The Dangers of Engaging in Corrupt Practices
This page focuses on risks related to corruption; learn more about doing business in China:
Navigating the Chinese Business Environment
Common Frauds and Scams
Protecting your Intellectual Property
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Companies doing business in China are more susceptible to certain risks including fraudulent reporting, misappropriation of assets and lack of management integrity. ‘Guanxi’ or ‘relationships’, are of particular importance in China; relationships with government bodies, investors, partners, and even with staff. ‘Guanxi’ is often an important factor in the vendor selection process as well as when a companyis engaging with agents, consultants and business partners. The importance of the establishment and maintenance of ‘guanxi’ in China increases the opportunity that corrupt practices will arise in the course of regular business affairs.
Corrupt Practices in China:
Situations where corrupt practices are likely to be encountered by foreign businesses in China include:
a. Corruption during the procurement process. Here are some red flags to be aware of during sourcing/procurement initiatives:
- Close association with Government officials
- Losing bidder hired by winning bidder
- Losing bidder is not registered
- Low initial bid but many change orders
- Continual acceptance of high-price/low quality goods
- Unnecessary middlemen in the process
A possible scenario:
You are an established Canadian advertising company that has just set up a Chinese branch. You are very excited to be here and are eager to acquire your clients. You enter the tendering process to obtain a lucrative contract to create a series of adverts for Brand X. You lose the bid though the price of the final bid is not known, and the contract goes to small Chinese company with only a few employees. You later find out that this small, not very well known Chinese company is registered to the son-in-law of a powerful Chinese government official. This small and not very well-known Chinese company subsequently contacts your company and tries to outsource the work of the contract they won to you.
b. Official and commercial bribery required to get things done:
- Official bribery refers to facilitation payments paid to officials
- Commercial Bribery can include bribing client staff
- Bribery can include routine gifts, entertainment and banquets required to establish/maintain ‘guanxi’.
A possible scenario:
You are a large Canadian company seeking to expand to China, as China’s growing economy presents an ideal environment for your products. Upon arriving in China, though networking and the hiring of local staff, you learn that the industry in which your company is involved is de facto controlled by a high ranking government official in China. You are encouraged to entertain and build a good “guanxi” with this official in order to ‘ease’ your entry the Chinese industry. You are urged to take him and his associates out to lavish dinners and to present them with expensive gifts or money at appropriate Chinese holidays. You are further asked to you use your network in Canada to help the government official’s grandchildren find jobs in Canada and to help them immigrate to Canada.
c. Agents, dealers, distributors who engage in bribery:
- There are instances where foreign companies may not be aware that they or their local associates are guilty of misconduct.
- Beware of the implications of third party conduct as your company could be liable even if you have disclaimer against the actions of your agents, dealers and distributors.
A possible scenario
You are a Canadian vineyard who looking to begin selling your product in the booming Chinese market. As this is your first venture in China, your company does not have a “China team” in your company; in fact, you do not have anyone on your team who knows anything about China. Thus, you decide to hire a Chinese “consulting” agency to help you hire appropriate personnel. You pay the Chinese consulting agency a bulk fee, for which they assure you that they will find you reliable Chinese distributors and will negotiate a price that all parties will be happy with. The Chinese consulting firm may use bribery to persuade the Chinese distributors to buy from your company instead of engaging in fair procurement competitions. Though your company may not be aware of the doings the consulting firm you have hired, you are implicated in their misconduct.
d. Internal fraud/embezzlement:
- Fake receipts (‘fapiaos’). Employees may present fake receipts and try to get reimbursed from the company for money they did not spend. In China, it is possible to buy fake receipts.
- Extortion. For example, employees might threaten the company with “if you don’t give me a raise, I’ll steal your intellectual property and sell it to the competitor”.
A possible scenario:
You are a Canadian technology company that has established an office in China. An employee of your company presents you will “fapiaos” (receipts) from a business trip which you later discover are fake. Instead of having used the allotted sum for travel expenses, the employee has pocketed the money. You conduct a thorough investigation on this employee and find the grounds to discharge him. When you present this employee with his severance package, he is displeased at how much he will receive and threatens to sell company technologies that he has acquired through his work with you to your competitor.
Overview of the Anti-Corruption Legal Frameworks:
Since March 2013 the new Chinese leadership has executed a broad anti-corruption campaign, resulting in increased pressure and vigilance on the business practices of foreign companies in China. While the focus of domestic bribery prosecution in China had traditionally been on Chinese nationals accepting bribes, in 2011 China also criminalized foreign bribery under Article 163 of China’s Criminal Law. Many multinational companies have recently been implicated in accusations of corrupt practices under the new legal provisions.
