Introduction
In recent years, global business leaders have focused heavily on external threats to their China operations. Shifting regulatory policies, geopolitical tensions, trade restrictions, and aggressive local competition, for example, have dominated executive conversations and boardroom agendas. This focus is understandable. Such risks are visible, widely reported, and often perceived as existential to market access and operational continuity.
But in the process, many companies underestimate a more insidious threat: misconduct by internal bad actors, usually in collusion with third parties. The assumption that global compliance frameworks will function as intended once rolled out in China can obscure significant local blind spots. This is especially the case when cultural, societal, or operational nuances are not fully understood or managed.
Unlike external shocks, which grab headlines and boardroom attention, internal fraud often builds slowly — until it is exposed by an outside trigger, such as a tax audit, business partner dispute, or government investigation. When misconduct surfaces this way, executives are often blindsided, not just by the fraud itself, but by the fact that it was the external system, not internal controls, that brought it to light.
This article examines how misaligned risk perception leaves multinational companies vulnerable and why internal threats deserve more attention, particularly in today’s challenging economic and regulatory environment. It also suggests a range of proactive measures to avoid getting caught off guard.
The Forces Behind Misconduct Coming to Light
1. Heightening Regulatory Enforcement
China has made significant strides in cracking down on corruption and fraud in recent years. High-profile government-led campaigns have targeted not only state-owned enterprises (SOEs) but also private sector companies, raising the bar for compliance and enforcement. An example of this was the nationwide anti-corruption crackdown targeting the healthcare sector starting in mid-2023. Pharmaceutical companies and medical device manufacturers were impacted, along with public hospitals and healthcare officials.
This shift means that authorities are more proactive and informed about financial irregularities and corporate misconduct, making it harder for fraud and compliance issues to remain hidden. Government investigators often have access to comprehensive data, both via routine data collection and through dawn raids on multinational companies’ third parties, such as dealers and vendors suspected of illegal activity. Companies that are unaware that they have been engaged in misconduct or are an accessory in a crime, or think that they can fly under the radar, often find themselves exposed when regulators come calling.
2. The Power and Reach of the Tax Authorities
One common way fraud is uncovered in China is through tax audits. The State Administration of Taxation (SAT) has invested heavily in data analytics and real-time monitoring of business transactions. This enables them to track discrepancies in invoicing, sales reporting, and deductions, often before companies even realize they are at risk.
For example, VAT fraud — where companies overstate their expenses to reduce tax liabilities — is a significant concern to the SAT. Due to China's e-invoicing system (now covering most business transactions) and other advancements in digitization, tax authorities can detect suspicious activity through analytics of data across different government platforms. Employee expense fraud and fraudulent vendor payments are often brought to light as a consequence of unexpected tax audits.
Tax authorities may also initiate audits in response to complaints or leaks of internal misconduct from disgruntled former employees or business partners. In addition, sometimes audits are launched as part of national enforcement campaigns, such as VAT fraud crackdowns or sector-specific initiatives.
3. Increased Data Transparency and Sharing Between Regulatory Bodies
China's regulatory environment is becoming increasingly transparent, particularly when compared to its own historical standards. Over the last decade or more, China has made significant strides in improving business transparency, particularly around corporate information, taxation, and regulatory enforcement records. For instance, the National Enterprise Credit Information Publicity System now integrates data from multiple agencies, creating enhanced visibility into corporate behaviors.
In addition, China has mechanisms in place to share information across multiple regulators. This makes it easier for inconsistencies to be flagged early and for different authorities to coordinate in conducting investigations and enforcement efforts.
4. Tensions and Breakdowns in Internal Relationships
Fraud in China often also comes to light through internal conflicts. This could involve disgruntled employees, business partners, or suppliers who may have a motive to expose misconduct. In Chinese business culture, personal relationships (guanxi) often blend with professional responsibilities in ways unfamiliar to Western executives, creating potential conflicts of interest. While strong relationships can sometimes mask fraudulent behavior temporarily, their breakdown can lead to swift exposure.
The Chinese workplace often operates with a greater emphasis on hierarchical relationships than many Western organizations. This cultural dynamic creates specific vulnerabilities: When employees feel unfairly treated or sidelined, for instance, they may be more likely to report irregularities they hsve observed rather than engage in direct confrontation.
