Introduction to Integrity Awareness Training
Table of Contents
1. Introductions
2. Changing Business Dynamics
3. Integrity Awareness Training Overview
4. Defining Fraud and Corruption in China
• What is it?
• What are the statistics?
• What are the potential risks?
• Why does it happen?
• What can you do about it?
5. Recommendations
Commercial, Operational & Risk Management Advisory Firm in China
Introductions
Moderator
Alex Bryant has been an active leader in the
international business arena for more than 12
years, primarily in the areas of strategic planning,
sales and marketing, global logistics, product
development, joint
ventures/partnerships/wholly-owned foreign
enterprises and general management.
Alex Bryant
Founder & President
Former Director of
International Business
Development for Barnhardt
Manufacturing Company
Prior to founding East West Associates in 2005,
Alex spent eight years as the Director of
International Sales and Business Development
for Barnhardt Manufacturing Company.
Commercial, Operational & Risk Management Advisory Firm in China
Introductions
Jon Anderson
Jay Hoenig
Mark Plum
Senior Executive Advisor
Director
Director
Former Director for Kyosay
Global and Vice PresidentDirector of Strategic
Services for Boldt
Metronics
Former Chief Operating
Officer Asia Pacific for Hill
and Associates Group and
Chairman of Hill &
Associates (PRC)
Ex-Chairman American
Chamber of Commerce in
Shanghai
Former President of Briggs
& Stratton Asia
(NYSE: BGG)
Commercial, Operational & Risk Management Advisory Firm in China
The Changing Business Dynamics
in China
Changing
Table of Contents
Dynamics
CHINA’S NEW NORMAL
•
Stagnant Global Economies; Exports Slowing; Currency
Strengthening
•
Traditional Eastern markets maturing
•
Go West Traction Expanding Domestic Market
•
Rising domestic and foreign competition
•
Government Promoting Consumerism
•
Rising Nationalism/Indigenous Innovation/Anti-Monopoly
Commercial, Operational & Risk Management Advisory Firm in China
Changing Dynamics
BUSINESS IMPACTS OF THE NEW NORMAL
•
Labor, Material and Services Cost Rising
•
MNC’s Restructuring Businesses Ops
•
Government Mandated Labor Increases – 15%
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Growing Income Disparity
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Increased Unionization - ACFTU
•
Increased Labor Demands and Activism
•
Government tolerating Labor Activism
Commercial, Operational & Risk Management Advisory Firm in China
Changing Dynamics
DEMOGRAPHIC, POLITICAL AND SOCIAL CHANGE
Changing work force: older, less mobile, more costly
•
Size of working population (15-64) has stopped growing in 2015
•
15-24 age group shrinking: 225m today, 150m in 2022
•
Fewer young workers, but growing numbers of factories
2nd Generation Migrants: Children of Reform Era
•
Better educated: Exposed to mass media
•
More demanding
•
More aware of rights: Sensitive to inequality
•
Different expectations:
•
Little experience as farmers
•
Not going back to farm
•
More acclimated to city life
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Changing
Review of
Dynamics
China
Most US companies remain optimistic and
continue investing in the China market
29% reported China as their number on global investment priority
96% are maintaining or increasing their investment in China
95% forecast similar investment in 2015
2015 AmCham Business Survey
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Introduction to an
Integrity Awareness Training
Workshop
Integrity Training Overview
Typical Training Workshop Objectives
 Enhance
awareness and understanding of proper ethical
conduct in business situations
 Deputize and empower your employees to be an
important element of fraud detection, deterrence and
prevention through the understanding of reporting
mechanisms
 Customized training to address IP theft prevention, fraud,
kickbacks, bribery, conflict of interest, cyber crime, etc.
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Integrity
Training
Overview
Changing
Dynamics
Typical Venues
 Introduced by senior executive/manager to stress
importance
 Maximum 20-25 employees
 Separate sessions for (1) executives (US and China), (2)
managers, (3) employees, and (4) suppliers
 Typically “functionally” focused using recent Company
ethics issues
Commercial,
In English Operational
and/or Mandarin
& Risk Management Advisory Firm in China
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Integrity
Training
Overview
Changing
Dynamics
Typical Training Outline
 Information Sharing (1.5 hour)
 Workshops (1 hour)
 Group Discussion (1 hour)
 Wrap-up & Takeaways (30 min)
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13
Integrity
Training
Overview
Changing
Dynamics
Assume that…

