Subsidiaries conceal reports or engage in "backdoor dealings"? This kind of "stealth corruption" must be rectified.

Are subsidiaries concealing reports and engaging in “dark box operations”? This “invisible corruption” must be addressed.

Reporter: Li Song

State-owned enterprises, with concentrated power, dense funding, and rich resources, are key areas for anti-corruption efforts. Research conducted by the reporter from “Ban Yue Tan” has found that in recent years, significant progress has been made in promoting the governance of corruption issues within state-owned enterprises, but there are still persistent chronic problems that need urgent rectification. Due to reasons such as lax upper-level supervision and insufficient penetration of oversight, some subsidiaries of state-owned enterprises have become “dark corners” for anti-corruption governance, with “invisible corruption” phenomena emerging: some subsidiaries make significant decisions without approval from the parent company, engaging in “private arrangements” and dark box operations; some subsidiaries “package projects,” deliberately evade supervision, and cover up corruption issues…

Dark box operations are easy, and corruption schemes abound.

During visits across various regions, the reporter found that in some governance structures of state-owned enterprises, primary groups mainly perform management functions, with a large amount of business delegated to secondary enterprises. Subsidiaries engage in specific operational work, with numerous projects and dense funding. An analysis of corruption situations in some subsidiaries of state-owned enterprises mainly revealed the following two issues.

— Major decisions are made without approval from the parent company, leading to dark box operations.

In an interview with a state-owned financing leasing company, it was found to be continuously violating regulations by issuing financing leases to multiple private enterprises. In the process, to siphon off state-owned funds, relevant personnel fabricated false financial reports claiming the company had been profitable for three consecutive years, forged invoices and contracts for purchasing excavators, and fictitiously claimed ownership of more than 30 excavators to meet financing lease conditions. Due to prior bribery, the person in charge of the company did not conduct substantive risk control assessments and comprehensive investigations regarding the authenticity of the leased items, whether the collateral was sufficient, or whether the financing entity was operating normally, directly giving a “green light” for issuing financing leases.

The reporter found that this company did not report major decisions to the parent company, nor did it seek approval from the parent company, leading to regulatory failures. This is an important reason for the occurrence of corruption issues and the significant losses of state-owned capital.

— “Packaging projects” deliberately evades supervision, covering up corruption issues.

In recent years, as the anti-corruption campaign in state-owned enterprises has continued to advance, the supervision of subsidiaries by state-owned enterprises has become increasingly strict. The decision-making process for “three major and one large” matters has become more standardized, and there are now relevant institutional requirements regarding which matters should be reported to the parent company and which can be decided by subsidiaries. However, some discipline inspection cadres from state-owned enterprises told the reporter that some subsidiary heads are adept at “project packaging,” taking advantage of their familiarity with specific business operations and processes to deliberately evade supervision requirements, achieving the purpose of seeking personal gain through power.

One enterprise interviewed has clear regulations stating that for contracts involving leasing engineering equipment with amounts over 500,000 yuan, decisions must go through the group company’s executive meeting. However, some subsidiary “top leaders” collude with business personnel to deliberately split a contract into two or three contracts or to stagger the contract amounts, evading institutional requirements to avoid submitting for approval to the group company, handing business over to specific interested parties, and achieving power rent-seeking through deception.

Upper-level supervision is lax, and internal controls are discounted.

The emergence of corruption issues in some subsidiaries of state-owned enterprises is due to both lax upper-level supervision and reflects problems such as internal controls being “on the wall but not in the heart, and implementation being discounted.”

Upper-level supervision is lax. Some parent companies of state-owned enterprises do not fulfill their responsibilities as investors, focusing more on the income and profit indicators of subsidiaries while paying insufficient attention to their party conduct and integrity construction. Although the system seems complete and layers of checks are in place, in reality, some supervisory executions are merely formalities, amplifying operational risks.

Internal supervision lacks strong penetration. Some state-owned enterprises have over ten subsidiaries, with long business lines. In actual operations, parent companies do not have a clear grasp of significant fund flows and specific project operations in subsidiaries, leaving them “unclear about which links have corruption risks and where there are supervision blind spots, always feeling that supervision is far-reaching.”

In some enterprises, departmental decision-making opinions replace subsidiary decisions, undermining parent company supervision and amplifying corruption risks. In a certain enterprise, a popular chemical product is sold, with the sales department effectively holding pricing authority. “When the sales department head reports a selling price, the company generally adopts it. Although the price approval process is followed, it is merely a formality,” said a relevant discipline inspection and supervision cadre, noting that the price approval process is essentially ineffective, and the parent company has long been unaware of such loopholes, allowing sales department staff in subsidiaries to manipulate pricing for kickbacks.

Internal control systems are ineffective, and key personnel lack self-discipline. Corruption in some subsidiaries of state-owned enterprises exhibits characteristics of “gang operations and secret profit-sharing.” In one local state-owned enterprise subsidiary, the general manager colluded with the human resources department head to control a long-unused public account and privately divide policy support funds and insurance compensation funds deposited into that account for over seven years.

Discipline inspection and supervision cadres handling the case stated: “In this case, the two collaborated in their roles; the account was legal, the seal used was legitimate, and the general manager’s signature was present during the fund extraction. The enterprise was controlled by ‘insiders,’ exacerbating corruption risks.”

Strengthen institutional construction and weave a tighter supervision net.

The fifth plenary session of the 20th Central Commission for Discipline Inspection pointed out the need to maintain high-pressure deterrence to reinforce the fear of corruption, adhere to strong measures to treat ailments and severe penalties to combat chaos, continue to uncover and clean up, and deepen the governance of corruption in key areas such as finance and state-owned enterprises.

Industry insiders suggest that to curb the emergence of corruption in subsidiaries of state-owned enterprises, relevant institutional construction should be improved. The internal governance responsibility list of state-owned enterprises should be refined, focusing on key areas such as “three major and one large” decision-making matters and bidding processes, clarifying the boundaries of enterprise responsibilities and powers, and ensuring that the reporting system is effectively implemented; enterprises with conditions should gradually integrate core business data related to finance, engineering, and investment from subsidiaries, using data tools to achieve real-time and effective supervision of fund flows, contract signing, and project progress, thereby improving the penetration of supervision.

Strengthen collaboration between discipline inspection and supervision at the local level to enhance supervisory effectiveness. Relevant cadres from the Discipline Inspection Commission in the Changshou District of Chongqing and the Wan Sheng Economic Development Zone suggested that local discipline inspection and supervision organs have diverse investigative methods and rich practical experience, while enterprise discipline inspection commissions are familiar with industry ecology and understand business interactions. Joint efforts between local and enterprises can leverage respective advantages to strengthen communication and coordination in routine supervision, clue transfer, and information sharing, and through joint visits and research, identify integrity risk points and promote the improvement of institutional mechanisms to better prevent and mitigate corruption risks.