Related offences include: conspiracy to bribe, attempting to bribe, aiding and abetting, counselling, an intention in common to bribe and possession of property or proceeds of property obtained or derived from bribery or laundering that property or those proceeds.
In 1998 Canada brought into force the Corruption of Foreign Public Officials Act (CFPOA), which implements our obligations under the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions. The CFPOA is thus Canada’s anti-corruption law, banning Canadian companies and their employees from bribing foreign officials to gain an advantage while doing business abroad. It helps to ensure that Canadian companies act in good faith and aims to create a level playing field for international business, consistent with the principles behind the OECD Convention.
In 2013, Canada strengthened the CFPOA through six new amendments:
1. The changes to the Act make it easier for the Canadian government to prosecute Canadian companies for bribery regardless of where the alleged crime took place. Previously, prosecutors needed to demonstrate a “real and substantial link” between Canadian territory and the crime. For example, if a Canadian subsidiary had bribed a foreign official using profits gained from operations in that country and no Canadians were involved or informed, the crime may not have fallen under the Act's jurisdiction.
2. This amendment will come into effect at a later date determined by Cabinet.
3. The Royal Canadian Mounted Police (RCMP) now has exclusive authority to lay charges under the Act.
4. All businesses can now be charged with bribery under the Act. Previously, only for profit businesses could be prosecuted under the legislation.
5. The maximum penalty for offences will increase from five years' imprisonment to 14 years.
6. The Act now includes an offence that prevents falsifying financial records to hide foreign bribery.
How to Protect Yourself:
a. Due diligence is always a good idea!
- Anti-corruption risk should be an integral part of the due diligence you conduct in the context of mergers and acquisitions.
- Third-party conduct is the most common cause of anti-corruption non-compliance. Risks in this regard can be minimized by conducting effective due diligence.
The Trade Commissioner Service can help!
b. Conduct a thorough risk assessment. It is understandable that companies have limited resources for compliance efforts; an effective risk assessment will help you deploy those efforts effectively.
c. Develop a compliance plan. A good compliance plan ensures that employees must cooperate in corruption investigations and also acts as a deterrent.
- Some suggested elements of a good compliance plan:
- 1. Raise risk awareness with management and board members.
- 2. Draft compliance and anti-bribery principles. Enforce “ethical standards” about procurement rules, gifts and hospitality and third party appointment (agents, distributors, suppliers).
- 3. Establish culture of vetting and conducting due diligence checks on all third party engagement.
- 4. Provide general training to all employees and tailored training for management, procurement, finance, human resources, internal audit and sales.
- “Digitalising” processes (e.g. approval processes, procurement processes) may help limit the risk of corruption and make it easier to track evidence of corruption.
- Some service providers have global business ethics or anti-corruption groups that can help you design an effective plan.
a. A monitored whistle-blower system is the most common method of detecting corruption and a good deterrent.
- This can be implemented through a whistle-blowing hotline (e.g. an email or telephone for the sole purpose of reporting suspected corruption).
- Please note that it is important to verify the veracity of whistle-blowers’ complaints to maintain the integrity of the system. A further system may be put in place to punish whistle blowers who intentionally or maliciously make false reports.
b. An investigation team could be put in place, which may also have the benefit of serving as a deterrent to potential wrongdoers.
- A good investigation team could have two components (internal and external):
- The internal team should look into fact finding and preservation of anything suspicious/potential evidence
- The external team can be outsourced to auditors, lawyers etc. It is better to have trusted contacts in place as a contingency than to seek help after signs of fraudulent conduct appear.
- If your company already has an internal investigation team in place, it is suggested that you follow these guidelines:
- 1. Verify the veracity of the suspicion/accusation and ensure all implicated employees’ cooperation.
- 2. Seize all evidence (including electronic data and devices).
- 3. Suspend the employee(s) suspected of corruption or related offences.
- 4. Conduct thorough investigation based on seized evidence.
- 5. Determine course of action based on investigation results. Please note that in China, termination of an employee for reasons related to fraud or suspicion of fraud requires
- a. A serious breach of the company’s rules, where fraud and economic loss to the company is proven.
- b. A serious dereliction of duty. This does not require proof of fraud but only that the employee(s) in question have failed at their duties.
- Engage external investigation services. The below lists of service providers may be of assistance.
- You can report allegations of bribery to the Royal Canadian Mounted Police in Calgary at 403-699-2550 or in Ottawa at 613-993-6884. You can also report your suspicions and findings of corruption and related offices to the Canadian Trade Commissioner Service in China (email@example.com).
- For more information on Canada’s regime, see the Corruption of Foreign Public Officials Act (http://www.tradecommissioner.gc.ca/eng/canadexport/document.jsp?did=140958),
- For more information on what others are doing:
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