You are the General Manager of ABC company
 You have received an anonymous email alleging that Mr. Y, who has been a
Procurement Manager with your company for 7 years, has a personal interest in
DEF company, which is one of ABC’s suppliers

What do you do?
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Integrity
Training
Overview
Changing
Dynamics
What actually happened…
 Mr. Y. was not contacted
 Instead we discreetly obtained DEF’s supplier application form and found that
it had the same telephone number as the residential number stated in Mr. Y’s
employment application form
 At the same time, there were rumors that Mr. Y’s brother worked for DEF
 We reviewed DEF’s file and could not find any documents explaining how DEF
was selected as a supplier
 We reviewed the bidding process and awards to DEF over last several years
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Integrity
Training
Overview
Changing
Dynamics
From this scenario, do you see any potential business risks?
(Group Discussion)
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Integrity
Training
Overview
Changing
Dynamics
Potential Risks

Conflict of Interest (Mr. Y & ABC Company)

Kickbacks/Illegal Gratuities

IPR or Trade Secret Theft

Bid Rigging

Substandard Products

Fictitious DEF Company

Breach/Lack of Procurement Procedures

Breach/Lack of Internal Controls
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Defining Fraud & Corruption
What is Fraud & Corruption?
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18
Defining Fraud & Corruption
Definition of Fraud & Corruption

Perpetrator(s)

Intentional or deliberate act
 Deprive others of property, money or other assets through unethical
means

Personal (or company) gains
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Defining Fraud & Corruption
Key Elements of Fraud/Corruption

Concealed activity;

Public and private sector;

Violates company’s regulations/policies or country laws;

Direct or indirect financial benefit to perpetrator(s);

Adversely impact assets and revenue

Lowers morale and trust inn leadership

May Lead to unfair competition
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Defining Fraud & Corruption
High Cost of Fraud/Corruption in US

The median loss caused by fraud is $159,000

5% of annual corporate revenue lost to fraud

Costs $652 billion annually

1 in 4 frauds cost in excess of $1 million

3-5% of GDP
Source: “ACFE Report to the Nation”
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Defining Fraud & Corruption
Statistics on Fraud & Corruption in US

87.9% of perpetrators are first time offenders

Management accounts for 50% of financial statement fraud

The average fraud goes undetected for 18 months

Employee tips most common method of detection (34.2%)

Second most common is by accident (25.4%)
Source: “ACFE Report to the Nation”
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Defining Fraud & Corruption
Fraud/Theft – Reward /Risk Equation
 The average armed robbery nets US $65,000
with an 82% probability of being caught
 The average fraud nets US $685,000 with a 2%
probability of being caught
Source: Certified Fraud Examiner newsletter
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Defining Fraud & Corruption
High Cost of Fraud & Corruption in China
Corruption accounts for an estimated
13.5% - 16.9% of China GDP
Source: Carnegie Endowment
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Defining Fraud & Corruption
Top Challenges for Foreign Companies
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Rising Cost
HR Constraints
Increasing Competition
Lack of Market Maturity
Fraud and Corruption
IP Infringement
Protectionism
Lack of Infrastructure
Labor Unrest
Unfair Procurement
Business Disputes
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90%
90%
82%
72%
60%
55%
38%
36%
33%
32%
30%
Source: AmCham Shanghai: 2013-14 White Paper: American Business in China
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Defining Fraud & Corruption
Fraud and Corruption: China Statistics
 80% of government officials and 70% of CEO’s of SOE would be considered
corrupt by international standards

