approach in business dealings rather than trying to settle a dispute with the AIC later, after the company has been investigated and challenged, or even faces the risk of criminal charges.