'Mr. Confession' and his boss drive China's antitrust crusade

The Qualcomm booth at the 2014 International CES.
Source: Qualcomm | Facebook
The Qualcomm booth at the 2014 International CES.

A signboard at the top of a staircase in the ageing Beijing offices of the National Development and Reform Commission (NDRC) directs lawyers and company officials to numbered conference rooms for antitrust meetings.

The printed list names half a dozen or more companies on any given day - a sign of the recent flurry of activity from the NDRC - one of China's three antitrust regulators. The direction of investigations has drawn heavy criticism from foreign officials and the overseas business community.

Inside those rooms, lawyers and executives describe meetings with the NDRC as "interrogations", where raised voices, flaring tempers and verbal reprimands are commonplace.

From interviews with more than two dozen attorneys, executives, and experts, who have been drawn into investigations with the NDRC's price supervision and anti-monopoly bureau, a picture emerges of a culture of intimidation under the leadership of Director General Xu Kunlin.

The agency's aggressive tactics coincide with an increasingly sobering business climate for foreign firms in China. Fears over the ruling Communist Party's support for domestic firms has prompted some to declare the end of a golden age for foreign business in the world's second-largest economy.

Read MoreChina anti-trust regulator fines Volkswagen and Chrysler $46M

The NDRC has investigated dozens of foreign firms over alleged "anti-competitive behavior" - from auto parts makers and milk powder producers to drugs firms and tech companies, including Qualcomm, which faces a potential record fine of more than $1 billion. Last week, the NDRC said it fined a Chinese venture of Volkswagen AG and Chrysler's local sales unit a combined $46 million, its first punishment of foreign carmakers for price-fixing.

Lawyers who have faced off against the NDRC say the antitrust bureau uses widespread behind-the-scenes tactics - from personal threats to forced apologies and brow beatings - to enforce China's 2008 Anti-Monopoly Law.

Xu, an outspoken official, denies his investigations are unfair or target foreign companies. His bureau's actions, however, are "reminiscent of Red Guard tactics," said a Chinese lawyer who represented a foreign firm in an NDRC probe.

"The lack of due process in these investigations is disturbing. It doesn't matter if this also is being done with Chinese companies. It doesn't matter if they bully their own people as well. The use of intimidation violates their own rules and cannot be one of its tools," said James Zimmerman, a Beijing-based partner at Sheppard Mullin, and a former chairman of the American Chamber of Commerce in China.

"Translate my curses"

Sessions at the NDRC 'hearings' are filmed and photographed, and companies under investigation are required to review and sign off on hastily produced Chinese-language transcripts of the meetings before leaving the building.

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"The confession is important to them. It's a confession and rectification culture," said one executive familiar with the NDRC's antitrust investigations.

Because of the sensitive nature of ongoing investigations and fear of personal retaliation or reprisals against their companies, most people who spoke to Reuters for this story didn't want to be named.

Representatives of two companies navigating antitrust issues said the NDRC made threats or insinuations in face-to-face meetings that their employees might be held personally liable. Companies are discussing at board level about which executives they will send to China to minimize risk, said a business consultant who has advised firms on antitrust matters. U.S. wireless technology patent developer InterDigital apologized after its CEO publicly refused to send executives to China for talks with the NDRC for fear they may be arrested.

Company representatives are routinely subjected to verbal abuse, according to people who have sat through some NDRC meetings, often at the hands of Xu Xinyu, director of the bureau's second division, and no relation to his boss. His "interrogation" style interactions have earned him the nickname "Mr. Confession" among some lawyers.

On one recent occasion, Xu told an interpreter before berating a delegation from a technology company: "I want you to translate my curses," the executive recounted.

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"Clients come out of meetings with him shaken, said a foreign lawyer who has represented companies under NDRC probes. "There's the insinuation that foreign company executives will be personally persecuted or prevented from leaving the country."

Tracking China's antitrust activism
Tracking China's antitrust activism   

"Two warning system"

Last August, Reuters reported that Xu Xinyu had pressured firms not to bring external lawyers to fight antitrust accusations. Chinese lawyers, either in-house or hired from local law firms to represent companies, are frequently the focus of intimidation, said people who have been present at NDRC meetings.

They recalled a 'two warning system' where lawyers running afoul of vague protocol or who are persistent in defense of their clients are threatened with being banned from meetings with the regulator, a way of suppressing client advocacy.

"If you aren't allowed to engage with the NDRC, they know you'll lose your value to your client. You can see why people are afraid," said the Chinese lawyer who has appeared in front of the NDRC.

Legal experts say local lawyers are put in an awkward position as attorney-client privilege is a grey area in China and not officially recognized under law.

