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Thursday
May212015

Fapiaos (Part 4, conclusion): How to minimize the compliance risk

Part 1 of this series explained what a fapiao is, and Part 2 outlined the different types of fapiaos in China. Part 3 described common ways that fapiaos are misused for fraud, embezzlement, and corruption.

In this concluding post, we consider ways to counter these schemes to minimize fapiao-related compliance risk.

Require third parties to submit individual fapiaos for their own expenses. Third parties engaged by a company (e.g., a conference organizer, travel agency, consultant) sometimes need to incur expenses in connection with the services they provided. Third parties submit a single, combined fapiao that includes these expenses in addition to whatever service fee the third party charges for their time or effort. From a compliance perspective, you can reasonably require that the third party submit supporting fapiaos for each separate expense that the third party incurred. Some of our clients require this and it is a good practice.

Verifying fapiaos. The Tax Bureau of every major jurisdiction in China has a website where a user can go online and verify that a fapiao is real. The information provided by the website can differ slightly for each jurisdiction. In most cases, the website will require the following numbers found on the face of the fapiao: (1) the fapiao code (发票代码) for the establishment issuing the fapiao (similar to a tax ID number); (2) the fapiao number (发票号码) (i.e., the unique number for the individual piece of paper); and (3) the password (密码) or verification code (验证码), which in some cities requires scratching off a gray box similar to a lottery ticket.  (Scratching off the gray box exposes the verification code or password that is then used on the website.)

The government website will then indicate whether the information the user inputted is consistent with the Tax Bureau’s records of fapiaos that it collected back from establishments. This verification will catch fake fapiaos (see Part 3 for a description) but typically will not catch the other schemes. The website sometimes issues “false negative” results (i.e., saying that the information the user inputted is inconsistent with the Tax Bureau’s records) because of data entry or technical errors with the Tax Bureau, but it at least suggests a red flag.  There are other province-specific issues in using the Tax Bureau websites. (A list of websites for various provinces and major cities can be found by emailing the author at ecarlson@cov.com.)

Fapiaos can also be verified via a phone hotline and in-person at the relevant Tax Bureau. A few types of fapiaos, such as taxis, must be checked via telephone rather than online. Note that the data on the fapiaos, all of the websites, and the Tax Bureau hotline are in Chinese only.

In addition to routine review of expense reports by Finance, some of our clients sample a certain percentage of expenses each month or each quarter to look for fapiao fraud. Some clients look at an absolute number, some at a percentage of all expenses, and some at frequency (e.g., all employees will have at least one expense reviewed per quarter, all vendors will have at least one transaction checked per year). In our experience, employees who know that their expense reports may be checked are deterred somewhat from the more egregious forms of fapiao fraud.

Testing all fapiaos can be prohibitively time-consuming, but in our experience, sampling based on certain vendors, certain amounts, or in connection with other risk factors can be well worth the compliance investment. 

Requirements to submit point-of-sale receipts and/or credit card slips. Some of our clients require the point-of-sale receipt to be submitted in addition to the fapiao where possible. (As noted above, some establishments require handing over the point-of-sale receipt to obtain the fapiao.) If the date, time, amount, vendor name, or other particulars of the three forms of documents are inconsistent, it could point to a misused fapiao scenario. 

Some of our clients require expenses over a certain amount to be paid using company or individual credit card, and require the credit card receipt to be submitted along with the fapiao. We regard these as good practices.  These methods prevent fake fapiaos, borrowed machine fapiaos, and often fapiaos with incorrect descriptions (see Part 3 for details of each), although they usually will not catch the other types of schemes. 

Employee training. Some of our clients provide basic training on spotting irregularities in fapiaos to their finance personnel who review and process expenses.  Others train external-facing employees on how to handle difficult situations, such as where the vendor says that the fapiao machine is broken, or the employee is presented with what may be a fake fapiaos.

Companies usually do not want to educate their employees on how to cheat the system, but training on company expectations can prevent situations where otherwise well-meaning employees cannot obtain a real fapiao for the business-related transaction and therefore use a substitute fapiao from a personal expense so they are not forced to pay for the business expense out of their own pocket. 

Statement of services. As noted in Part 2, the descriptions of goods or services on a business-to-consumer fapiao usually are very short (e.g., “meal fee,” “room fee,” “service fee,” “consulting fee”). For business-to-business transactions, however, most companies require a contract or additional statement of services to pay services fees, consulting fees, agent fees, and the like. This is particularly useful when the payee is an individual.

Other compliance measures. Other techniques that some of our clients use include calls or site visits to establishments to confirm the legitimacy of expenses, and establishing black lists or white lists for certain establishments.

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Dealing with fapiaos is a reality of compliance in China. This series is intended to provide a basic overview of fapiaos and some suggestions for minimizing compliance risk. It is not, and is not intended to be, legal advice. Feedback is welcome and can be directed here.

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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