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Case Studies
Unauthorized rebate from supplier
Mr Chow started a joint venture with three of his friends by setting up a chemical engineering company in Hong Kong and a chemical manufacturing factory in Guangdong. The four of them were all directors of the company, each holding 25% of the company shares.
As Mr Chow had substantial experience in operating factories in Mainland China and had developed an extensive business network in Hong Kong and Mainland China especially with Mainland suppliers and government officials, he offered to manage the Mainland factory as the paid General Manager in charge of the business there.
Mr Chow often boasted that the success of the Mainland factory was due to his networking clout. At the same time, he kept grumbling that he had to cover the enormous entertainment expenses with his own money. As the General Manager of the Mainland factory, Mr Chow was entrusted with key procurement decisions. When one of his Hong Kong suppliers learned that Mr Chow had recently bought a property in Mainland China, he presented Mr Chow with an expensive audio- visual set-up, hoping that this gift would secure a contract for the supply of chemical raw materials.
This seemingly thoughtful present soon brought its reward in the form of a first order from Mr Chow. To secure future business, the supplier also offered 5% of the transaction amount as a rebate to Mr Chow at his request. Subsequently, the bribe money was deposited into Mr Chow’s bank account in Hong Kong.
Case Analysis
Under the Prevention of Bribery Ordinance (POBO), the principal of a company is the entire Board of Directors, while individual shareholders or directors are considered as agents. In this case, Mr Chow was an 'agent' as he was one of the shareholders and the paid General Manager of the factory. Prior to any solicitation or acceptance of any advantage in the course of business, Mr Chow should have obtained permission from the Board of Directors.
The principal’s permission should be definite and given in advance in accordance with Section 9 of the POBO. Otherwise, the agent has to apply for permission as soon as reasonably practicable after the acceptance. In addition for such permission to be lawful, the principal must have carefully considered the application before granting permission.
Mr Chow’s company had not stated clearly in advance whether or not its staff members could accept advantages in relation to their duties. During the investigation, Mr Chow claimed that he had notified other shareholders that the rebates concerned were used to cover the entertainment expenses incurred in Mainland China. Nevertheless, he had, in fact, only casually brought this matter to the attention of just two of the shareholders. Furthermore, the arrangement had not been discussed at any board meeting or formally approved, and there was no record of the accepted rebates, nor how they were dealt with. As such, Mr Chow was considered not to have obtained the company’s permission to accept the rebate at the material time. Moreover, he had not applied for retrospective approval from his company, and his acceptance of the rebates was not known to and approved by all shareholders. Thus Mr Chow accepted the rebates without the principal’s permission.
To protect the interest of the companies and their stakeholders, companies should take the initiative to formulate rules and regulations governing the acceptance of advantages by their board members and staff and to state clearly in writing the company’s stance and policy regarding acceptance of advantages, and entertainment. The procedures for declaring acceptance of advantages and the channels for making enquiries should also be laid down and made known to all staff.