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In a report this month, the U.S.-China Business Council (USCBC) noted its members' concerns about being pressured to "admit guilt" in antitrust investigations without being able to see or respond to evidence. It said company lawyers were at times not allowed to be on site during 'dawn raids' of company offices by investigators or at later proceedings. It also noted that regulators had indicated that attempts to mount a legal defense would raise a 'red flag', signaling guilt.

Such actions may violate the NDRC's own rules on evidence gathering in price-related cases. A 2013 amendment to the agency's provisions on obtaining evidence stipulates: "Law enforcement personnel shall not collect evidence by menace, luring, fraud or any other unlawful means."

"The NDRC explicitly informs the enterprises under investigation of facts of alleged breaches, reasons and grounds for intended penal decisions, and their rights to make statements, defend themselves and apply for hearings," China's three antitrust regulators said in a joint statement last week.

Concerns about China's brand of antitrust enforcement were raised at high-level strategic talks between the United States and China in July. The U.S. Chamber of Commerce wrote to U.S. Secretary of State John Kerry and Treasury Secretary Jacob Lew in April urging Washington to get tough on what it called Beijing's use of competition policy to advance its industrial agenda.

"We hope the NDRC can respect procedures and companies' rights and be more transparent," said one influential Chinese antitrust lawyer. "It's so sensitive that none of us dare speak about it."

Read MoreThis is what China's antitrust drive is really about

Driving the culture

Several people with direct knowledge of some of the highest profile NDRC cases described Xu Kunlin as a resourceful and savvy official, and, in public, a vocal proponent of the sanctity of China's anti-monopoly law. Behind the scenes, however, they say he is defensive when his bureau is criticized and breaks the constraints of due process in his zeal for results. He is known as an intimidating personality, who knows how to apply media pressure and engage companies in a trial of public opinion to bend negotiations in his favor.

"Xu is a commanding presence. He's a politician. The feeling is that he's driving the culture within the bureau," said the executive who has sat in on meetings with both Xu's.

If Xu Xinyu – "Mr. Confession" – is the man who delivers the punch, Xu Kunlin is the brains behind the bureau's tactics, say people in China's antitrust circles. "There's a real sense that Xu Xinyu is Director General Xu's man, that they're close," the executive said.

A lifetime NDRC official, Xu Kunlin, now 49, was a young director general among the heads of the agency's 30-plus departments and bureaus when he took on the role in December 2009. Born in Yongchun county in the southern coastal province of Fujian, Xu spent years in the NDRC's powerful pricing department.

He attends only meetings with the highest level executives from the major companies under investigation, say people involved in NDRC antitrust issues. Even when he is not present at meetings, his subordinates seek his approval and run messages back and forth. NDRC staff are known to break off from meetings to present Xu with updated offers. He rebuffs those he considers "insincere", executives said.

Read MoreLew warns China on antitrust probes: WSJ

The NDRC did not respond to a Reuters inquiry about the use of intimidation tactics, but Xu Kunlin has defended publicly his bureau's conduct. At a press briefing last week, Xu said he had asked companies under NDRC investigation about allegations of intimidation raised by business lobbies.

"They said they didn't make those criticisms and they didn't represent their opinions," Xu told reporters. "Our antitrust enforcement work is strictly conducted according to regulations. It is fair and transparent."

The NDRC says it has reviewed 335 anti-monopoly cases, among which just 33 involved foreign-invested companies. Critics argue, however, that the agency's statistics are not transparent.

Nonetheless, major investigations and the largest fines have tended to be focused on foreign-invested companies. "It is the market position of large companies that makes them inevitably the main object of market regulators," the three antitrust enforcers said in their joint statement.

Reading Beijing's stance on antitrust campaign
Reading Beijing's stance on antitrust campaign   

Single agency

As Xu's bureau ramps up enforcement activity and cements its reputation as the most aggressive of China's antitrust enforcers, there is growing debate locally whether to have a single agency responsible for the Anti-Monopoly Law - currently enforced by the NDRC, the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce.

Read MoreChina anti-trust regulator conducts new raids on Microsoft, Accenture

That has spurred speculation that the agencies are jockeying for position, though they play down any notion of in-fighting.

When the SAIC raided Microsoft's offices in July, antitrust circles buzzed that the agency was responding to the NDRC and Xu, who had raised the stakes with his high-profile investigations and record fines.

Last December, Xu ruffled feathers when he said in the official English newspaper China Daily that the three agencies had "overlapping" responsibilities, and he favored merging their antitrust bureaus into one government body tasked with carrying out unified law enforcement efforts.

Some took that as a veiled bid for his department to be crowned China's top antitrust regulator.

"The empire, long divided, must unite," Xu later demurred at a press briefing, borrowing the opening phrase from the classic Chinese novel "Romance of the Three Kingdoms" – about the power struggles of three states vying for dominance in post-Han dynasty China.