China: Cartel Investigations
It is the seventh anniversary of China’s Antimonopoly Law (AML) in 2015. As one of the first firms that took part in the drafting of the AML and thereby one of the first to provide AML-related services, we are fortunate to have participated in the rapid development of this legal regime. One of the most important trends we witnessed in recent years is that the AML enforcement authorities (AMEAs) are paying closer attention to cartels and enforced more serious punishment on cartelists. In this article we aim to provide in-house counsel and other international practitioners with an overview of cartel investigations in China by introducing the legal framework, investigation process and development of enforcement.
Enforcement policies and guidance
In China, the main substantive law governing cartel actives is the AML, which was enacted on 30 August 2007 and became effective as of 1 August 2008. The cartel enforcement authority is shared between the National Development and Reform Commission (NDRC), which mainly investigates in price-related cartel agreements, and the State Administration for Industry and Commerce (SAIC), which is responsible for investigation regarding non-price related cartel agreements. Since 2008, the NDRC and the SAIC have also promulgated several rules governing both substantive and procedural aspects of enforcement against cartels, which include:
• Rules on Anti-price Monopoly (issued by the NDRC on 29 December 2010, effective as of 1 February 2011) (the NDRC Rules);
• Rules on Administrative Enforcement Procedure regarding Anti-price Monopoly (issued by the NDRC on 29 December 2010, effective as of 1 February 2011);
• Several Provisions on Regulating the Price-Related Administrative Penalty Power (issued by the NDRC, effective as of 1 July 2014) (the NDRC Penalty Rules);
• Provisions and Procedures on Investigating and Handling Cases of Monopoly Agreements and Abuse of Dominant Market Position by the Administration for Industry and Commerce (issued by the SAIC, effective as of 1 July 2009); and
• Rules of Administration for Industry and Commerce on the Prohibition of Monopoly Agreement Behaviours (issued by the SAIC on 31 December 2010, effective as of 1 February 2011) (the SAIC Provisions).
Before the AML was enacted, the Price Law of 1998 and the Bidding Law of 2000 also contained certain provisions addressing cartel issues.
Types of cartel agreement
The AML explicitly prohibits the following monopoly agreement between competing business operators in Article 13 of the AML:
• fixing or altering the prices of commodities;
• restricting the production quality or sales quality of commodities;
• dividing sales markets or procurement markets of raw materials;
• restricting the procurement of new technologies and new equipment, or restricting the development of new technologies and new products;
• jointly boycotting transactions; or
• any other monopoly agreement as defined by the antimonopoly enforcement agency of the State Council.
Monopoly agreements are defined under the AML as agreements, decisions or other concerted conducts that eliminate or restrict competition. Horizontal monopoly agreements are strictly prohibited, unless the parties can prove that the relevant agreement falls within the exemption stipulated under Article 15 of the AML.
Pursuant to Article 15 of the AML, the prohibition against cartel agreements will not apply where a business operator is able to prove that the agreement was reached for any of the following purposes:
• for the purpose of technological improvement or research and the development of new products;
• for the purpose of upgrading product quality, reducing costs, improving efficiency, the undertakings unify product specifications or standards, or carry out professional labour division;
• for the purpose of increasing the efficiency of small and medium-sized enterprises and to strengthen their competitiveness;
• for the purpose of fulfilling public interest objectives such as energy conservation, environmental protection and disaster relief;
• for the purpose of alleviating a serious drop in sales quantity or obvious overproduction in times of recession;
• for the purpose of protecting legitimate interests in foreign trade and economic cooperation; or
• any other circumstances stipulated by the laws and the State Council.
In addition, a company intending to invoke exemptions under the first five items listed above must also prove that the agreement it has entered into would not severely restrict competition in the relevant market, and that the agreement would bring about benefits for consumers.
However, antitrust authorities rarely apply Article 15 to cartel cases in practice. According to publicly available information, no cartel cases have yet been exempted based on the above-mentioned exemptions.
In addition to the aforementioned cross-industry exemptions, Article 56 of the AML provides an exemption for the agricultural industry: the AML will not apply to cooperative or collaborative acts between agricultural producers and rural economic organisations in business activities such as the manufacturing, processing, sale, transportation and storage of agricultural products. There are no other industry-specific exemptions available thus far.
