If I had to choose one word that should (and does) strike fear into the hearts of product buyers everywhere, it would be Sinosure.
Nearly all Chinese manufacturing companies that provide credit to foreign businesses do so because their invoices are insured by Sinosure. Sinosure (a/k/a The China Export and Credit Insurance Corporation) is a massive China State Owned Entity (SOE) that provides Chinese companies with insurance coverage against commercial and credit risks.
Foreign companies typically do not deal directly with Sinosure until they have a payment dispute with their Chinese manufacturer. When that happens, Sinosure steps in and threatens to sue the foreign company that owes the money. Sinosure does this with a battery of debt collection companies and lawyers it uses in the debtor’s country to pursue the debts of the Chinese manufacturers it insures. Sinosure is very aggressive in pursuing collection cases against American companies, most of whom have little clue about what they are up against. In the United States, Sinosure typically works with Brown & Joseph and Leviton Law Firm.
The Typical Sinosure Case
The below is a composite of the many cases our international lawyers have seen:
1. U.S. buys $2 million of widgets from Chinese manufacturer.
2. U.S. company pays Chinese company $1.4 million upfront for the widgets, with the remaining $700,000 to be paid upon approved delivery.
3. The widgets that arrive in the U.S. are of poor quality and the U.S. company (rightly) refuses to pay the remaining $700,000.
5. The U.S. sells the bad widgets at fire-sale prices, netting $400,000 or $300,000 less than the $700,000 it is already out of pocket to the Chinese company.
6. The Chinese manufacturer threatens the U.S. company with a lawsuit and the U.S. company threatens the Chinese company with its own lawsuit or with counter-claims for “the bad product and for the damage caused to our reputation.”
7. The U.S. company then does nothing for months, figuring there is no way the Chinese company will sue it in the United States and also figuring that suing the Chinese company would be more trouble than it is worth.
8. All of a sudden, a U.S. collection agency/lawyer retained by Sinosure contacts the U.S. company and says that unless the U.S. company immediately pays the remaining $700,000 owed to its by now former China manufacturer, it will soon be sued in the U.S.
9. The U.S. company starts out defiant, telling Sinosure’s lawyer it will never pay anything because it doesn’t owe anything and if the Chinese company were to sue in the United States, it will counterclaim.
10. The U.S. company then learns it can no longer buy its products on credit from any manufacturer in China because Sinosure put the U.S. company on a list of companies whose China exports will not be insured. Once a company makes this list, no Chinese manufacturer will extend that company any credit.
11. The U.S. company’s inability to buy from China on credit is tough on them, especially because it is already reeling from having lost money on the bad product it received.
12. The U.S. company then calls its former manufacturer to try to work out a “win-win” settlement
Real Life Sinosure Nightmare
Unfortunately, as far as I know, the U.S. company and the Chinese company never work out a settlement that allows the U.S. company to get its China product purchasing credit restored. Instead, our Sinosure lawyers often see the following:
1. The U.S. company works out a deal with the Chinese company to pay it $350,000 and it pays the Chinese company the $350,000, believing its emails are sufficient to prove the deal.
2. The Chinese company is delighted to have received the $350,000, especially since this is in addition to the compensation it already received from Sinosure.
3. The Chinese company does not tell Sinosure it received the $350,000 because that would require it send that money to Sinosure — not to mention that it had no authority from Sinosure to do such a deal.
4. The Chinese company is not going to start selling its products to the U.S. company again. Why would it when it cannot get export insurance from Sinosure were it to do so? This is true of every other Chinese company for the same reason.
5. At this point, the U.S. company is in a terrible position. It is in the hole $650,000 for the bad widgets and it is having to deal with Sinosure’s incredibly aggressive American law firm that has zero clue about anything China.
6. Unable to afford to hire U.S. litigators to fight the lawsuit that has just been or will soon be filed against them and to hire China lawyers to sort through and explain what transpired in China, the U.S. company tosses in the towel.
Sometimes U.S. companies try to negotiate directly with Sinosure’s lawyers but settlement is rarely possible and even when it does happen it has many of the same risks set forth above.
How to Handle Sinosure Correctly
The above nightmare scenario can be prevented so long as you do not “settle” with your Chinese manufacturer or with Sinosure without making 100% certain you doing so will actually resolve ALL claims against you. Do not pay anyone anything without first getting a proper written agreement (in Chinese) that makes clear all claims (of both your Chinese manufacturer and Sinosure) have been resolved. 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 very troubling additional lawsuits down the road.
And this is only if you are insistent on settling. Most of the time there are various ways to get Sinosure to give up and for you to start getting credit from Chinese manufacturers again.
UPDATE: For more on the risks you face when Sinosure calls, check out China’s Sinosure: It’s Back and It Wants Your First Born.