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Is your general manager stealing from you? Caddie Shanghai gets defrauded

“Surprised that your local manager is running off with company money? It is always disappointing to see that foreign managers or business owners release control over their Chinese subsidiary”, mentions Stephane Grand, Managing Director of S.J. Grand Financial and Tax Advisory. That’s the case happened with Caddie Shanghai, the Chinese branch of Caddie France that was defrauded back in 2012. Identifying the culprit(s) in a fraud in China is not always difficult: in most episodes he/her are encouraged to act shifty thanks to a lack of internal monitoring, as well as an absence of in-house systems. When there isn’t control, the perfect environment to commit fraud is created: employees with any sort of personal or financial needs see the opportunity to embezzle and profit.

With this second Case Study about fraud in Chinese companies, we analyze how adequate internal control systems can be beneficial to manage a distant branch. The only client name appearing in this sequence of Case Studies is Caddie, as the company’s owner decided to communicate the fraud to the press.

Case details

Client name:
Confidential
Started
May 10, 2012
Completed:
June 10, 2012
Value:
$ 125 000
Category:
Fraud Cases

Caddie, the shopping trolley industry’s world leader, was founded 90 years ago in France. Before 2010, the company seized the opportunity offered by the growing food retail industry in China, opening a factory in the Shanghai municipality. At that time, China was going to become today’s first world’s grocery market. And, as Caddie’s trolleys also serves airports, hotels, and hospitals, the country’s fast-racing development seemed the perfect target.

The Shanghai factory, once established, started to be managed by Caddie’s former importer. The subsidiary was locally producing the shopping trolleys to sell them both to the Chinese and the Asian markets. In 2010, Caddie Shanghai was generating 25% of the group’s total turnover. That’s when the management released control, perhaps because reassured by the good economic performance.

Nevertheless, at the end of the same year, the company run into financial troubles. The Chinese operation went largely unmonitored for over a year. To recover the economic loss and relaunch Caddie Shanghai, Altia Group, a French Private Equity Fund, purchased it in 2012 aiming at restructuring the factory’s operations.

S.J. Grand was hired in late 2012 to conduct the pre-acquisition audit. “During the investigation’s first phases, we promptly realized severe accounting irregularities were taking place: somebody was getting richer and richer behind the back of the company’s ownership”, continues Stephane. Indeed, after more accurate investigation, we pointed out a fraud was happening.

Sometimes, the scam is so big that is almost hard to believe.

As a matter of facts, the Chinese General Manager was hiding that he founded 17 companies to supply raw materials and machines, as well as to purchase finished products, diverting the company’s profits into his pockets. As this wasn’t enough, he also opened a bank account in Hong Kong to divert revenues of foreign sales. Smart guy.

“Be pitiless and cold-hearted, don’t let the felon get away with its crime!”

Although we recommended the new ownership to strike hard and fast, they tried to negotiate with the General Manager and this led them nowhere but to the abyss. The sly General Manager went to the next level starting to move the machines out of the premises to a new factory established across the river in Jiangsu. This new factory was using the brand name Caddie, violating the company’s name property right. Moreover, the felon and the company’s bank manager came from the same small village in inner China. The fact hided a possible collusion, even if we didn’t succeed to prove it.

During the whole investigation, the General Manager refused to cooperate. When senior executives show aggressive behaviors, not only during the audit but also when making critical financial decisions, they are most likely committing a crime. Ethical weakness and anger can be powerful signs to unveil shifty personalities. The manager, after being officially fired by the new ownership, refused to return official documents prohibiting the company to change registration. In this way, he (un)officially remained the head of the Shanghai branch, in spite the shareholders’ decision.

This case of fraud demonstrates that, no matter the size of your company, a serious embezzlement can be under your nose. The fraud in Caddie China involved the following illegal circumstances:

  • Parallel companies: creation of 17 parallel companies that sold and bought raw materials and finished products to divert extra money in the manager’s pockets;
  • Embezzlement: opening of a bank account in Hong Kong to divert profits coming from abroad;
  • Potential collusion: corruption or favors between the company’s bank manager and the General Manager;
  • IP infringement: stealing the brand’s name by opening a second company named Caddie.

Case Study China - S.J. Grand

The investigation’s result was clear: the Chinese company was defrauded. S. J. Grand spur Caddie to sue the General Manager, as evidences against him were irrefutable. This time the company ownership followed our advice: in March 2013, the Chinese manager was sued for embezzlement and theft, and Caddie Jiangsu for IP infringement. Caddie France won the lawsuit, imposing a hefty fine and 2-year imprisonment.

The damage caused to Caddie was estimated at several million Euro, but the exact sum is undisclosed. However, it is public, thus reportable here, that the company’s turnover in 2012 was EUR 15 million, and most of it had been diverted into other companies’ accounts.

Why should you be so concerned if something unexpected happens? Because consequences of fraud bring with them a negative and costly impact in terms of:

  • Financial loss;
  • Fines and penalties, which can even be heavier that the loss itself;
  • Shareholders and investors mistrust;
  • Loss of image and reputation;
  • Demotivation of the personnel.

Besides the financial loss and the risk of penalty under the law, great pressure from the public may damage the company’s reputation and, consequently, make distrust it. This often lead shareholders to stop investing in it, and clients to stop buying its products reducing the company’s market share.

WAYS TO PREVENT FRAUD ACCORDING TO THIS CASE STUDY

Winning a lawsuit is a relief, but wouldn’t be better to avoid one? In China, going to court is really costly. If multinationals could somehow afford the sum; many SMEs could lose more money with their legal counselor, rather than with the fraud itself.

Therefore, how to avoid getting defrauded?

  • Due Diligence: before letting your Chinese partner manage your company, conduct a due diligence on him/her;
  • Improve control: make sure all internal policies and procedures are in compliance with the law;
  • Internal audits: organize internal audits on a regular basis;
  • Company chops: power control and supervision, especially monitoring the use of company chops;
  • Anti-fraud trainings: prepare your employees and encourage them to report shady facts;
  • Be present: avoid releasing control, anytime.

If you’re sensing strange behaviors, or you’re receiving more and more complains on the product’s quality for example, get in touch with us. Our team of professionals can help you figuring out what’s going on. Believing in transparency as a key to manage any kind of business, S.J. Grand detects and uproots fraud with a fast and effective action.