Competitively sensitive information exchange
As mentioned in Section 2.2, under the AML the term 'monopoly agreement' is defined as an agreement, decision or other concerted practice that eliminates or restricts competition. Therefore, pure exchange of sensitive information without entering into a monopoly agreement itself would not be considered a violation. Nevertheless, concerted practice can be acts in concert without the explicit conclusion of written or oral agreements, and can be presumed upon a consistent pattern of actions in the absence of reasonable explanations, communication of intentions or exchange of information. The exchange of certain competitively sensitive information, such as pricing strategies, cost information or specific customer information between competitors may be considered a way to facilitate concerted practice. It is clearly indicated in both the NDRC Rules and the SAIC Provisions that when determining whether there exists any concerted practice prohibited by Article 13 of the AML, the enforcement authorities will look into factors including communications of intentions between the competitors and acts in concert by the competitors. Therefore, even though exchange of sensitive information is not per se a violation, business operators should bear the above risk in mind and avoid engaging in such behaviours.
The cartel investigations in China are administrative processes and are carried out by the NDRC and the SAIC.
The NDRC and the SAIC can handle cases themselves or delegate their authority to their provincial counterparts. The NDRC has generally delegated its authority to the provincial price authorities, while the SAIC’s authority is delegated to provincial administrations for industry and commerce (AICs) on a case-by-case basis.
Pursuant to Article 2 of the AML, the AML will apply to monopoly conduct occurring overseas under the circumstances the conduct has the effect of restricting or eliminating competition in the Chinese market. Due to the extraterritorial application of the AML, the NDRC and the SAIC have authority to investigate cartel activities occurring in another country if the cartel has affected the domestic Chinese market. Therefore, even if a cartel agreement is concluded overseas, and the companies that enter into the cartel agreement have no physical presence in China or any substantial contact with China, the NDRC and the SAIC still have the power to investigate the cartel and the companies as long as the cartel has anti-competitive effects on the Chinese market.
For example, in the Japanese auto parts case (see Section 4.2), the NDRC found that the cartel involved several operators outside the territory of China. However, the products were sold to Chinese car makers with prices agreed between cartelists, thus having an adverse impact on the Chinese market. Therefore, the NDRC exerted its extraterritorial jurisdiction in order to investigate those cartelists located outside of China, and penalised them for violating Article 13(1) of the AML.
The investigation process
Under Article 38 of the AML, the AMEAs may initiate an investigation based on its own initiative or based on the complaints from third parties, including business operators, industrial associations and other governmental agencies. The AMEA is required to keep the identity of the complainant confidential.
The AML also includes a leniency programme and the AMEA regards it as a useful tool for identifying cartels. Accordingly, in practice, many cartel investigations are triggered by leniency applications filed by whistleblowers. See Section 3.6 for a detailed introduction to the leniency programme.
Measures that may be taken by AMEAs during investigations
Pursuant to Article 39 of the AML, the AMEA can adopt the following measures to investigate potential cartel agreements or practices of a business operator:
• entering the business premises of the business operators who are under investigation or any other relevant places to conduct inspections;
• making enquiries of the business operators, interested parties, or other relevant entities or individuals, and requesting them to provide relevant explanations;
• inspecting and duplicating the relevant business documents, agreements, accounting books, business correspondences, electronic data, files, or documentations of the business operators, interested parties, or other relevant entities or individuals;
• seizing and detaining the relevant evidence; and
• enquiring into the book account of the business operator.
In practice, very often the AMEA will interview the employees of the target operator. The AMEA will normally create a written transcript of the interview and ask the interviewee to sign it. The interviewee is entitled to verify the content of the transcript before signing and to request for modifications if the transcript is not an accurate record of what he or she says. Companies and any individuals subject to an investigation are required to cooperate according to the AML. If they refuse to cooperate or even obstruct the investigation, such as by refusing to provide the relevant materials or information to the AMEA, providing false materials and information, concealing, destroying or removing evidence, they may be subject to the penalties provided under Article 52 of the AML.
Article 52 of the AML provides that an order may be issued by the AMEA to make reparations. The AMEA may impose a fine of up to 20,000 yuan on individuals, or a fine of up to 200,000 yuan on entities. In serious cases, a fine of between 20,000 and 100,000 yuan may be imposed on individuals, and a fine of between 200,000 and 1 million yuan on entities. Where the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law.
There is no strict timetable to be followed by the NDRC or the SAIC in investigating cartel cases. According to the cases published by the authorities, depending on the specific circumstances of the cases, some cartel investigations are closed within a few months (such as the Japanese auto parts case), and some may take one or two years.
Pursuant to article 46 of the AML, where a business operator has entered into and implemented a cartel agreement, the AMEA will order the business operator to stop the illegal conduct, confiscate the illegal income and further impose a fine ranging from 1 to 10 per cent of the sales amount of the preceding year. In practice, the penalty of confiscation has rarely been implemented by the NDRC. The agency normally only imposes the other two forms of penalties, (ie, imposing a certain amount of fines and ordering the business operator to stop the illegal conduct).
