Part I of this series explained what fapiaos are and why they are used, and Part 2 explained the different types of receipts and fapiaos in China. Today, we explore the most common fapiao-related schemes.
Because fapiaos are ubiquitous in the Chinese business landscape, there are various schemes for misusing them.
Inflated fapiaos. Some establishments will issue an authentic fapiao but in an amount greater than the actual expense. A portion of the difference will be kicked back to the establishment to cover the tax on the difference, and/or to an individual at the establishment who issued the fapiao. For instance, an employee may have a business-related meal at a restaurant with a client, and the waiter delivers a bill of RMB 400.( RMB 1 equals $0.16)
The company employee discusses and agrees with the waiter (or restaurant owner) to create a fapiao for RMB 600. The company employee pays the restaurant the RMB 400, plus perhaps RMB 50 to the restaurant to cover the incremental tax. The employee seeks reimbursement for RMB 600 using the inflated fapiao, even though he only spent RMB 400. The remaining RMB 150 could be pocketed by the company employee, shared with the client, or used to fund a bribe. This was common several years ago with travel agencies. (See my June 2013 post here, which was published a month prior to media scrutiny of the practice starting in July 2013.)
Fake fapiaos. Anyone who speaks or reads Chinese and lives in China knows the legions of advertisements for fake fapiaos. Ads can be found on business cards stuck in elevators and subway cars. Spray-paint fapiao offers are stenciled onto walls. Owners of Chinese mobile phones routinely receive SMS/text messages advertising fake fapiaos. (The civil and criminal penalties for making, issuing, selling, and purchasing fake fapiaos seem to have a limited deterrent effect.) Fake fapiaos look real but cannot be verified through the local tax bureau, although some advertisements for fapiaos assert that they can in fact be verified. (We’lll talk more about verification in the final Part 4.)
In this scheme, an unscrupulous employee purchases a book of these fake fapiaos for a low price — for instance, RMB 100. The face value of the fake fapiaos is much higher — perhaps RMB 2000. The unscrupulous employee submits these fake fapiaos to the company for reimbursement. If the employee is able to get away with it, he has made a tidy profit of RMB 1900, which can be pocketed or used for an improper payment.
Borrowed fapiao machines. Establishments (often a restaurant) sometimes “rent out” their fapiao machines to a third party, who then print fictitious fapiaos and pays a fee to the restaurant for use of the machine. The third party sell fapiaos to unscrupulous employees, which seek reimbursement from the company similar to the scenario above.
In this scenario, no transaction actually occurs, but because the fapiao was printed from a legitimate fapiao machine, the fapiao can be verified with the local tax bureau, which makes detection more difficult.
A variation of this scenario is the “cloned” fapiao, which a duplicate fapiao is printed from a legitimate machine containing the same transaction details, such as date, time, and amount. In this variation, an employee obtains a duplicate fapiao and then submits two fapiaos at different times and is reimbursed twice for the same expenses. (Alternatively, the employee shares the duplicate with a co-worker/friend, who seeks reimbursement as well.) Because both the original and the duplicate fapiaos were printed from a legitimate machine, the fapiao can be verified with the local tax bureau.
“Substitute” fapiaos (替代发票). Another common scheme is for an employee to seek reimbursement for a personal expense that is not work-related expense (for example, a meal with one’s family or friends, or gas for a personal car). In this scenario, the employee claims in the expense report that she had dinner with a customer when in fact she had dinner with her family. A transaction actually occurred and the fapiao is “real” and verifiable, but the transaction was not as the employee described.
Fapiaos with incorrect descriptions. Many stores ask consumers how they want the description listed on the fapiao. Unscrupulous employees could ask for the expense to be listed as something innocuous when it was in fact gifts or gift cards. Descriptions such as “office supplies” (办公用品), “stationery” (文具), and “daily use items” (日用品) are commonly used in this scenario.
Real fapiaos. As the name suggests, the transaction occurs exactly as the employee describes.
The following table attempts to outline these different schemes.
Tomorrow we’ll examine compliance strategies to minimize fapiao-related fraud risk.
Eric Carlson, a contributing editor of the FCPA Blog, is a 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.