To begin to comprehend China’s vast underground economy, one need only visit Shanghai’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 Shanghai South Railway Station. “We sell all types of receipts.”
Buyers use fake receipts to evade taxes and defraud employers. 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. However, 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 operation in China 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 Shanghai advertise all kinds of fake receipts: travel receipts, lease receipts, waste material receipts and value-added tax receipts. Promotions for counterfeit fapiao (發票) 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, quoting 2 percent of the face value of the receipt as his fee.
Another seller boasted, “I once printed invoices totaling [US]$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, 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 (劉保祿), a government official from 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 US$21 million with fake invoices.
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, so they supplement a lot of it with reimbursements. This is hard to monitor,” said Wang Yuhua (王裕華), an assistant professor of political science at the University of Pennsylvania and the author of a study on bribery and corruption in China.
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.
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.
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. 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 falsely 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 scams in China are not new. A few years ago, the US Securities and Exchange Commission (SEC) filed complaints against several other big companies for doing essentially the same thing in China.
In one complaint, the SEC said that from as early as 2004 to the beginning of 2009, IBM’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 SEC 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 PricewaterhouseCoopers report last year, Doing Business and Investing in China, the consulting firm 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.”
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