Article 46 further provides that where a monopoly agreement has been formed but has not been implemented, a fine of up to 500,000 yuan may be imposed. Nevertheless, the authorities tend to take a stringent approach in interpreting this provision. Therefore, in practice it is not easy for cartelists to lower their fine to 500,000 yuan by arguing non-implementation, unless they can provide strong evidence in this regard.
In addition to the above administrative sanctions, pursuant to article 50 of the AML, cartelists bear civil liabilities pursuant to the AML if the cartel arrangement causes losses to others. The AML does not provide for any criminal liabilities arising from cartel activities either for business entities or individual employees.
Factors considered in determining the fine
Pursuant to Article 49 of the AML, when determining fines, the AMEAs must consider factors such as the nature, seriousness and duration of the illegal acts. The SAIC Provisions contain similar rules. According to Article 10 of the SAIC Provisions, when determining the specific amount of the fine, the SAIC must consider factors such as the nature, details, seriousness and duration of the illegal acts, etc. Further, if a business operator voluntarily ceases any acts amounting to monopoly agreements, the SAIC may, at its discretion, reduce the penalty for such business operators, or exempt them from the penalty.
The NDRC Penalty Rules, which took effect as of 1 July 2014, provide more detailed guidance on the determination of fines. The NDRC Penalty Rules explicitly stipulate five kinds of decision that could be made by the NDRC and its provincial counterparts: no punishment, mitigated punishment, lighter punishment, normal punishment and heavier punishment. Similar to the relevant rules set forth in the SAIC Provision, when considering the penalties to be imposed, the NDRC and its provincial counterparts would take into account factors such as the seriousness and duration of the illegal acts, whether the operator ceases the monopoly agreement on its own initiative, whether the operator proactively eliminated or mitigated the harmful effects of the illegal acts, whether the operator cooperates with the authorities, the role of the operator in the monopoly agreement, etc.
There is no provision articulating the relationship between the leniency programme and the above-mentioned factors to be considered when determining the penalties. From the decisions published by the NDRC, where both the said factors and leniency programme are involved, it appears that the NDRC would first examine the factors mentioned above to decide a basic fine to be imposed and then apply the leniency programme to waive or reduce the fine accordingly.
Article 46 of the AML provides general rules for a leniency programme, indicating that where an operator has voluntarily reported the relevant facts on entering into a monopoly agreement to AMEA and provided important evidence, the AMEA may, at its discretion, reduce or waive the sanction for such operation.
The NDRC Procedural Provisions and the SAIC Provisions each set out the details of their own leniency programmes, which show some subtle differences of leniency application compared with these AMEAs.
The SAIC programme explicitly provides that the SAIC may not exempt or reduce penalties for the organiser of a cartel agreement, whereas the NDRC programme does not explicitly exclude the possibility of granting favourable treatment (including immunity) to an organiser (ringleader). For example, in the cartel investigation against sand-dredging companies announced by the NDRC in October 2012, the company that received leniency treatment was reported as one of the organisers of the cartel.
The NDRC Procedural Provisions provide that the NDRC may grant full immunity to the first applicant who voluntarily reports the facts to the monopoly agreement and provides important evidence to the NDRC. The wording suggests that the first applicant may not necessarily be granted full immunity by the NDRC. In comparison, the wording of the SAIC Provisions seems to more definite, and expressly provides that the first business operator shall be immune from sanction.
The SAIC programme provides no further guidance on the sliding scale of leniency; it only indicates that the civil fines imposed on the subsequent applicants other than the first may be alleviated at the sole direction of the SAIC. On the other hand, the NDRC leniency programme stipulates that the second applicant may receive a reduction of no less than 50 per cent, and the other subsequent applicants may receive a reduction of no more than 50 per cent.
In practice, most of the leniency applicants to the NDRC were granted full immunity or a reduction to some extent according to the decisions that have been published by the NDRC. In particular, NDRC officials stated on several occasions that the NDRC encourages cartelists to apply for leniency programmes. Meanwhile, it is worth noting that according to the public statement of NDRC officials, the leniency programme only applies to fines and does not apply to the confiscation of illegal income. As for the SAIC, according to the decisions disclosed on its publication platform, there is no clear indication that operators under the investigation applied for leniency treatment so far and accordingly, it is not clear how the SAIC would implement the leniency programmes.
