Ed. Note-last month Eric Carlson had a three blog post in the FCPA Blog where he discussed travel risks and corruption in China. I asked Eric if I could combine his posts and repost them as one blog post on this site, which he graciously allowed me to do.
In any country, paying for travel for government officials, customers at state-owned enterprises, or customers at purely private enterprises can present corruption risks. Many worthy publications have addressed travel risks generally and how to minimize those risks, including establishing a true business purpose for the trip, ensuring transparency with the recipient’s organization, pre-approving a detailed itinerary to ensure that sightseeing/leisure does not predominate, paying expenses directly to vendors where possible, avoiding unnecessary stopovers or family members or friends accompanying, etc.
In my experience counseling clients operating in China and conducting numerous internal investigations in China, there are several travel-related risk areas that occur uniquely, differently, or more frequently in China: (1) abuse of travel agencies; (2) “training” trips, factory “inspections,” “study trips,” and other euphemisms for disguised leisure travel; (3) contractual travel; and (4) travel “required” by PRC law.
This series will address each area in turn, with the backdrop of other China-related enforcement actions based in whole or in part on improper travel benefits: Lucent (2007), Siemens (2008), Control Components (2009), Avery Dennison (2009), UTStarcom (2009), Daimler (2010), Alliance One (2010), IBM (2011), Biomet (2012), and Pfizer/Wyeth (2012).
Abuse of Travel Agencies
While many travel agencies in China provide legitimate services, some travel agencies — regardless of their size and reputation — are a common way for employees to circumvent company procedures. This can occur in a variety of ways, some of which are interrelated:
Event planning abuses. In addition to arranging air and train tickets and hotel bookings, many travel agencies in China also serve as meeting and event organizers. Company employees may collude with travel agencies or their employees to submit inflated fapiaos (tax-valid receipts) or fapiaos for events that never actually occurred. The fapiaos are submitted to the company for reimbursement, and the (excess) funds are either pocketed or used for other purposes (bribes, employee bonuses, slush funds, off-book accounts, etc.).
Mixture of legitimate and illegitimate travel. Sometimes money paid from the company to a travel agency for legitimate travel is, with the complicity of company employees, siphoned off for use in unapproved travel for government officials or company customers arranged by the travel agency.
Other collusion with travel agencies. Another practice is to have a company employee book a plane ticket through a travel agency and pay for the ticket, which then issues a fapiao. The employee then cancels the trip, gets the money refunded from the colluding travel agency (minus a “service fee” withheld by the travel agency — a common amount is 15%), and takes the fapiao to the company to get reimbursed. As above, the funds are then either pocketed or used for other (often improper) purposes. The website Travel Sky) can be used to check whether a domestic plane ticket has actually be used.
Parallel itineraries. A company employee requests the travel agency to prepare two itineraries: one for internal company approval that shows little or no sightseeing, no per diems, etc., and a second “real” itinerary with extensive sightseeing, per diems (often handed out in an envelope at the airport), lavish or inappropriate hospitality, etc. (These parallel contracts are sometimes referred to in China as “yin-yang contracts”.)
Variation: the travel agency prepares, and the company approves, an itinerary that reflects a modest class of travel for government officials or customers (economy-class flights, business hotels), but the actual travel benefits provided by the travel agency are luxury (first-class flights, five-star/resort hotels, money for shopping, etc.). The company (via its employees who collude with the travel agency) then reimburse the travel agency for these extra “upgrades” through other means.
“Package deals.” A company employee requests a travel agency to organize flights, hotels, local transportation, etc. (This is particularly common for travel outside of China, where logistics could be difficult for someone who does not have strong English abilities.) The travel agency then submits an itinerary (and later, a fapiao) with the description of package deal, which can easily conceal cash per diems, sightseeing, etc.
Companies can mitigate risks related to travel agencies by (1) ensuring that invoices, receipts, and fapiaos contain details; (2) comparing final itineraries to draft itineraries for approval; (3) providing training (in Chinese) to local employees on this topic; (4) ensuring that thorough due diligence is undertaken on travel agencies; (5) assigning the responsibility of contacting travel agencies and arranging details with them to personnel in the organization who have compliance training and are not themselves involved in the planned travel; (6) flagging this area as a specific topic for a compliance audit; (7) changing travel agency vendors from time to time, and (8) for companies with sufficiently large operations in China, bringing travel and event planning in-house.
