In addition to worrying about improper payments to government officials, you should review your commission payments with an eye toward identifying commercial bribery risks. Properly vet agents and transactions, and be sure commissions are paid for service and not influence. You need to emphasise Chinese law prohibitions as well as foreign anti-bribery laws.

Guan Feng
Partner
King & Wood







The international perspective


PRC law covers both bribery of officials and commercial bribery. In some respects it is broader than the United States' Foreign Corrupt Practices Act (FCPA), which focuses on bribery of foreign officials. Under the FCPA, the category “foreign officials” includes employees of state-owned enterprises. The FCPA also allows for liability for breach of anti-bribery regulations in the host country. The new UK anti-bribery legislation is equally broad and may in practice have broader coverage than the jurisdiction under the FCPA. It is interesting to note that traditionally in China, the authorities have focused on the recipient of the bribes, whereas the FCPA has focused on the payer of the bribe. That dynamic is changing and in China, we are seeing a greater focus on corruption in companies and bribery in the commercial context.

You are correct that the bribery schemes have become more creative. It is no longer simply a red envelope passed at dinner. Often several departments cooperate together, for example, sales colludes with purchasing to make unlawful payments through vendors to state-owned enterprises. In turn, this scheme requires the engineering department to alter the project requirements to increase the value of the vendor purchase to allow for the amount to be passed through as the bribe. Embezzlement continues through related company contracts and improper agent bribes disguised as legitimate contracts, ostensibly providing a commission for services rendered. The use of fapiao (official invoices) continues to be a source of trade and improper, non-transparent accounting practices. There has also been an increase in tax matters, particularly unrecognised income and fraudulent issuance of value-added tax (Vat) invoices.

You should be mindful of the following possible warning signs: 1) sole selection on vendors or favoured vendors; 2) large reimbursements or reimbursements submitted with unrelated fapiao; 3) frequent whistle-blowing by employees or tips from trusted vendors and agents; 4) managers, who are deeply involved in the approval of all transactions, or who always turn to favoured employees to accomplish transactions; and 5) delay in receipt of requested data from the accounting department. You should do the following: 1) periodic random audits; 2) frequent training on code of conduct and related policies; 3) properly vet vendors, distributors and agents; 4) monitor the delegation of authority; 5) incorporate anti-bribery provisions in your contracts; and 5) be open to the business needs of the sales and purchasing staff by trying to find ways for them to lawfully meet targets. Always be sensitive to the fact that business is based on relationships in China. You need to co-opt your staff in the compliance endeavour and not alienate them. By understanding the business reality they face, you can work with them to find compliant solutions to achieve the business objectives.

Meg Utterback
Partner
King & Wood

The specialist perspective


We are now seeing more systematic frauds by senior executives that take place over an extended period, causing significantly more financial, legal and compliance exposure than isolated kickback and bribery incidents.

In order to combat fraud, you need to understand the makeup of today's common fraud schemes in China which include:

1. Conflict of interest – a successful entrepreneur rarely has only one business, he usually has several similar or complementary businesses which may be in his name or in his family members' names. It is common to find the entrepreneur siphoning funds from the company in which he is employed to support his “side” business.

2. Collusion – be it cross-departmental or with third parties in the supply chain, the ringleader recruits like-minded accomplices in an effort to increase the financial reward. The invoked “code of silence” allows the fraud syndicate to fester within the organisation for years.

Prevention: High staff turnover, especially among senior managers, should be a red flag. It becomes easier for corrupt staff to trick new hires into accepting a fraudulent status quo and can be explained away as “the way things are done.”

For foreign companies, allowing a local CEO to become the single communication channel with headquarters is dangerous. In China, senior hires commonly bring along a team from their former companies; this can result in cliques being formed that tie employee loyalty to the boss rather than the company.

Put in place a whistleblower program taking into account the local culture. An effective whistle-blowing mechanism needs to be independent, consistent and well-communicated. Over time, the employees need to be confident that they will not be retaliated against for voicing their concerns; complaints should be vigorously investigated by parties without vested interest or bias; complaints should not be manipulated as a tool for a witch hunt to further personal agendas; disciplinary actions on proven offenders should be fair and consistent.

When hiring a local manager in China, do not assume that strong local expertise negates the need for thorough due diligence. It is important to establish independently whether or not the local partner has the government relationships that he or she claims, and whether this relationship is an institutional alliance based on operational strength and contributions to the local economy or, more dubiously, a relationship based on personal “blessings” from select individual benefactors.

As governments worldwide crack down harder on corruption, companies need to be able to demonstrate they have taken all reasonable steps to prevent the bribery of private or public officials.





Violet Ho
Managing Director, Head of China
Kroll