RAE Systems: Genuine Receipts, False Expenses

The RAE Systems FCPA case concerned alleged bribes hidden in cash advances and expense reimbursements at two Chinese joint ventures. The Securities and Exchange Commission alleged that approximately $400,000 in payments to agents and government officials generated more than $3 million in revenue. For someone in sales, finance or audit, the telling detail is the receipt: the paper could be genuine while describing an expense the money never covered.

The Securities and Exchange Commission’s December 2010 complaint under the Foreign Corrupt Practices Act described warnings that reached the parent company before the alleged payments continued. Acquisition diligence, a finance executive’s visit and a former manager’s email all supplied reasons to examine the cash-advance system. The commission alleged that RAE repeatedly responded without changing the machinery that let the money out.

What RAE Sold and Who Bought It

RAE developed and manufactured chemical and radiation detection monitors and networks, with Chinese operations organized under RAE Asia in Hong Kong. It was a publicly traded company with securities registered in the United States. Its Chinese sales business put employees in contact with large state-owned enterprises and government departments, the customers whose purchasing decisions the SEC alleged the payments were meant to influence.

The ventures had separate acquisition histories. RAE acquired a 64% stake in the Beijing business, KLH, in 2004 and negotiated an additional purchase in June 2006 that brought its stake to approximately 96%. It acquired a 70% interest in the Fushun business in December 2006.

That structure matters to an insider because the customer relationship, the cash payment and the accounting can sit in different parts of the company. A salesperson knows the government customer and the business being pursued. Finance sees the advance and the receipt, while management receives the reported expense and any warnings about it.

RAE-KLH Cash Advances and the Wrong Receipts

At the RAE Systems joint venture KLH, the commission alleged, cash advances and false reimbursement claims hid bribes inside ordinary sales expenses. Its FCPA complaint said sales employees financed sales activity and travel through advances and reimbursements. According to the complaint, RAE’s pre-acquisition diligence had identified both government-facing customers and employees’ use of advances to bribe officials.

Sales employees had to submit an expense claim explaining how they spent an advance. They also had to provide government-issued tax receipts, known as fapiao, so KLH could deduct sales expenses for tax purposes. The complaint alleged that the supporting paper often belonged to a different transaction:

The commission alleged that KLH’s accounting department knew employees were submitting inaccurate fapiao but accepted whatever kind arrived because the receipts supported income-statement deductions. Accounting classified the expense according to the receipt as travel, entertainment or meals. The description followed the paper, even when the paper did not follow the money.

We see the absurdity in that arrangement: a government-issued receipt helped dress up a payment allegedly meant to corrupt a government decision. The books and records problem was the mismatch between the claimed expense and the actual use of the advance. An employee who understood that mismatch could explain something a receipt-authenticity check would miss.

The Warning That Did Not Change the System

RAE told KLH to stop bribery, but the commission alleged that it left the cash-advance practices substantially intact. At a June 2004 board meeting, RAE directed the venture toward arrangements such as finder’s fees, commissions and consulting fees, and separately gave oral instructions that bribery must stop. The complaint alleged that RAE neither imposed sufficient controls nor changed employees’ use of inaccurate fapiao to justify advances.

According to the complaint, in May 2005 the chief financial officer visited the Chinese facilities and found approximately $500,000 in advances for which KLH had not received fapiao. The executive’s report to U.S. headquarters raised the possibility that cash was funding bribes and supplemental employee income.

The complaint said RAE responded with compliance training in early June and required employees to certify that they had not engaged in bribery. According to the complaint, it again failed to make sufficient changes to the advance system. The commission alleged that sales employees continued obtaining cash for bribes and that the associated expenses appeared as business fees or travel and entertainment.

The company had a warning, a training response and employee certifications. The alleged payment route survived all three. Same cash. For an insider, the question is what changed in the approvals and reimbursements after the warning reached headquarters. A training attendance record cannot answer that question by itself.

A Former Manager Explained What the Borrowings Meant

A former KLH general manager’s internal report described how a contract and purchased invoices allegedly concealed kickbacks. In August 2006, the manager emailed RAE’s U.S. headquarters about a contract under which KLH paid RMB 380,000 and received RMB 355,000 back. The manager said the remaining money bought invoices used to offset recorded personal borrowings, which the manager described as kickbacks to clients.