Companies in China often pay for training trips for their customers. While many of these are legitimate, many are abused for improper purposes. Some of the common fact patterns include one or more of the following:
the training trip involves a small portion of training time and a large portion of recreation time;
the trainings are actually not technical in nature, but are sales promotions for the company’s products or services (often with a healthy helping of leisure/recreation);
the training is held frequently (quarterly, annually) when the subject matter has not changed since the previous training;
the training is not reflected in any underlying sales or services agreement;
the training is held at a resort or tourist location that lends itself to recreation;
the training is held internationally when the meetings could have been held as effectively (or more effectively) in China; and/or
the number or rank of people is not appropriate to the purported training.
A variation of the “training” trip risk area above are euphemisms for paid travel that purport to have a business purpose but may be predominantly or exclusively leisure travel. Euphemisms that could be used for either legitimate purposes or to disguise improper travel include “factory tours” or “factory inspections”, “product demonstrations”. “study trips”, “experience exchange seminars” , “technical liaison meeting”, “academic promotion activities”. In addition to the risk areas listed immediately above for training trips, common fact patterns that could indicate abuses in these additional scenarios include:
the customer already has an adequate knowledge of the technology and does not require a training session;
the individuals attending are not people with a technical background (e.g., engineers) who would be well-positioned to do a meaningful inspection or to contribute to or benefit from a technical meeting;
the attendees are selected by the seller paying for the trip rather than the buyer;
the inspection or demonstration is held on a Friday or Monday or immediately before or after a holiday to ensure a long weekend of recreation before or after the event;
the company employee pays for shopping trips or other “extra” expenses for the delegation that are reimbursed by the company as something else; and
a relative (or mistress) of the government official/customer also travels with the group as a temporary company “employee.”
We have worked with clients to structure and modify compliance programs for travel that involve ensuring a true business purpose for all such trainings, robust internal pre-approval, full transparency with the customer’s legal/compliance department, and developing “gray lists” and “black lists” of locations where trainings should not take place.
In some cases, the training trips and factory inspections referenced in Part II are included in a sales contract. The cost of the training is often included as “cost of goods sold” and simply added to the cost of the sales contract. (Various reasons are given for wanting to include the travel in the contract, including that the purchaser would not be able to get the travel approved internally otherwise, which may signal a red flag.)
While inclusion in the contract provides a small measure of transparency, in many cases the contractual clause desired by the purchases contains only a very high-level description of travel, often without important details such as what costs will/will not be covered, when the travel will occur, who will select the attendees, the number of attendees, duration of the trip, and when travel must be concluded.
In addition, we have handled many cases where the lack of specificity in the agreement has led to commercial disagreements: the purchaser comes back to the seller many months (even years) after the contract has been signed, asserting that the seller “owes” them certain travel benefits under the contract, even though the product/service has long since been delivered, undercutting any business purpose for the “training” or “factory inspection.”
Companies increasingly are seeking to ensure that sales contracts that include provisions for sponsored travel include more granular details about travel (often included in an annex or appendix to the contract), and that the travel benefits are fully transparent with the counterparty. Moreover, in many cases companies are now declining to pay the costs for customer visits, preferring for those costs to be borne by the customer directly (even if the ultimate contract price is reduced by a proportionate amount).
Travel Required Under PRC Law
Several PRC laws/regulations, particularly in the customs and quality inspection area, specify that PRC government officials are to travel to a foreign location to inspect products to ensure that the products are fit for import into China. Most of these statutes, however, are silent on who is to pay for the travel. In many cases, PRC government officials assert that the foreign company importing the product should pay for the travel.
To demonstrate lack of corrupt intent, some companies obtain legal advice from a law firm located in China on the precise requirements of and interpretation of the regulations. (We have handled several cases where local employees translated regulations into English in a manner that supports their own interpretation.)
Further, companies can work with the government entity to create additional transparency, such as a letter from the entity specifically authorizing a certain official(s) to travel on certain dates to certain locations and specifying what costs will and will not be covered.
Eric Carlson, a contributing editor of the FCPA Blog, is a Beijing-based partner at Covington & Burling LLP. He specializes in anti-corruption compliance and internal investigations, with a particular focus on China and other regions of Asia. He speaks Mandarin and Cantonese and can be contacted at firstname.lastname@example.org.