Corruption Risks — China Travel Edition (Part III)

Part I of this series (here) addressed abuses of travel agencies, and Part II (here) detailed common euphemisms and fact patterns in China to disguise leisure travel benefits. Today’s post focuses on contractual travel and travel required under PRC law.

Contractual Travel

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.

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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 here.