South China Morning Post Investigation Details How “Consultants’” Assist Chinese Factory Owners to Evade Labor Laws

It is no surprise to companies with robust anti-bribery and anti-corruption programs that doing business in China poses high risks of bribery.  A variety of Foreign Corrupt Practices Act (FCPA) resolutions by the U.S. Department of Justice, as well as a bevy of Chinese prosecutions and convictions of senior officials and corporate executives, provide specific examples of long-running systemic corruption.  What is not always clear from most public reporting on corruption in China, however, are the deeply embedded institutional practices and techniques that contribute to the maintenance of systematic corruption.

A January 22 report in the South China Morning Post presents the result of a detailed investigation that examined the relationships between so-called “consultants” and factory owners in China.  These relationships involve “consultants” who advise factory owners on how to flout labor laws through various means.

One consultant told a Post reporter who was posing as a factory owner looking to sell goods to Western buyers, “As long as you cooperate, keep the troublemakers out of the factory on inspection day, and make sure workers follow our guidance on answering questions, we will guarantee you pass.”  Such consultants’ services reportedly range “from basic coaching of workers on how to answer auditors’ questions, to the provision of additional record books – such as a modified set for auditors claiming that all workers are paid in full, on time, and for any overtime worked.”

Other services that the consultants offer include:

  • Arranging “for a particularly friendly auditor to inspect, at a time of the factory owner’s choosing, to ensure that the facility is well-prepared.”
  • Using software “that can conjure up documents for a full team of seemingly legitimate factory workers and records in 90 seconds, including in cases where the actual workers are not of age or do not have the proper documentation, or where time sheets may not be kept, or may be in conflict with China’s labour laws.”  One Chinese consultant, “who documented his activity over 2016 and 2017 on a Chinese blogging site, fabricated an entire suite of documents on employee attendance, payroll and training for a paper-packaging factory in Dongguan.”  At another factor, the same consultant covered for underage workers by going to a nearby print shop “to doctor their identity cards before auditors could see them, telling the auditors that the previous employee list was an ‘input mistake’.”
  • Bringing auditors “to a ‘show factory’ – someone else’s plant that is more likely to meet Western-set standards,” or erecting temporary walls in factories to conceal deficiencies.

The most common practice described in the Post investigation, however, was bribery.  Each of five Chinese consulting firms that the Post interviewed stated that “a bribe would be necessary to pay off the auditor – many of which are from well-known international companies – and get access to accredited platforms that could open doors to supplying some of the world’s top brands.”  A representative of one such consultant said that “For auditors from one firm, you give them a red packet stuffed with cash on the inspection day. Auditors from another firm dare not take the red packet at the scene, so we would transfer the money to them one week before inspection day.”

A variant of this practice, according to a Hong Kong-based supply chain consultant, is for the auditor to tell the factory owner, “’I have forgotten my watch, a Rolex, in your factory – once you return it to me, I will ensure that your factory passes’.”

The Post report also suggests that one factor that may contribute to the growth of these
consultants is the growth of audit-sharing platforms.  These platforms, which “allow member companies to share data on ethical standards at thousands of factories globally,” “are commonly used by brands to minimise audit duplication and improve conditions across the supply chain.”

Although a large company may request that a platform accredit a particular supplier, the platform operators do not conduct the audits themselves, but have a third-party auditor conducts the inspection.  “[I]f the factory passes, the supplier is accredited and uploaded to the platform for one or two years. This opens the door to hundreds of potential buyers – each of which can commission spot-check audits to confirm the inspection is legitimate, but industry sources say these checks are not done as commonly as they should be.”

The Post also reported that a database of more than 5,000 audits conducted in China in 2020 showed that more than 90 per cent of factories audited by third-party auditors for one well-known set of platforms “were not transparent in their documentation and had falsified record-keeping for worker pay, working hours and overtime, suggesting they pose a greater risk of cheating on inspections.”

Although fraudulent documentation and corruption are known to be longstanding problems in China, the Post report should prompt companies depending on Chinese factories’ production of goods to revisit their supply-chain due diligence processes, and to scrutinize any audits that provide positive inspection reports.  In many cases, the practices that the report describes result in “production-line workers enduring marathon shifts without being paid properly, working for weeks on end without a day off, and not being given insurance coverage as required by Chinese law.”  Companies that turn a blind eye to these kinds of abuses risk violating not only labor laws, but anti-bribery and corruption laws in China and other countries.

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