China: Chinese Antitrust Regulators Signal The Commencement Of Anti-Monopoly Law Investigations And Fines

Last Updated: 17 June 2009
Article by Martyn Huckerby and Kien Choong

On 5 June 2009, China's State Administration of Industry and Commerce (SAIC) officially issued its first two procedural rules under the Anti-Monopoly Law (AML), signalling that from 1 July 2009, firms will need to be ready for SAIC investigations and the risk of fines being imposed. These rules outline the procedures SAIC will follow when investigating abuse of administrative power and non-price related abuses of dominant market position and entering into anti-competitive arrangements.

1. Background

The AML prohibits monopoly agreements, abuse of a dominant market position, and abuse of administrative power. The AML also contains a merger control regime.

Whereas merger regulation in China is administered by the Ministry of Commerce (MOFCOM), SAIC is responsible for regulating Monopoly Agreements, Abuses of Market Power and Abuses of Administrative Power. However, SAIC's responsibility is limited to matters not involving price, as the National Development and Reform Commission (NRDC) takes responsibility for regulating price-related matters. Accordingly, the two SAIC rules specifically exclude matters involving price.

The two procedural rules issued by SAIC are as follows:

  • Rules on Procedures for Administrations of Industry and Commerce to Investigate and Sanction Monopoly Agreements and Abuses of Market Dominance, and
  • Rules for Administrations of Industry and Commerce on Prohibiting Abuses of Administrative Powers to Eliminate or Restrict Competition.

SAIC has also recently been consulting publicly on draft substantive rules in relation to monopoly agreements and abuse of dominant market position. These draft rules were the subject of an earlier alert and are relevant to the SAIC procedural rules discussed in this alert (as indicated below).

2. Procedure for investigating and sanctioning Monopoly Agreements and Abuses of Market Dominance

Commencing an investigation

Allegations of monopolistic conduct may be made to Administrations of Industry and Commerce (AIC) at any level, including provincial and below. However, it appears that a formal investigation may only be made by SAIC itself, or a provincial level AIC as authorised by SAIC on a case-by-case basis. Provincial level AICs may not delegate their powers to AICs below the provincial level.

Investigative powers

An AIC has wide ranging investigative powers, including the power to:

  • enter premises
  • interrogate individuals
  • take copies of documents and electronic data
  • seize evidence, and
  • obtain information from banks.

An AIC may also require a firm to provide information about the firm's:

  • legal form
  • business performance in the past three years, and
  • relationship with business counterparts.

Undertakings in return for suspension of an investigation

A firm may request a suspension of an investigation by undertaking to take specific measures to eliminate the impact of the suspected monopolistic conduct. The application must include:

  • a statement of the 'violation facts' and 'effects'
  • specific measures for eliminating the effects, and
  • a specific schedule for fulfilling the undertaking.

If an undertaking is accepted and the investigation is suspended, the firm must give a written account of the extent to which it fulfils its undertaking. A suspended investigation may re-commence if the undertaking is not fulfilled, if there is a material change to the basis for suspending the investigation, or if incomplete, incorrect or misleading information was provided by the firm when seeking the suspension.

Leniency policy

An AIC may, at its discretion, exempt a firm from sanction or reduce the sanction if the firm actively reports a monopoly agreement and provides significant evidence concerning the monopoly agreement. However, this relief is not available to the organisers of the monopoly agreement. 'Significant evidence' is evidence sufficient to initiate an investigation or that plays a key role in identifying the conduct of entering into a monopoly agreement.

The draft SAIC Rules on Prohibiting Monopoly Agreements (discussed in our earlier alert) contain provisions setting out the nature of the relief from penalties available to firms ("informants") that actively provide significant evidence of a monopoly agreement. The relief available is in the form of discounts to administrative penalties that would otherwise apply to the informant. The amount of the discount depends on the informant's position in time relative to other informants, as set out in Table 1 below:

If an informant is the: Discount on penalty
First to report a monopoly agreement 100 per cent
Second to report a monopoly agreement 50 per cent
Third to report a monopoly agreement 30 per cent

Table 1: Discount on administrative penalty for early informants

Penalties

If an AIC determines that there has been monopolistic conduct, the AIC may impose an administrative penalty. A provincial level AIC must report to SAIC before suspending or terminating a formal investigation, or before imposing an administrative penalty. Under the AML, an administrative penalty may be between one and 10 per cent of the firm's turnover for the most recent year. A decision to impose an administrative penalty may be reviewed internally ("administrative review") or by a court ("administrative litigation").

