Multinational companies operating in the country should adapt
their compliance programs in light of the risk of civil and
Fraudulent official receipts—or
"fapiao"(the Chinese word for an official
invoice)—pose serious obstacles to multinational corporations
operating in China and underscore the need for both flexible
compliance procedures tailored to country-specific risks and
significant internal investigative responses to travel and
entertainment irregularities in Chinese operations.
Recent news reports disclosed that major
investigations have been undertaken on allegations that fraudulent
fapiao are being exploited by employees of multinational
corporations to conceal improper payments.1 Our
experience conducting internal investigations and compliance
reviews in China has confirmed that fraudulent fapiao are
widely available in black markets and are used as a means to
fraudulently obtain funds from legitimate company operations.
Differentiating between fraudulent receipts and legitimate ones can
be difficult for both regulators and corporations. As explained by
TheNew York Times, "[d]etecting fake or
doctored receipts is a challenge for tax collectors, small
businesses and China's state-run enterprises," and such
schemes are "so pervasive that auditors at multinational
corporations are also being duped."2 Fake
receipts—including travel receipts, lease receipts, and
value-added tax receipts—have become "the grease for
schemes to bribe officials and business
Although these doctored receipts are illegal in China and
violators risk capital punishment, the demand for fake records is
so strong that a surprising amount of the dealmaking is conducted
in public. TheNew York Times reported that
"[s]igns posted throughout [Shanghai] advertise all kinds of
fake receipts" and that "[p]romotions for counterfeit
'fapiao' . . . are sent by fax and through mobile
phone text messages."4 Recently,
PricewaterhouseCoopers issued a report on doing business in China, which noted
that "[u]se of fake fapiao and supporting
documentation is the most common mechanism to extract cash from
firms, either as fraud to enrich employees or as a means to fund
bribes which may constitute a violation of the [Foreign Corrupt
Practices Act] and/or the UK Bribery Act."5
As evidenced by several U.S. enforcement cases stemming from
this practice, multinational corporations operating in China need
to be aware of the risks posed by fraudulent receipts and adapt
their compliance programs to screen for and prevent such practices.
The implementation of global compliance procedures without
accounting for country-specific risks, such as counterfeit
fapiao, can increase companies' risk of exposure to
criminal liability and reputational damage both within and beyond
The risks posed by fraudulent receipts are heightened for
industries "where the target market is constituted largely of
individuals who meet the U.S. Department of Justice's
definition of 'government officials,'" including the
pharmaceutical and medical device industries.6 A recent article from the Xinhua News Agency,
the official press agency of China, reported that Chinese
prosecutors received a record number of bribery inquiries (more
than 600,000) during the first six months of 2013 and that the
Supreme People's Procuratorate—China's highest
national agency for prosecution and investigation—is actively
targeting "construction projects, government procurement,
public resources use, bank loans, the purchase of pharmaceutical
and medical equipment, transportation, commerce, and personnel
management" in its fight against corruption.7
Morgan Lewis's White Collar Practice
Morgan Lewis's national and international White Collar
Practice features dozens of former prosecutors and former
high-level government officials whose experience representing
companies and individuals covers a broad array of substantive white
collar and government enforcement areas, including, among
False Claims Act
Industrial accidents and workplace safety
Securities fraud/SEC enforcement
David Barboza, Coin of Realm in China Graft: Phony
Receipts, N.Y. Times, Aug. 4, 2013, at A1.
PricewaterhouseCoopers, Doing Business and Investing in
China 59 (2013).
Yang Yi, Inquiries over bribery up in China (July 15,
Copyright 2013. Morgan, Lewis & Bockius LLP. All Rights
This article is provided as a general informational service
and it should not be construed as imparting legal advice on any
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
On Halloween eve, three years after authorization by the JOBS Act, the SEC finally adopted rules permitting small ventures and business startups to raise up to $1 million over a 12-month period by selling shares...
The SEC recently issued under the JOBS Act the long-awaited crowdfunding rules, whereby small businesses may raise capital from a large number of investors, each of whom contributes a small amount of money, without going through the trouble of filing a registration statement with the SEC.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
In her year and a half as Assistant Attorney General in charge of the Criminal Division, Leslie R. Caldwell has repeatedly emphasized the importance of a company having a compliance program fine-tuned to its specific risks to prevent fraud and corruption.
In our latest client alert, we provide a detailed overview of the final rules, Regulation Crowdfunding, which will be applicable to crowdfunding offerings conducted in reliance on Section 4(a)(6) of the Securities Act of 1933 as amended.