Corruption in China could be regarded as a cultural habit, deeply-rooted since Mao’s post-reforms period. Yesterday and today bribes are not only paid in cash but also in kind offerings (cigarettes, liquors, and gifts). In any form, corruption typically involves the purchasing and/or the sales departments, and it engages both Chinese and foreign companies. These must adopt measures to avoid being caught in offense of fraud ruining their reputation.
In China, fraud risk can appear in three different segments: when reporting fraud, when misappropriating company’s assets, and when managing the integrity of the company. The third one involves bribery and corruption, known as being pervasive to the Chinese economy. Ownership control, internal structure weaknesses, irregular accounting practices are often the most critical risks that enterprises face.
The following case study about bribery in a foreign invested company doing business in China aims at giving measures to detect fraud.
According to Transparency International, in 2016 China ranked 79th in the global corruption perception index; it scored 40/100 in the perceived level of public sector corruption (0 is highly corrupted – 100 is clean).
Although the Chinese government’s recent anti-corruption efforts at both public and private level are slowly bringing corruption under control, it remains severely widespread in the country.
Corruption can take 4 main forms in a company or organization:
Corruption in most cases involves two individuals: a party who pays and a party who accepts the payment, both of whom share the purpose of profiting from the transaction. When corruption is properly committed, tracks are hard to notice: the parties never openly discuss the transaction, they hide payments, and use cash.
According to our experience, there are signals that can give an alert of possible corruption. For example, as corruption in China mostly engages purchases and sales, these are the first departments that should be investigated.
As a matter of facts, cases of fraud involving the above-mentioned departments are frequent. We will take the example of two foreign companies get defrauded:
The first case, bribery in a purchasing department, involved a UK manufacturing company based in Wuhan, central China. The foreign management hired S.J. Grand to review the purchasing team’s activities as they were noticing discrepancies in the products prices. Our review identified that the raw materials and semi-finished goods were purchased above market prices by a wide margin. We could also establish that there was a collusion between the purchasing manager and more than one supplier to share the price difference in the form of luxurious personal gifts and shopping cards with high monetary value. This deceitful practice, which is common in many industries, directly impacted the company bottom line.
The second case, bribery in a sales department, involved a Chinese-Dutch invested distribution company based in Shenzhen, southern China. It was again the foreign management team to ask for S.J. Grand’s support. They believed the sales prices, together with terms and conditions, were not in line with the market practices they expected. Our team confirmed the allegation after a 2 days on-site investigation. Prices were indeed not in line with the market’s standards and the company’s seals team was evidently living above the standards they could have afforded with just their remunerations. Sales people were receiving bribes in order to sell below the market, they were not pursuing accounts receivables and they were giving extraordinary sales terms, such as extremely long payment terms. The company suffered for a reputation damage, as bribery practices were well ingrained in the purchasing team and had become the norm.
The result obtained after the investigation phase was supported with documents proving that in both companies the staff was being bribed and was accepting bribes. In China, corruption can become a “dance” that silently moves among departments and key roles damaging your revenues and your public image (especially abroad). Corruption shapes the mind of your employees, who benefit with small efforts and do not see a real threat corresponding to their actions.
As mentioned, noticing some signals of corruption is possible. In most cases, these can be seen in some employees’ behaviors:
Also, being reluctant to provide information to auditors may be a clear sign of fraud.
If you detect one or more of these “red flags” in your enterprise, don’t think about it twice: contact us to perform a first investigation. In China, in many cases, relying on a single individual or on local staff having good relations with Authorities is not prudent. It is advisable to structure cooperative relations with officials, rather than giving free hand to a single person.
Even if it is not possible to totally prevent briberies and corruption, effective strategies can be used. Among others, these can include:
Knowing how to read a behavior is sometimes essential to discover illegal practices. Our international professionals are able to mitigate the risk of fraud thanks to more than 15 years of direct experience in China and Asia. Contact us if you have any inquiries.