Though my law firm constantly gets calls from companies scammed in their China dealings, it is rare that I learn of three scams in one week (and it is only Wednesday). It is also rare that they are as interesting as the ones I will be describing. Add in this Reuters article from yesterday that quotes me on fake [Ikea] stores in China and it truly has been China scam week — for me anyway.
The first scam is about a Chinese due diligence company that contacts companies overseas and tells them they have a Chinese company lined up to buy their business. The foreign company (I understand that this company mostly focuses on Latin America) is then told that before the Chinese company will reveal itself, the foreign company must submit to a due diligence inspection, with the Chinese company and the foreign company splitting the due diligence fees and each party paying $20,000.
What makes this scam more sophisticated than most is that the Chinese company uses Americans as its salespeople. These American salespeople either do not know that they are engaged in a scam or they do not want to know. The American salespeople do the deal and the Chinese company even sends someone out to the purchasing company and conducts a bit of work. A few months later, the foreign company is informed that the potential Chinese buyer is no longer interested.
There are a lot of smart things about this scam. First off, virtually nobody knows they have been scammed. Second the amount scammed is just about perfect. It is enough to make it worth the scamming company’s while, but not enough for the company that was scammed to bother investigating further or to bother reporting it and looking bad for having been duped.
The second scam would have been completely routine, but for the large amount of money involved and the sophistication of the company scammed. I learned of this one from a China consultant friend who asked me if there is anything the international litigators at my law firm could do to try to get the money back. Here’s the story:
An American manufacturer receives unsolicited offers from two Hebei-based companies for chemicals. This American manufacturer had been seeking out chemicals via Alibaba and that is presumably how it had been brought to the attention of the Hebei companies. The Hebei companies send the American company samples of three chemicals. The American company tests them and finds them acceptable to purchase.
The American company subsequently places an order for $750,000.00 worth of two of the three chemicals from the two Hebei companies. To protect itself (but not correctly), the American company uses an Irrevocable Letter of Credit, documents at sight. What this means is that the Chinese banks must pay the Hebei companies as soon as the banks are presented with documents showing the products have been put on a ship for shipment to the United States. Or to put it even more simply, the Chinese companies get their money as soon as the material is on the boat.
And of course, this is what they do. The Hebei companies secure bank payment as soon as their materials are loaded.
Five weeks later, the American company receives its product in the United States, but upon opening it, realizes it has been sent 100 drums of water and 50 tons of some unidentifiable white powder.
The Hebei company that sent the white powder no longer responds to emails, faxes, or phone calls. A quick googling of their name reveals that it is a frequent topic on anti-scammer message boards. A quick search of China official company records then reveals there is no such company in China. After a few days, communication is lost with them as well. There are some indicators the two “companies” are one and the same.
My law firm does a quick search of China official company registrations and determines neither company ever existed.
Please note that I secured permission from my friend to write the above.
The third (probable) scam is also fairly routine, but it is one of my personal favorites because it emphasizes the benefits of doing due diligence on your “lawyers.” An American company contacted me after sending a cease and desist letter to a Chinese company accusing it of using its China trademark and demanding that it cease doing so. The Chinese company responded by saying that it owned the trademark, having registered it a couple of years ago. The scam here is that the American company had paid a “lawyer” (I put this in quotes because I am skeptical it was actually a lawyer) to register its brand as a trademark in China and it had the Chinese certificate of registration to prove it.
Now, however, when it did a China trademark search for its brand name it did not show up anywhere as the owner, but its Chinese rival did. For more on China scams involving fake lawyers check out China: Where Even The “Law Firms” Are Fake.
Our international IP lawyers explain that the Chinese company (which by all appearances looks completely legitimate and had nothing to do with the scam) now owns the trademark for its brand name in China and if the American company does not stop using that brand in China it will likely get its own cease and desist letter soon. We then work with them on securing a new trademark for a new brand name.
Is this sort of thing actually getting worse or is it just an aberrant week?