I recently wrote on the FCPA Blog about anti-corruption internal controls in China related to the Bruker Corporation settlement. That post focused mainly on policy translation, local language training, and independent compliance oversight of local operations. Another common compliance weakness, in my experience, relates to disbursement controls in China — specifically, the unfortunately all-too-common problem of inauthentic fa piao.
Fa piao are receipts issued to vendors by the Chinese tax authorities. There has long been a significant market for fake, or more recently, “cloned” fa piao — cloned in the sense that they replicate details of a previously issued authentic fa piao.
This is not an “underground” problem. A 2013 New York Times article said buyers use fa piao “to evade taxes and defraud employers. And in a country rife with corruption, they are the grease for schemes to bribe officials and business partners. Making them and using them is illegal in China. Some people have been executed for the crime. But demand is so strong that a surprising amount of deal-making takes place out in public.”
An inauthentic fa piao is not necessarily proof of fraud or embezzlement by the employee. Vendors themselves may issue bad ones to evade taxes. But fake fa piao should be considered risk indicators and used as a basis for a follow-up inquiry. Testing every fa piao can also be prohibitively time-consuming and expensive, and likely unnecessary. So it’s better to develop a risk-based approach to identify thresholds or receipt types or both to be verified (e.g, over RMB 500, certain vendor types, etc.).
Compliance, legal, and internal audit personnel involved with anti-fraud or anti-corruption compliance (or controls testing) should know the problem of inauthentic fa piao exists. Finance and accounting personnel should be trained how to spot the fake receipts. For example, fa piao typically contain a “password” covered by a seal similar to a scratch-off lottery ticket. Once uncovered, the password can be used to validate some of the basic details of the receipt (vendor name, etc.).
(Those of us in the industry joke that it’s easy to spot the colleague who has just returned from performing anti-corruption forensic accounting procedures in China. Their clothes, computer bags and coins are covered with the grey scratch-off material.)
The business of making and selling inauthentic fa piao has become more sophisticated. Some counterfeiters have switched from outright fakes to the “clones.” And sellers are now writing the Chinese characters for fa piao next to a mobile phone number in chalk on the pavement rather than hovering around train stations with booklets hawking them openly. With China’s aggressive anti-corruption campaign, the trend toward harder-to-detect fake fa piao is likely to continue.
Pete Viksnins, a long-time friend of the FCPA Blog, recently joined the Forensic, Investigative and Dispute Services practice at Grant Thornton LLP, based in McLean, Va. He’s also an adjunct professor at The George Washington University, where he teaches the Fraud Examination and Forensic Accounting course to Masters of Accountancy candidates. He can be reached here.