Suspension of an investigation
The business operators under investigation may apply for suspension of an investigation by filing written applications for suspension and by making commitments to take specific measures to eliminate the anti-competitive effects during the limited period as approved by the AMEA. The AMEA will supervise the performance of the undertaking and will have the right to resume the investigation if any of the following occur:
• the operator fails to perform its commitments;
• there are significant changes to the facts on which the suspension decision was made; or
• the suspension decision was made on the basis of incomplete or inaccurate information submitted by the business operator.
Where the AMEA considers that the business operator has fulfilled its commitments, the AMEA may decide to terminate the investigation. By applying the suspension procedure, the AMEA can decide to terminate the investigation without reaching an affirmative decision for the violation after accepting the commitments from the business operators.
Theoretically, the suspension procedures also apply to cartel violations. However, in practice, the authorities have never suspended any cartel investigations; suspension procedures normally apply to investigations of abuse of market dominance.
China does not recognise the concept of attorney–client privilege. Therefore, confidential communications or work products between a client and an attorney (whether a foreign attorney or an attorney licensed to practise in China) or between a foreign attorney and a Chinese attorney are not privileged. Although Chinese attorneys have the obligation to keep the clients’ information confidential, this does not exempt the attorneys from being forced to disclose the information in investigative proceedings.
In some investigations, both the NDRC and the SAIC required the in-house counsels of the companies under investigation to turn in their e-mail exchange with outside counsel and with other employees of the company in relation to the investigated conduct. Nevertheless, as far as we know, the regulators have never asked outside counsel to submit documents that they receive from clients.
Since 2013, the NDRC and its local counterparts have initiated cartel investigations in a number of industries, including LCD panel, gold jewellery, automobile, auto parts, car shipment and insurance.
In 2013, 2014 and 2015 so far, a total of eight cartel decisions were made by the NDRC, which are listed below.
Some of the important cartel cases are listed in the table above.
Details of two recent significant cases are as follows.
Japanese auto parts case
On 18 September 2014, the NDRC published its final decision regarding the Japanese auto parts case. In that case, a total of 12 Japanese auto parts suppliers were fined an aggregate amount of 1.24 billion yuan due to their participation in cartels. The investigation in essence consists of two cases. In the first case, four auto bearing manufacturers were found to have organised ARA meetings in Japan as well as export market meetings in Shanghai to discuss and collude in the timing and scope of raising prices for bearing products in the Chinese market from 2000 to June 2011. In the second case, eight Japanese auto parts suppliers were found to have concluded horizontal monopoly agreements on fixing and changing the prices of 13 types of auto parts, including starting motors, wire harnesses, throttle bodies and alternators from January 2000 to February 2010.
According to the final decisions published, the NDRC found that the collusion between competitors served to eliminate and restrict competition on the pricing of bearings and other auto parts in the Chinese domestic market, and harmed the legitimate rights of the downstream manufacturers and the interests of consumers. Considering the fact that the parties concerned had executed the monopoly agreements for over 10 years, which constituted a serious violation, the NDRC decided to impose fines on all 12 Japanese auto parts suppliers to the highest extent (ie, 10 per cent of the companies’ sales in the previous year. However, since all 12 companies applied for leniency and the NDRC found that the companies were cooperative during the proceedings, it decided to grant leniency to the parties. Specifically, the NDRC granted full immunity to two companies, because they were the first in each case to voluntarily make a report to the NDRC and provide important evidence. The other 10 companies received reductions of between 20 and 60 per cent.
Zhejiang insurance caseOn 2 September 2014, the NDRC published its decisions imposing fines of an aggregated amount of 110 million yuan on the branches of 23 property insurance companies in Zhejiang province and the Zhejiang Insurance Industry Association, among which one insurance company received full immunity for being the first applicant under the leniency programme. This is the first time since the implementation of the AML that the NDRC has published the full version of its penalty decisions.
Decision Target entity Amount of penalty (yuan) Illegal conduct
April 2015 Mayang Brick Factory
Allocating sales market and price fixing
Shangyu Concrete Association and eight other concrete companies in Shangyu district of Shaoxing, Zhejiang
Allocating sales market
Four quarry operators in Wuxi in Chongqing
Allocating sales market
Six fireworks wholesale companies in Chifeng in Inner Mongolia
Allocating sales market
Association of construction quality inspection in Ci Xi City of Zhengjiang and other companies
Association undertakes certain ratification measures
Allocating sales market organised by industry association
Brick and Tile Association of Yi Bin city of Sichuan and other companies
Allocating production and sales quantities organised by industry association
Tourism association and association of tourist agencies in Xi Shuang Ban Na in Yunnan
Horizontal monopoly agreement organised by industry association
As a result, Zhejiang Insurance Industry Association received a fine of 500,000 yuan in accordance with article 46 of the AML; the Zhejiang branch of PICC, as the first leniency applicant, received full immunity from punishment; the Zhejiang branch of China Life Property and Casualty Insurance Company Limited, as the second leniency applicant, received a 90 per cent reduction to the fine of 1 per cent of the company’s sales in the previous year; while the Zhejiang branch of China Ping An Insurance Inc, as the third leniency applicant, received a 45 per cent reduction to the fine of 1 per cent of the company’s sales in the previous year. For the other 20 insurance companies, fines of 1 per cent of each company’s sales in the previous year were imposed.
