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Forensic Focus: Fraud Risks and Trends in the China Real Estate Industry

Forensic Focus: Fraud Risks and Trends in the China ...

The real estate industry has certain unique characteristics. Companies are project-oriented, staff turnover rates are high, and management is project-based. These characteristics result in an environment that is conducive to fraudulent activities, such as embezzlement and improper procurement. KPMG analyses fraud risks and trends seen in the real estate industry based on our up-to-date industrial and professional experience. This report covers three recent case studies from the following three perspectives: revenue interception by internal employee, profit diversion by JV partner and procurement fraud.

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Preface

As a result of macroeconomic changes and a slowdown in economic growth, the real estate industry in China is facing pressure from multiple sources including market forces, regulations, capital and costs.

Our observations

Fraudulent activities are usually undertaken by individual employees or groups of employees for their own self-interest. They often take advantage of their positions and internal control deficiencies to conceal fraudulent and illegal conduct. We recommend companies stay alert in respect to the indicators, and closely monitor and further investigate immediately once the indicators were found at the early stage.

Case #1 – Revenue interception by internal employee

KPMG assisted a multinational real estate group in an internal investigation at its project company in China. Following customer complaints, the group management suspected that a sales manager in the Chinese project company was involved in a range of fraudulent activities, such as selling the same property to multiple customers and extending the property sales/purchase process without a justifiable reason.

Case #2 – Profit diversion by JV partner

KPMG helped an overseas-listed real estate group perform an internal investigation into the financial situation of its Sino-foreign joint venture (JV). According to an internal report, there was a material risk that the joint venture’s customer deposits, time deposits, and loans had been embezzled.

Case #3 –Procurement fraud

KPMG helped an HKEX-listed real estate group perform internal reviews of procurement and payment processes at three subsidiaries in its property and hotel management segments. Our review identified internal control gaps across different segments of the group. We also identified a number of red flags, such as rapid growth in procurement expenses, unreasonable land costs, frequent related-party transactions, and transactions with dubious business purposes.

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