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Thursday
Aug302012

Mooncakes, Mooncake Coupons, and Compliance in China

As many compliance professionals who deal with China know, mooncakes are common gifts at the Mid-Autumn Festival (also known as the “Moon Festival”), which falls on the fifteenth day of the eighth lunar month (September or early October).

This year, Mid-Autumn Festival falls on September 30, and a recent deluge of questions from clients across a range of industries prompts me to write a short post explaining some of the nuances of mooncake gifting and the potential compliance implications.

Mooncakes are a Chinese pastry, usually round with an egg-yolk-based crust and filled with lotus seed or sweet bean paste.  Many Chinese consider them a delicacy and part of the celebration of the Mid-Autumn Festival; Western palates often describe the taste of mooncakes as “acquired.”  In recent years, chocolate and ice cream variations have arisen.  Mooncakes nearly always come in boxes of four or  more. The price of  a box of mooncakes can range from the very cheap (RMB 40 or 50, or US $6 or 7) to the very expensive (RMB 600 and up, or  -- US $100 or more). In many cases, the multiple layers of extravagant packaging are worth more than the actual mooncake. And in a few cases, mooncake boxes are given with “extras” inside, such as red wine, cash, or mobile phones.

Mooncakes are customarily given to contacts in business and government as well as to relatives and sometimes friends. In recent years, the local trend has been toward giving “mooncake coupons” (月饼票  or 月饼券, also translated as “mooncake tickets” or “mooncake certificates”) instead of actual mooncakes.  Reasons given for the trend vary from convenience to impracticality of shipping mooncakes long distances (the heat in the late summer may cause them to spoil, or an elegant box could be damaged in China’s postal system).

Some of these mooncake coupons are redeemable at a particular store (e.g., Walmart, Carrefour) and can be used to purchase goods other than mooncakes.  Other mooncake coupons are on their face redeemable only for a particular brand of mooncakes (although stores sometimes make exceptions and allow purchase of other non-mooncake items).

An interesting secondary market has developed for mooncake coupons.  Like other gift cards and other pre-paid cash equivalents, mooncake coupons are often resold (“回收” or “recycled” ) for cash.  Prior to Mid-Autumn Festival, one can easily find people willing to buy mooncake coupons at subway stations, in front of stores and malls, or online forums. The amount of cash one can sell a mooncake coupon for varies from 50% to 70% of the face value, depending on the type of coupon and the number of days before Mid-Autumn Festival.  For instance, a mooncake coupon with a face value of RMB 200 might be sold to a buyer 10 days before Mid-Autumn Festival for around 70% of the face value, or about RMB 140 (US $22) in cash.

Because mooncake coupons can sometimes be resold for cash on the secondary market, companies that have prohibitions on gift of cash or cash equivalents face challenges on deciding whether to give actual mooncakes, mooncake coupons that can be redeemed only for mooncakes, mooncake coupons that are more broadly redeemable, or nothing at all.

PRC law provides only limited guidance to compliance professionals in navigating the intricacies of deciding whether gifts of mooncakes or mooncake coupons are appropriate. Although the government has issued various regulations, most recently three in 2011, on the issuance and purchase of certain larger value commercial prepaid cards, mooncake coupons are not specifically addressed.   

*     *     *

So what happens to these re-sold mooncake coupons?  Some are “re-gifted” to another person, simply saving money for the reseller. Some individuals purchase resold coupons in large quantities at steep discounts and then sell them back to a willing manufacturer, reducing the need to manufacture as many mooncakes and/or reducing the liability for redemption of the gift cards on the manufacturer’s accounts.

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Eric Carlson, a contributing editor of the FCPA Blog, is a Beijing-based attorney at Covington & Burling LLP. He specializes in anti-corruption compliance and investigations, with a particular focus on China and other regions of Asia.  He speaks Mandarin and Cantonese. He has written about last year’s amendment to China’s Criminal Law here and here, and he can be contacted here.

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