China: False expense claims and serious violation of discipline

Labour Law Newsletter
Last Updated: 18 February 2015

by Maggie Kong, Shane Lou, Susan Shan, Kent Xu, Grace Yang, Anderson Zhang and John Zhou

Our labor law team recently dealt with several cases concerning employers dismissing their employees due to false expense claims. Such cases occur universally, in which the employees involved can be categorized as follows:

  1. Senior Executives

Senior executives are dismissed mainly for two reasons in the application for expense claims:

  1. changing relevant personnel or practicing office politics

It is usually an efficient, faster and easier strategy to change senior executives without making it public by studying their expense claims. Ordinarily, everyone gets along quite well. However, once the head office or the parent company, shareholders, or the board of directors intend to change senior executives, the financial department including the internal audit department of the company, will audit every invoice submitted by those senior executives. Once the senior executives are found to have violated the regulations, they will be threatened or induced (given that the potential employer will do background checks) to resign.

  1. Senior executives themselves seek personal interests by taking advantage of their position.

As senior executives hold many resources of their company, they will usually seek personal interests by taking advantage of their positions if they bear poor professional ethics, such as applying for reimbursing inexistent expenses. Undoubtedly, the company will dismiss them under this circumstance.

  1. Salespersons

Salespersons apply for false reimbursement mainly for the following four reasons:

  1. selling by granting sales commission

When pricing the products, some companies have taken into account the "commercial bribery" for transfer payment made by the salespersons. After achieving the sales budget, the company will grant bonuses to their employees at a certain ratio based on the sales volume that has been achieved. The salespersons have to provide invoices stipulated by the company when acquiring such bonuses. To gain their bonus, some salespersons will collect false invoices by any means, and thus apply for expense claims.

  1. fixed amount of subsidy

For the purpose of avoiding paying heavy individual taxes, some companies encourage their employees to gain the amount of subsidy by applying for expense claims, which should have been paid as salary.

  1. increasing the internal audit standards

In the huge storm of anti-bribery and anti-corruption, many companies increase the audit standards for expense claims, in which the invoices that could have been permitted are now rejected by companies and regarded as false expense claims because "the invoices does not conform to the items declared" .

  1. misappropriating the company's properties maliciously

For the sake of increasing their income, some salespersons will defraud the company of its property in the application for expense claims by fabricating nonexistent project expenses or exaggerating the actual expense.

False expense claims include providing false invoices, exaggerating the amount of expenses, conspiring with a third party and so on. What's more, there are various forms of false invoices, which will not be detailed here. Some companies set false expense claims as one serious violation of discipline in the handbook and give the severest punishment, namely immediate dismissal. Even though many more companies fail to specifically set out "false expense claims", they can also cite the following provisions concerning serious violation of discipline:

  • Deceiving the company;
  • Seeking personal interests by taking advantage of the position;
  • Misappropriating the company's property;
  • Violating specific rules and regulations of the company;
  • Violating laws and regulations;
  • Being engaged in commercial bribery; and
  • Damaging the social image of the company.

If the amount of false expense claims is relatively large, the acts of the employee involved may constitute misappropriation and the employee may be investigated for criminal activity. The Supreme People's Procuratorate and the Ministry of Public Security provides that, if the amount involved in the misappropriation crime is more than 5,000 RMB~10,000 RMB (as the case may be), the case shall be placed on file and the person involved shall be prosecuted. Beijing and Shanghai have set out specific standards for filing cases concerning misappropriation crime.

Case Study: Termination due to False Expense Claims

Mr. Wang took the post of sales representative in a medical company in 2001, and concluded a non-fixed term labor contract with the company in 2009. In 2013, his monthly average salary was 45,300 RMB (pre-tax). Before being dismissed, Mr. Wang took the position of regional sales manager. In September 2013, the medical company arranged medical experts and chief physicians to hold a two-day academic conference in Beijing, which was organized by a conference company. Mr. Wang conspired with the conference company to maliciously raise the conference cost and use the part of fees exceeding the normal cost to entertain 5 chief physicians. In December 2013, the medical company found out in the internal audit that the conference cost was extremely high. Upon investigation of all staff engaged in the conference, the medical company firmly believed that Mr. Wang violated the company's policy that "It is prohibited to bribe or entertain clients without permission" and thus dismissed Mr. Wang in January 2014. Upon receipt of the notification on dismissal, Mr. Wang applied for labor arbitration immediately, with claims of the labor dispute arbitration committee holding the termination of labor contract to be illegal and the company to make compensation.

In the court hearing, Mr. Wang argued that the academic conference was arranged and all conference expenses were reimbursed by the medical company, and violated no rules or regulations as a person in charge. But, after finishing the court hearing, the arbitral tribunal held that, all entertainment services other than the academic conference are not included in the academic conference agenda, while the entertainment expenses were covered by the conference fees rather than reimbursed separately, and that Mr. Wang was fully aware of the company's policy of prohibiting bribery and prohibiting entertaining clients alone, and that the company is entitled to dismiss Mr. Wang in accordance with laws as he has violated the company's regulations.

Through dealing with this case, I realized that bribery occurs in various forms and is becoming more covert. It's necessary for companies to fix evidences at any time when investigating such violations in order to dig into the inside story of expense claims. In addition, during the court hearing, combining present political and social situations, lawyers should better state to arbitrators and judges the significant harm caused by commercial bribery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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