82% of major fraud cases involved company’s own employees

19% of applicants have lied about their criminal records

Composition of Fraud:
Secret Commissions or Kickbacks (43%)
Expense account (29%)
False invoicing (27%)
Others - purchases for personal use, document forgery, price fixing (1%)
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Defining Fraud & Corruption
Why does Fraud &
Corruption happen?
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Defining Fraud & Corruption
Drivers Behind Fraud
Benefit, rationalisation
Motivation,
pressure (real
or perceived)
Opportunity,
likelihood of
detection,
consequences
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Defining Fraud & Corruption
Why All the Fraud/Corruption in China?
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Relationship-based society – “guanxi”
Lack of transparency/checks-balances – opportunities
Poorly developed corporate governance – owner driven
Poorly developed/institutionalized corporate procedures
Under-development regulatory bodies
Concentration of power – civilian/military/political party
2-tier MNC management-employee structure
Lack of local and offshore oversight
Low compensation for professionals – social pressure
Hesitant enforcement among foreign firms
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Defining Fraud & Corruption
Sectors Most Vulnerable to Fraud
Sales & Distribution
Kickbacks, false sales, sales of counterfeit product,
abuse of marketing funds
Purchasing
Kickbacks, transactions with related parties
Logistics & Warehousing
Sale of damaged goods, sales to counterfeit
channels, theft
Finance
Use of short term investments & petty cash,
collusion with other employees
Senior Management
All variations
Personal Expense Abuse
Prevalent, Endemic
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Defining Fraud & Corruption
Red Flags to Recognize Fraud
 Anonymous allegations
 Concentrated authority
 High reliance upon certain
suppliers and reluctance to
rebid
 Changes in employee
behavior (absence from work,
sudden paranoia, ostentatious
wealth
 Account Receivable is
always not being recovered
 High employee turnover
 High incidence of cash
payments
 Missing or poor paper trail
 Refusal or delays in
cooperating with normal
admin procedures
 Over budget
 Non-matching payee details
 Refusal to accept
promotion/transfers
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Why be Proactive
Why Should You Be Proactive?

FCPA/SOX compliance and your exposure

PRC Anti-Bribery law and your criminal exposure

Declining profitability and other losses

Legal defense cost

Lowering Company morale and turnover

Damaging Company “brand” reputation
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Global Concerns
A word about Commercial IP/TS Theft
It’s more than just Recipes
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Product designs
Construction & Advance materials
R&D products and activities
Branding and trademarks
Copyright and patents
Chemical processes, formulations and recipes
Manufacturing know-how
Machine design and performance data
Plant design and operations
Internal work processes, including security
Financial and accounting data
Client data
Proposals and pricing data
Strategic and tactical business plans
Product launch dates
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Global Concerns
Global IP Theft & Fraud Statistics
 69.6% of business professionals have stolen some form of corporate IP from
their employer when leaving a job.
 32.6% of employees leaving a job took sales proposals and/or presentations
with them.

30.4% admitted to taking information such as customer
databases and contact information.
 The most commonly used method for stealing IP is to send electronic copies
of documents and files to a personal email account.

Only 28.2% think that IP theft is completely unacceptable.
Source: US Department of Justice
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IP Theft & Fraud
Source of IP Theft & Fraud

Insiders, especially those leaving the organization

Competitors and corporate espionage

SOE and/or State sponsored espionage

Partners, customers and vendors

Accidental disclosures, such as online postings

Hackers and organized crime
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Regulatory Requirement
Legal, Compliance & Regulatory Requirements
•
US FCPA prohibits offering bribes or any payments to influence decisions,
including:
Offering, paying, authorizing payment to or promising any payment to a foreign
government official, SOE, political party or official, or political candidate with the
objective of obtaining, retaining or influencing business.

PRC Anti-Bribery (Commercial)
Prohibits both demanding and offering property and benefits in exchange for
favorably treatment

UK Anti-Bribery (Commercial)
Prohibits both the demanding and offering property and other tangible and
intangible benefits in exchange for favorable treatment
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Defining Fraud & Corruption
Typical Corporate Code of Conduct
 Provides guidance to all employees, vendors, suppliers, agents, and
representatives on policies and procedures
 Guidelines include:
 Integrity in Reporting
 Equal Treatment
 Business practices (internal & external)
 Procurement and bidding policies
 Finance and accounting procedures
 Expense account policies
 Conflicts of Interest
 Intellectual Property
 Sexual harassment
 Defines Company’s expectations and clearly shows the reporting mechanisms
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Summary
Summary - Integrity Awareness Training

Unethical business behavior in Asia and China is a major issue
 Fraud, corruption, and unethical behavior has serious legal, financial, morale and
competitiveness impacts
 Employees must understand the company’s ethics expectation, policies, practices
and consequences

Lack of transparency creates management challenges

Deputizing all employees provides additional “eyes and ears”

All executives must set the “tone at the top”
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CONTACT
Alex Bryant
Jon Anderson
Founder & President
China Vice President & Managing Director
East West Associates Inc.
East West Associates Inc.
Phone: (+1) 704-807-9531
China Mobile: (+86) 137 6434 7001
Fax: (+1) 704-362-2686
USA Mobile: (+1) 312-952-8255
China & United States
Shanghai
abryant@eastwestassoc.com
janderson@eastwestassoc.com
www.eastwestassoc.com
www.eastwestassoc.com
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