The commission alleged that RAE addressed that particular contract and the money was returned. It also alleged that RAE failed to investigate the broader allegation of continuing bribery and again left the sales-advance practices substantially unchanged. Recovering the money from one transaction did not answer the manager’s account of what other borrowings represented.

The criminal resolution supplies another detail about the response. Under its non-prosecution agreement with the Justice Department, RAE admitted facts that included an ordered internal audit that produced no findings or recommendations. We would want to connect the warning to the audit’s work and the later payments. The existence of an audit says little about whether it confronted the conduct an employee described.

RAE-Fushun and the Same Expense Machinery

RAE-Fushun was the later acquisition, with its own customers, employees and alleged payments. The Securities and Exchange Commission’s complaint described its customers as largely state-owned enterprises or government departments. It alleged that Fushun’s sales employees, like KLH’s, financed sales activities and travel through cash advances and reimbursements.

According to the complaint, Fushun personnel provided government officials with jade, fur coats, kitchen appliances, suits and expensive liquor to obtain or retain business. The alleged gifts and entertainment supported additional sales during 2007 and part of 2008. Expenses associated with the advances appeared in the venture’s books as business fees or travel and entertainment.

By the time RAE bought Fushun, its headquarters had already received both the finance executive’s warning and the former KLH manager’s email. The commission’s account of Fushun then describes the same advance-and-reimbursement process supporting gifts to officials. For someone inside the acquired business, the later payment records can show whether earlier warnings ever reached the way expenses were approved.

Technical Services That Bought Access to a Customer

The consultant route connected a service description to a particular government-facing sale. The commission alleged that, in January 2006, KLH paid a Chinese agent RMB 688,000 under a technical-services agreement for an oil project. It alleged that the agent instead used the funds for improper payments to employees of a state-owned enterprise affiliated with the Dagang Oil Field, helping KLH obtain an RMB 5,000,000 contract.

The same agent returned in the complaint’s account of 2007. KLH entered an RMB 2,000,000 agreement for market research, business-development advice and relationships with government agencies. The commission alleged that some of the money funded improper efforts to obtain or retain government business, and that the agent’s efforts resulted in two government contracts.

A person who knows what technical work actually occurred can test the explanation that accompanied the fee. Someone who dealt with the customer may know whose decision the consultant was being paid to influence. Together, those accounts can explain why a consulting invoice entered the expense system at all.

What Conduct Can Violate the FCPA?

In RAE’s case, the Securities and Exchange Commission alleged payments intended to influence foreign officials’ business decisions, inaccurate accounting for those payments and inadequate internal accounting controls. Its Foreign Corrupt Practices Act complaint addressed both the alleged bribes and the records and approvals that let them pass as business expenses. The advances were the funding mechanism, while the substituted receipts and expense categories supplied the accounting disguise.

RAE separately resolved the Justice Department’s criminal investigation through a non-prosecution agreement dated December 10, 2010. Its admitted account included sales advances, substituted receipts and approved reimbursement requests within the ventures’ consolidated operations. Management approval could coexist with a false expense description: the approval did not make the stated business purpose real.

The commission alleged that authentic receipts, routine expense categories and repeated compliance responses coexisted with continuing payments to win business. We look at the transaction those documents describe and what people inside the company knew about it.

When an Audit Tests Whether the Service Happened

A different company’s case shows the value of testing the service behind the entry. The 2022 Journal of Forensic and Investigative Accounting paper Fresenius Medical Care: A Case Study on the FCPA describes Chinese payments recorded as center marketing fees and an internal audit that identified payments to an agent without corresponding proof-of-service reports. The paper reports that Fresenius China then stopped making payments through that agent.

A tax receipt can establish what the paper says, while proof of performance addresses what the business actually received. The Fresenius study follows an audit finding into a change in payments. In RAE’s case, the commission alleged that warnings repeatedly left the advance system operating, making the transactions after the warning especially telling.

What Records Should I Preserve?

We work with you on the records you know and the business facts they explain. In this case, the whistleblower evidence lay across different roles: a sales employee could understand the recipient, an accountant the substituted receipt, and an auditor what happened after the concern reached management.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For foreign-bribery information, we assess the separate SEC whistleblower award program and which program fits your knowledge. We build the case around your contribution.

You Know What the Receipt Left Out

If you know that an approved expense paid for something different, or that a warning left the payments untouched, talk with our whistleblower experts about what happened inside the business. We build your strongest case around that knowledge, bring in FCPA whistleblower lawyers who understand joint-venture payments and issuer accounting, and stay beside you through the case.