When an employee, business partner, or vendor feels wronged, they may resort to whistleblowing or disclosing information to regulators or on social media. Companies that foster a competitive or overly ambitious work environment, combined with poor internal communication, are particularly vulnerable to these types of exposures.
5. Legacy Business Practices Now Under Strain
China's rapidly changing regulatory environment is putting pressure on questionable business practices that were once commonplace. Practices such as off-book payments, hidden vendor relationships, and the use of fake invoices are now highly scrutinized. What was once considered simply “the way things get done” is increasingly viewed as fraudulent activity by both regulators and the public.
In previous decades, it was not uncommon for some foreign-invested enterprises in China to maintain different sets of financial records for different stakeholders. However, with China’s rollout of integrated tax systems — real-time e-invoicing and cross-agency data sharing — such discrepancies are far more likely to be detected today.
Companies that previously relied on these informal practices, or “bent the rules” in other ways, are now finding themselves in the spotlight as enforcement ramps up. These legacy issues, when overlooked by foreign companies in China, can easily lead to exposure when the authorities conduct routine audits or when an insider decides to report them.
Building Resilience: Practical Steps for Business Leaders
To effectively manage corporate fraud risk in China and avoid being blindsided by external investigations or internal misconduct, headquarters should take a proactive approach. This includes not only detecting fraud but also embedding systems, policies, and behaviors that reduce the likelihood of fraud taking root in the first place.
Here are some practical steps global business leaders should consider:
- Do Not Assume “No News” Means No Risk: Silence from local teams can be misleading. Fraud often remains hidden until someone, internally or externally, has a motive to expose it. In China, cultural dynamics and hierarchical workplace norms can discourage employees from raising concerns directly with headquarters, especially if local management is involved. Executives should implement mechanisms to surface early warning signs and avoid overreliance on passive reporting.
- Pressure-Test Compliance Implementation: Compliance and financial policies need to be adapted to the local market. This includes expense reimbursement policies, documentary requirements, and conflicts of interest declarations. Ensure that policies are not just documented on paper but are enforced and understood. Perform audits to verify how the policies are applied in practice.
- Strengthen Third-Party and Related-Party Oversight: Many fraud schemes in China involve collusion between employees and external vendors or business partners. Implement a robust third-party risk management program, including enhanced due diligence, disclosure of personal connections, and regular third-party audits.
- Promote Effective, Culturally-Tuned Reporting Channels: Establish and promote an effective whistleblower program that accounts for Chinese cultural contexts. Employees should feel safe reporting misconduct anonymously, and there should be clear procedures for handling complaints appropriately and in a timely fashion.
- Regularly Review Local Tax and Finance Practices: Align internal financial processes with Chinese tax regulations and enforcement expectations. Ensure all transactions have proper documentation and business rationale. Engage external advisors when needed to assess vulnerabilities and confirm that local practices meet both regulatory and internal standards.
- Build Cross-Border Communication and Accountability: Foster regular, transparent communication between Chinese operations and headquarters. Assign clear ownership of compliance oversight, and avoid over-delegating sensitive responsibilities to local teams without adequate supervision.
- Invest in Localized Ethics and Compliance Training: One-size-fits-all training is rarely effective. Develop programs that address local cultural norms, common risk scenarios, and real-world case studies relevant to the Chinese business environment.
- Leverage Technology to Monitor for Irregularities: Deploy technology solutions that help to automate anomaly detection and flag potential issues early on.
- Engage Local Advisors Who Understand Regulatory Nuance: Build relationships with local advisors who understand both regulatory requirements and business realities, including “unwritten rules” that multinationals may overlook.
Conclusion
While fraud is an ever-present risk in any market, China's evolving regulatory environment, growing transparency, and sophisticated enforcement mechanisms mean that fraud is more likely to be uncovered — often from unexpected sources. As China continues to advance its regulatory frameworks and enforcement capabilities, this trend will only accelerate.
Multinational executives must not only assume that fraud could happen but also recognize that fraud in China gets discovered more suddenly than many expect. The question is not whether irregularities will come to light, but whether your organization will identify them first.
Proactively addressing these risks through strong compliance frameworks, vigilant internal controls, and a culture of transparency will help ensure that your company can manage fraud risk effectively and avoid the reputational and financial damage that comes with exposure.
For a confidential assessment of your organization's fraud resilience in China, contact Ankura’s specialized team of advisors who combine deep local knowledge with global best practices.
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© Copyright 2025. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
