The current issues the pharmaceutical industry faces in China around corruption have highlighted the potential risks in using travel agents. And because those risks aren’t limited to the pharmaceutical industry, it’s important that companies in all industries pay close attention to travel costs, says AlixPartners in its Financial Advisory Services newsletter.
"Although investigators have focused on travel agents' dealings in China in the past, this new development underscores the types of problems that can occur, which can range from disguising illegitimate payments as travel costs to documenting expenses that have never occurred," says AlixPartners.
The use of travel agencies in China represents a vehicle whereby employees can violate company policy; however, such risks are not restricted solely to the pharmaceutical industry, according to AlixPartners.
The dynamics of the travel industry are such that it is susceptible to risk exposure in three main areas: corporate fraud, travel and entertainment fraud, and violations of company policy.
To manage their travel needs throughout mainland China, Chinese companies often must use several travel agents and event consultants, thereby eliminating the system of controls that using a single vendor provides. Also, even reputable travel agencies can present risk to companies when a rogue agent engages in an alleged fraudulent activity.
For example, corporate fraud may occur when a company disguises illegitimate payments as travel costs. In such cases, a travel agent could issue a fapiao (a tax invoice controlled by the local tax authority) to the company to satisfy the latter’s internal controls.
A travel agent could also receive funds directly and hold them for future use on behalf of the company—creating a slush fund. Pharmaceutical companies may be particularly susceptible to this type of problem because of their geographically diverse customer bases and their types of marketing techniques such as sponsored conferences, symposia, and other promotional events to support sales of their drugs.
Sometimes they may even pay for travel expenses to and from such events on behalf of physicians or hospital administrators who can authorize the purchase and use of a specific drug. A travel agent might overstate the number of physicians who attend or even falsify the occurrence of an entire conference, directing to funds that could be used for illegitimate payments the expenses that would have been spent on travel and accommodations.
The use of a travel agent to inflate employee travel expenses is a more sophisticated version of the simple fake fapiao fraud, reveals AlixPartners.
In this scenario, an employee purchases a fake fapiao and submits it to support expense claims. However, the tax authorities in China are aware that there is a booming trade in fake fapiaos, and they have set up websites that can determine whether the unique reference number on a fapiao is genuine. By using a complicit travel agent, theemployee can instead have the travel agent issue a genuine fapiao to cover inflated travel costs or travel the employee never undertook.
By issuing a fapiao, the travel agent incurs a tax liability, but the cost can be covered by the profit from the scheme, leaving the additional funds to be divided between the employee and the travel agent. Such activities are easily detected by demonstrating that an employee was in two places at once: by submitting a claim for a legitimate business expense in one city when according to the travel history, the employee should have been in another one.
In another example, violations of company policy may occur if an employee uses a travel agent to disguise flying business class when that employee isn’t permitted to do so. Company policy may dictate that certain employees must travel in economy class on flights that are five hours or shorter. However, an employee might have a travel agent issue a business-class ticket and disguise it by splitting the costs across two economy-class tickets.