One of our oldest and most cherished traditions is to write about China scams at the end of every year. We do this because history shows this is the biggest month for them. It would seem that the scammers increase their activities at the end of the year, hoping to be less noticed/less examined due to the usual end of the season rush. I was reminded of this tradition after reading my emails this morning and getting hit with what look like a couple new fraud matters. I do have to give the scammers credit in that the diversity and ingenuity and number of scams is way up as well.
We are seeing the following old scams in quantity this year:
1. “The come to China to celebrate our deal scam” In this scam an alleged Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service. The terms of the deal are quickly (too quickly!) resolved and the Chinese company suggests the foreign company come to China to sign the contract and celebrate the great cooperation and friendship the two parties have established. The foreigner(s) gets to China (usually some really out of the way city in China) and is “treated” to a super expensive meal at which the contract will be signed. After much food and drink the foreign company is then told that Chinese custom requires the foreigner pay for the dinner and buy the Chinese CEO an expensive gift and pay the notarization fee for the contract. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the dinner and another $3,000 to $8,000 for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go buy the CEO gift on the foreign company’s behalf.
It isn’t until weeks later that the foreigner learns there is no deal and (most of the time) there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend another $10,000 or so to seal the multi-million dollar deal.
Our China lawyers constantly get emails from people asking if “their” deal looks real. Our answer is always the same: We do not know unless and until we do some basic research, but before getting on a plane, it is imperative that at least some due diligence is done on the China company AND if the company shows up as real, you should contact them to make sure they are really the ones with whom you are dealing. Sometimes just one email to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated.
2. “The new bank account to pay us scam.” This is the scam on which we so often focus and that is because far too many smart companies fall for it. This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often the new bank account is in Hong Kong.
What’s the scam here? Well, it is always possible the Chinese company has changed its bank account, but you should be quite certain of this before you switch your payment. In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company. The Chinese company would get the money in Hong Kong and then claim you had never paid and you still owed them money because it was completely your fault for having made the payment to someone other than to them. Then if you don’t make the second payment they report you to Sinosure and that is never a good thing. See How to Conduct Business with Chinese Companies That See a Dark Future.
In the last couple of years, this scam has became even more sophisticated when computer hackers from all over the world started hacking into Chinese company’s computers and sending out invoices that purported to be on behalf of the Chinese company.
How can you avoid getting caught up in this type of fraud? Take note of the following:
- The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
- Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
- Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam. The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.
3. “The fake company scam.’ This is an old scam that seems to morph into something slightly different every year. My personal favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website appears proclaiming really cheap trademark, copyright and patent registrations in China. The foreign company sends some money and nothing ever gets filed. There are two variations on this one, one much more sophisticated and harmful than the other.
The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows it still needs to register its IP in China.
Under the more sophisticated version, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate. The foreign company is convinced its China IP registrations have been covered and it does not learn for many years that it is not. By that point, there are no traces that might lead to the scammers.
A recent addition to the panoply of fake company scams is fake freight forwarders. See Forwarders put on alert over new Chinese freight scam. The most common version of this scam is similar to the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing:
Fraudulent forwarders pose as legitimate companies with spare capacity. They arrive on-time to collect loads and then disappear.
Another frequently seen scam involves organized gangs creating their own websites and advertising themselves as freight forwarders. These sites are characterized by very basic information, freemail accounts, and mobile phone or Skype contacts only, Mr Yarwood warned.
A third type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit.
Many years ago, a company came to us after its multi-million dollar cargo had disappeared. Our 15 minute check of the shipper’s (fake) business license told us the company was a complete fake.
What is the best way to prevent falling victim to this scam? Pretty much the same as with most other scams. Make sure you know with whom you are doing business. Do your due diligence and if you do not know how to do even basic due diligence in a foreign country, pay someone who does. For more on what that means, check out the following:
- How To Conduct China Due Diligence. Just Ask.
- Effective Due Diligence In China
- China Due Diligence. Not Optional.
- Seven Rules of China Due Diligence
- Let Me Tell You About China Due Diligence
- Giving China Due Diligence Its Due
- Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker
What have you seen this year?