China has not to date sought to criminalise cartel conduct under the Anti-Monopoly Law. That said, criminal penalties may apply to bid rigging under other laws in China. In particular, bid rigging is a crime under the PRC Criminal Law of March 1997 if the bid rigging is serious and it harms the interest of the person requesting the bid, the interest of other bidders, or the legitimate interest of the state and other citizens. 'Bid rigging' includes both collusion among bidders when submitting a tender, as well as collusion between bidders and persons inviting the tender. The penalties for engaging in criminal bid rigging include fixed term imprisonment not exceeding three years, criminal detention and/or a fine.

3. Rules on prohibiting Abuses of Administrative Powers

The AML prohibits Abuses of Administrative Powers that eliminate or restrict competition. The SAIC rules apply to abuses by administrative agencies and organisations having a public affairs function conferred under law.

The SAIC rules do not contain much substantive content in terms of how abuses of administrative powers will be regulated. The rules simply indicate that SAIC or provincial level AICs may propose remedial action to a higher competent authority, as set out in the following table.

Party alleged to be abusing administrative power Who may take action?
Department under the State Council SAIC may propose a remedy to the State Council
Organisation with a nation-wide public affairs function conferred under law or regulations SAIC may propose a remedy to the department in charge of the organisation with a public affairs function
Department under a provincial government Provincial level AICs may propose a remedy to the competent higher authority
Organisations with local public affairs function conferred under law or regulations Provincial level AICs may propose a remedy to the department in charge of the organisation with a public affairs function

Table 2: Abuses of Administrative Powers

As alleged 'administrative abuses' are likely to involve difficult trade-offs between competing public interest goals, including the goal of not restricting or eliminating competition, it would be difficult for the SAIC rules to be prescriptive about how such abuses will be regulated. For example, there may be genuine differences in views over the desirability of restricting competition in delivering mail in urban areas so that the state postal service can continue to subsidise the delivery of mail in rural areas. On the other hand, it is not clear what the SAIC rules achieve in substantive terms.

That said, the SAIC rules could perhaps lead to greater transparency on how difficult trade-offs between competing public interest goals are made provided SAIC or provincial level AICs publish their recommendations on appropriate remedies and if the State Council (or relevant higher competent authority) publish their reasons for accepting or rejecting recommended remedies.

There is, however, an important substantive rule that may have a significant impact on firms. Article 5 states:

"An undertaking shall not carry out any monopolistic conduct for the reason that it is forced, appointed or authorized to do so by the administrative agencies or organizations with a function of managing public affairs under the authorization of laws and regulations."

It appears that firms found to have engaged in monopolistic conduct will not be excused on grounds that the conduct was engaged in pursuant to a direction of an administrative agency or organisation. Firms may therefore be placed under a difficult situation of conflict. Such firms may need to consider reporting the matter to SAIC for resolution of the conflict.

4. Implications

In publishing procedural rules in advance of the substantive rules being finalised, SAIC is clearly gearing up to commence formal investigations into alleged abusive behaviour under the AML. Given the significant potential fines for breaching the provisions of the AML (between one and 10 per cent of turnover) it would be prudent for firms to start preparing for the possibility of such SAIC investigations. Such steps should include:

  • reviewing any agreements with competitors to ensure that they do not involve price fixing, market-sharing or other abusive provisions
  • putting in place procedures to deal with unannounced investigations by regulators (so-called 'dawn raids')
  • assessing market share to determine whether the obligations on dominant firms apply, and
  • implementing an antitrust/competition law compliance policy and training key staff on the AML.

It will also be important for firms to be familiar with provincial or municipal levels of the AIC, which will be undertaking the majority of substantive investigations under the AML.

The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.

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