Your China manufacturer asks you to send its payment to a bank account in another jurisdiction, such as Hong Kong or Singapore. Should you agree? Probably not.
When working with our clients that are having their products manufactured in China (or in various other leading manufacturing countries such as Taiwan, Thailand, Mexico, Poland, Vietnam, India, etc.), our international manufacturing lawyers draft agreements to protect our client’s intellectual property and other confidential information. See Overseas Manufacturing Contracts (OEM, CM and ODM).
Another priority is to manage and mitigate the risks that regularly arising in product sourcing relationships. One extremely common situation is where a China, Taiwanese or Vietnamese factory will request our client pay them via a bank outside their own jurisdiction — often in Singapore or Hong Kong.
Should you agree? If possible, no, and the reasons for this are as follows:
1. You will likely be aiding and abetting your manufacturer in engaging in tax evasion and this could render your contract unenforceable. If your Chinese supplier receives payment into a bank account under its company name in China, it will need to include your payment as revenue/income on its tax and other financial filings. It is common for suppliers to direct some payments to Hong Kong and then some into China when they need to pay bills, ensuring that the off-shore payments do not increase their tax liability. This is true of manufacturers from many other countries as well.
2. If you pay your Chinese or Vietnamese or Taiwanese manufacturer via its Hong Kong bank account, you almost certainly will be paying a Hong Kong company affiliated with your manufacturer, not your manufacturer. What this means in real life is that your manufacturer can easily claim that you never paid them because you didn’t. A common situation we see is where a container arrives to the client’s designated port and the client then pays the remaining balance owed to a non-China bank account. However, the container remains stuck at port because the Chinese supplier claims it never received the remaining balance and they refuse to give the client the B/L. The Chinese supplier then requires payment to a bank account in China to secure the release of the B/L. Another thing we often see is when a foreign company sues its Chinese product supplier for bad product, the supplier will counterclaim for payment, claiming that it never received it because it didn’t.
3. It also bears mentioning that whenever your product supplier changes the bank account to which they want you to pay them, you should have a procedure to make sure that you are not being taken in by a bank switch scam. See The China Bank Switch Scam: Still Very Much Alive.
Our international manufacturing lawyers work daily with clients to protect them from tax evasion and money for nothing scenarios, using the following methods:
1. We draft contracts that require the supplier to receive your payment only at a bank account in their actual company’s name, which means the client will be paying directly to the supplier for the product the client receives from it.
2. We make sure the bank account owner’s name exactly matches the supplier’s registered Chinese company name.
3. We help provide for procedures for confirming bank account changes the product supplier may make in the future.
Paying your China supplier to an account other than a China account in their Chinese name could be seen as tax evasion and it also can render your agreement with your supplier unenforceable. Doing this also increases your chances of never receiving your product or receiving bad quality product. It is therefore important your international product supply contracts make clear that your payment obligations are with your actual manufacturer and not some related or unrelated Hong Kong or Singapore entity. You often will receive strong resistance on this issue from your supplier, but in most cases, it will make sense for you to stand firm.