MCLC: phony receipts

[Denton, Kirk]

MCLC LIST
From: Costas Kouremenos <enaskitis at gmail.com>
Subject: phony receipts
***********************************************************

Source: NYT (8/3/13):
http://www.nytimes.com/2013/08/04/business/global/coin-of-realm-in-china-gr
aft-phony-receipts.html

Coin of Realm in China Graft: Phony Receipts
By DAVID BARBOZA

SHANGHAI — To begin to comprehend China’s vast underground economy, one
need only visit this city’s major transportation depots and watch as
peddlers openly hawk fake receipts.

“Receipts! Receipts!” calls out a woman in her 30s to passers-by as her
two children play near the city’s south train station. “We sell all types
of receipts.”

Buyers use them to evade taxes and defraud employers. And in a country
rife with corruption, they are the grease for schemes to bribe officials
and business partners. Making them and using them is illegal in China.
Some people have been executed for the crime. But demand is so strong that
a surprising amount of deal-making takes place out in public.

It is so pervasive that auditors at multinational corporations are also
being duped. The British pharmaceutical company GlaxoSmithKline is still
trying to figure out how four senior executives at its China operation
were able to submit fake receipts to embezzle millions of dollars over the
last six years. Police officials say that some of the cash was used to
create a slush fund to bribe doctors, hospitals and government officials.

Signs posted throughout this city advertise all kinds of fake receipts:
travel receipts, lease receipts, waste material receipts and value-added
tax receipts. Promotions for counterfeit “fapiao” (the Chinese word for an
official invoice) are sent by fax and through mobile phone text messages.
On China’s popular e-commerce Web site, Taobao.com, sellers even promise
special discounts and same-day delivery of forged receipts.

“We charge by percentage if you are looking for invoices written for a
large amount of money,” said one seller in an interview, quoting 2 percent
of the face value of the receipt as his fee. Another seller boasted, “I
once printed invoices totaling $16 million for a construction project!”

Detecting fake or doctored receipts is a challenge for tax collectors,
small businesses and China’s state-run enterprises. While there are no
reliable estimates of how much money is involved in the trade, as China’s
economy has mushroomed and grown more sophisticated, so has the ability to
falsify receipts.

With considerable tax revenue at stake, the Chinese government has
announced periodic crackdowns. In 2009, the authorities said they detained
5,134 people and closed 1,045 fake invoice production sites. A year later,
they said they “smashed” 1,593 criminal gangs and raided 74,833
enterprises that had filed false invoices with the government.

In one of the biggest cases this year, a businessman in Zhejiang province
was jailed for helping 315 companies evade millions of dollars in taxes by
issuing fake invoices, a crime sometimes punishable by death.

That could be the fate of Liu Baolu, a government official from northwest
China’s Gansu province. In February, he was sentenced to death with a
two-year reprieve for using fake receipts to embezzle millions of dollars.

As harsh as the crackdowns sound, experts say they are often ineffective.
One reason, analysts say, is that even government officials take part in
black market activity. In 2010, for instance, the National Audit Office
said it caught central government departments embezzling $21 million with
fake invoices.

And state employees, whether they work for government agencies or
state-owned enterprises, seem as eager as anyone else to bolster their
compensation by filing fake invoices.

“Their salaries are relatively low,” said Wang Yuhua, an assistant
professor of political science at the University of Pennsylvania and the
author of a study on bribery and corruption in China. “So they supplement
a lot of it with reimbursements. This is hard to monitor.”

China’s fapiao system took root in the late 1980s and early 1990s, when
the government began requiring companies to use official receipts issued
by the tax authorities for every business transaction. The receipts
usually come with a number and government seal.

But the tax receipt system was quickly exploited. Gangs began producing
high-quality imitations of the official invoices using specially designed
printers with markings that bore a striking likeness to red government
seals.
And at many companies, rogue employees started colluding with advertising,
consulting and travel agencies to forge or falsify receipts for the
purpose of embezzling corporate funds.

So widespread is receipt fraud that clerks at many hotel gift shops agree
to falsify receipts so they show up as room charges. And at least one
mutual fund company in Shanghai asks its employees to turn in fake
receipts every month to claim half their salary — an accounting fraud that
reduces tax liability for the company and the employee.

In the Glaxo case, Chinese investigators say the drugmaker’s top Chinese
executives worked closely in recent years with a Shanghai travel agency to
falsify documents. For instance, airline ticket receipts were filed for
trips that never took place and when executives listed 100 guests at a
conference, perhaps only 80 showed up, making it possible to file false
inflated receipts and thus embezzle from Glaxo’s London headquarters.

Six other global drug companies, including Merck, Novartis and Roche,
acknowledge that they used the same travel agency in the last three years,
though none of those companies said their executives did anything improper.
Travel agency schemes in China are not new. A few years ago, the
Securities and Exchange Commission filed complaints against several other
big companies for doing essentially the same thing in China.

In one complaint, the S.E.C. said that from as early as 2004 to the
beginning of 2009, I.B.M.’s employees in China created “slush funds” with
its travel agencies and business partners, partly to “provide cash
payments and imported gifts, such as cameras and laptop computers to
Chinese government officials.”

In a separate complaint, the S.E.C. said that between 2005 and 2010,
Wyeth, a division of the drug company Pfizer, had “submitted false or
inflated invoices for organizing large-scale consumer education events.”
In a 2013 report, “Doing Business and Investing in China
<http://www.pwccn.com/home/eng/doing_biz_invest_cn.html>,” the consulting
firm PricewaterhouseCoopers said the “use 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.”

“Some private travel agencies in China are small mom-and-pop companies
that go under the radar,” said Susan Munro, a lawyer in Beijing for
Steptoe & Johnson.

Despite its ubiquity, it is remarkably hard to catch. Analysts say the
cost of monitoring is high and would involve the tedious work of verifying
millions of receipts by calling hotels, airlines and office supply stores
and scrutinizing countless transactions for signs of fraud.

Another challenge is that many of the receipts sold are official receipts
that, for example, no one claimed from a hotel. The unused receipts are
then resold to dealers and enter the black market.

It happens here in Shanghai, where companies that advertise by fax that
they sell receipts also offer, with some specificity, to buy unused
receipts.

“Due to our diverse accounting service for other companies, we now need
invoices from various industries (13% or 17% VAT),” one ad sent out last
week by the Shanghai Fangyuan Accounting Agency reads, referring to the
value-added tax receipts. “If your company has leftovers of 13% or 17% VAT
invoices, we can offer good rates to buy them.”