Chinese Regulators Punish 15 Cinemas for Box Office Fraud

2012-10 BIZ China Tickets Illustration

When it comes to doing business with China, the devil is always in the details. The recent announcement that the Chinese government finally will comply with a World Trade Organization order to treat U.S. films more fairly is no exception.

Local experts believe that as much as 10 percent of Hollywood's gross box office in China in 2013 may have been lost to illegal skimming by cinemas.

Chinese regulators have punished 15 local movie theaters for falsifying box office receipts under new rules that clamp down on cinemas manipulating revenue data, viewership figures and other forms of fraud related to ticket sales.

According to a statement from the China Film Association and the China Film Producers Association, 15 theaters were involved to different degrees, with the most serious six offenders being slapped with a distribution embargo, while the lightest punishment is “criticism.”

PHOTOS: China Box Office 2013: The Top 10 Movies

The move is welcome news for Hollywood, as it means the box office data coming out of China should become more reliable, and that studios' share of China revenues will be more secure.

In January, the State General Administration of Press, Publication, Radio, Film and Television (SGAPPRFT) issued a circular with a new standard on the technicalities of managing cinema ticket sales. The rules are aimed at stopping tax avoidance and the cheating of filmmakers and distributors by falsifying the numbers of moviegoers and reporting artificially reduced ticket sales.

Official box office data for last year shows sales of $3.6 billion, with domestic movies taking $2.12 billion of that, a rise of 54.3 percent for homegrown films. However, industry experts believe that real box office sales are at least 10 percent more, the Xinhua news agency reported, and the underreporting of box office sales was hitting tax revenues and the bottom line of studios and distributors -- both Hollywood and local.

The cinemas were mostly in second- and third-tier cities and included theaters in Linfen, Hainan, Shenyang, Jiujiang and Chongqing.

PHOTOS: Inside Hollywood's Surprise Trip to China's Huading Awards

There were different kinds of transgressions. Some cinemas operated a dual system of gathering box office sales, whereby they offered some moviegoers handwritten tickets and others legitimate ones. Others simply collected money and directed customers to their seats without printing tickets at all.

In Liaocheng, a small city in the Shandong province, a cinema reported box office receipts of $321 (1,970 yuan), while actual takings were $8,330 (51,065 yuan).

In Wanning on Hainan island, between the end of January and early February, the computer ticketing system registered no screenings and no audiences, but checks revealed that there had in fact been normal showings throughout the period.

The statement said cheating was very rare in the big cities -- mostly taking place in smaller cities where the theaters were operated by independent investors.

STORY: Teenage Benedict Cumberbatch Look-Alike Goes Viral in China

While much of the theft was for personal gain, in some cities the growth of the number of theaters was too fast, with several cinemas setting up near each other, putting the operators under immense competitive pressure. They say they were forced to cheat to keep operations running.

Under the new regulations, ticketing software has to be upgraded to a national digital ticketing platform to stop cheating on box office sales.

All commercial cinemas must upgrade their software or face being barred from operation.