During the investigation, NDRC officials found that the Zhejiang Insurance Industry Association organised 23 insurance companies to agree to fix car insurance premiums and commission fees. The NDRC concluded that such a horizontal monopoly agreement would directly eliminate price competition among competitors, reduce operators’ motivations to improve their service quality, and deprive consumers of their right of choice by making it hard for the consumers to obtain low-cost and high-quality services. Therefore, the NDRC determined that the price-fixing conduct of Zhejiang Insurance Industry Association was in violation of Article 16 of the AML and also article 9 of the NDRC Rules, which forbid industry associations from engaging in monopoly conduct. Zhejiang Insurance Industry Association tried to invoke article 15(3) of the AML to exempt its liabilities, asserting that the purpose of organising such monopoly agreement was to help increase the efficiency and competitiveness of small and medium-sized undertakings. However, the NDRC believed that selecting the superior and eliminating the inferior is the inevitable result of competition. By inviting insurance companies to reach horizontal monopoly agreements on price fixing, the Association was in fact protecting the low-efficiency companies and weakening the competition dynamic in the relevant market. Therefore, the NDRC determined that the exemption clause stipulated in article 15(3) of the AML shall not be applicable. In terms of the 23 insurance companies, NDRC officials found their conduct to be in breach of article 13(1) of the AML, which prohibits competing undertakings from colluding to fix or change commodity prices.
Enforcement developments of SAIC
On 29 July 2013, the SAIC held a press conference to announce that it had launched a publication platform for antitrust enforcement decisions. As of August 2015, final penalty decisions of all cases that had been closed (a total of 25) have been published on the SAIC’s website, among which 20 cases are in relation to cartels. The cartels that have been investigated covered a wide range of industries, including insurance, construction materials, liquefied petroleum gas, tourism, etc.
In 2013, 2014 and 2015, a total of seven cartel cases were disclosed on the SAIC’s publication platform, and are listed in the table above.
Details of two cases are as follows.
Shaoxing Shangyu concrete case
On 5 September 2014, the Administration of Industry and Commerce of Zhejiang Province (Zhejiang AIC) published the decision regarding the Shaoxing Shangyu concrete case. In this case, a total of eight concrete companies, together with the Shangyu Concrete Association in the Shangyu district of Shaoxing, Zhejiang province were fined an aggregate amount of 1.72 million yuan for reaching horizontal agreement on market divisions.
According to the final decisions published, Shangyu Concrete Association organised the cartel that allocated the market share among eight participants as 33.5 per cent, 10 per cent, 9.5 per cent, 16.5 per cent, 6.5 per cent, 9 per cent, 7.5 per cent and 7.5 per cent. Zhejiang AIC found that the organisation of the cartel conducted by the Shangyu Concrete Association was in violation of article 46 of the AML, which prohibits industry associations from organising cartels. Eight participating business operators were found to be in violation of article 13 of AML and were each fined less than 500,000 yuan because they had not implemented the cartel arrangement.
Xi Shuang Ban Na tourism case
On 7 April 2013, Administration of Industry and Commerce of Yunnan Province (Yunnan AIC) published the decision regarding Xi Shang Ba Na tourism case. Tourism Association of Xi Shuang Ban Na and Association of Tourist Agencies of Xi Shuang Ban Na were each fined 400,000 yuan for organising a horizontal agreement called the Xi Shuang Ban Na Information Management Self-discipline Pact (the Self-discipline Pact) among tourism agents, hotels, tourist attractions and passenger transport companies.
According to the decisions published, the Self-discipline Pact required the tourism agents to make contracts with a selected range of tour routes, hotels and passenger transport companies and to submit tourism information through the online tourism information management platform. Certain pricing restrictions are also laid out.
Yunnan AIC found that the Self-discipline Pact served to eliminate and restrict competition in the tourism industry in Xi Shuang Ban Na and such arrangement by the Tourism Association of Xi Shuang Ban Na and the Association of Tourist Agencies of Xi Shuang Ban Na was in violation of article 46 of the AML.
According to the final decisions published, participating agents, tourist attractions and passenger transport companies were punished in another case. However, that official decision is not publicly available.