Nearly all Chinese companies that provide credit to foreign businesses do so because their invoices are insured by Sinosure. Sinosure is a massive China-based export and credit insurance company, as explained by Wikipedia:
Sinosure offers coverage against political risks, commercial and credit risks. This includes short-, medium- and long-term export credit insurance, investment insurance, bond and guarantee business, debt and capital retrieval business and credit assessment business. Investment guarantees cover political risks such as currency and remittance restrictions, expropriation and nationalization, sovereign breaches of contract and war.
Sinosure also provides support for export financing. In March 2011, in reached an agreement with J.P. Morgan to provide a wide array of financial services to exporters, with SINOSURE covering J.P. Morgan’s exposure.
Sinosure also covers SMEs (since 2005, even those with export volumes of under 2 million dollars a year that are unable to bear the political and commercial risks of international trade. The company also provides coverage for foreign investment by Chinese companies, this time most often by large SOEs.
Foreign companies typically do not deal with Sinosure unless and until they have a payment dispute with their Chinese product supplier. When that happens, Sinosure usually steps in and threatens to sue. Sinosure does this by hiring debt collection lawyers in the debtor’s country to pursue the debts of the Chinese manufacturers it insures. Sinosure has in the last few years, and especially in the last year, gotten quite aggressive in pursuing collection outside of China.
Sinosure usually enters the picture as follows:
- Foreign company (for purposes of this example, a U.S. company) buys $2 million of widgets from Chinese manufacturer for export to the United States.
- U.S company pays Chinese company $1.4 million upfront for the widgets, with the remaining $600,000 to be paid upon approved delivery.
- The widgets that arrive in the United States are of poor quality.
- The U.S. company refuses to pay the remaining $600,000.
- The Chinese manufacturer and the U.S. company seek to work out a deal and while that is happening, the U.S. company gets a threatening letter from a U.S. law firm claiming to represent Sinosure.
- The Chinese manufacturer will insist it never contacted Sinosure and that the U.S. company should just ignore Sinosure. The Chinese manufacturer will deny that Sinosure has any authority to act on its behalf and it will tell the U.S. company to just pay the Chinese manufacturer and if it does so all will be fine. In the meantime, Sinosure is claiming that if the US company just pays Sinosure, all will be fine.
- Oftentimes, even sub-suppliers start contacting the U.S. company to get paid.
Here are some basics you should know if anything like the above happens to you:
- Do not expect the law firm representing Sinosure to have any awareness of why you have not paid your China manufacturer.
- Do not expect the law firm representing Sinosure to know the correct amount you actually owe to your China manufacturer, or even whether you actually owe your China manufacturer anything at all.
- Do not expect the law firm representing Sinosure to care about ##1 and 2 above. The law firm’s only goal is to do Sinosure’s bidding and that is to get you to as quickly as possible pay as much as possible.
- Do not think about settling with Sinosure without a proper written agreement (in Chinese) that makes clear you have resolved all of your claims with Sinosure and with any Chinese manufacturer that might be able to argue you owe it money. This agreement needs to work in both China and the United States and it must be signed by all parties (including your Chinese manufacturers) or you could face additional lawsuits down the road. Sinosure’s lawyers will deny the importance of this but that is because their ONLY goal is to get your money.
The first thing you should do is take it very seriously. If you do not pay Sinosure, it will add your name to a list of foreign companies it will cease to insure. If you are no longer insurable in China none of your China suppliers (past, present or future) will extend you credit on your purchases. So the next time you need to order $2 million in widgets, you will need to pay the full $2 million upfront.
Here are a few more things you should know about dealing with a Sinosure debt collection:
- If you are not paying your Chinese supplier because you are having cash flow problems, Sinosure will not listen.
- If you are not paying your Chinese supplier because your supplier gave you bad product, Sinosure will “listen” if you do certain key things to “make” Sinosure listen. Sinosure’s lawyers will probably tell you that your reason for not paying does not matter, but that is just because they want you to pay quickly. It will be incumbent upon you to make Sinosure listen.
- There are all kinds of things you should do right away in china and in your home country to fortify and defend your company against all the things Sinosure will rain down on you.
My law firm’s international litigators have developed a whole host of strategies for dealing with Sinosure, with the specific strategies varying depending on the situation and the risk tolerance of the companies we are representing. I cannot reveal those strategies publicly for the simple reason that we do not want Sinosure or its lawyers to know them. You instead will just need to trust me when I say that when Sinosure comes calling you have plenty of options beyond just letting Sinosure roll all over you or losing your ability to buy on credit from China.