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 (信天游, Chinese only) 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” (阴阳合同).)
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 (“全包”), 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.
Tomorrow’s post will address “training” trips, factory “inspections,” “study trips,” and other euphemisms for disguised leisure travel.
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.