The China Bank Switch Scam: Still Very Much Alive

Long ago I formulated a self-imposed rule. Whenever I or one of my firm’s other China lawyers receive three emails on the same thing in a week, we write about it. This happened this week and the topic is that good old stand-by, the China Bank Switch Scam.

Two of the emails were from companies that had lost less than $50,000 were of the “we will never do business with China” school, so not all that much to be said about them. The third one though is far more substantial and I will be describing that one shortly.

But first, let me describe what this scam is not and then I will describe what it is. First off, it is not the entirely fake Chinese bank set up to bilk depositors. That happened in Nanjing earlier this year. This is also not the scam where a fake Chinese manufacturer takes money from a Western company and then never delivers any product because it has no product to deliver. That scam happens all the time, but mostly to unsophisticated Westerners who fail to conduct even the most basic due diligence on their supplier.

No, this is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening.

This scam usually involves your regular Chinese supplier asking you to make your next payment to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment, your supplier insists you still owe it the full amount (oftentimes with added fees) because it has yet to receive your payment. When you explain that you paid, your supplier points out that the bank account to which you sent the funds is not theirs and you still owe the money. What happened? Your Chinese supplier got hacked, either by someone outside or within the company and you indeed have yet to pay them.

Here is the latest, with all identifiers changed so as to disguise identity:

We had about $250,000 worth of widgets arrive in the USA in late December.

We paid the remaining balance of about $144,000 to the manufacturer a few weeks before arrival.
The container is still at port in the USA because the Chinese manufacturer is claiming that it never received the remaining $144,000 balance. They refuse to give us the B/L.

After months of trying to track down the wire, we learned that the manufacturer’s email was hacked and the wire information was changed and the money has been stolen by someone in Hong Kong. We had been communicating with two of their employees (first Steven and then Jasmine) for years and we visit them frequently as well. But at some point their were hacked and someone posing as one of their employees started to write us. They claim that the fake person gave us the wrong bank account information.

They refuse to release the goods if we do not pay them $135,000 more (they are giving us a small discount off the balance). We also will need to pay anther $15,000 in costs for the container being stuck. They are saying that if we do not pay this right away, they will have the container returned to China.
We need this product and every piece in that container is stamped with our company logo so we are concerned about that too.

We can take legal action against them, but we have worked well with them for years and I do not want to see this continuing to drag on.

I have offered to make a small payment to them, promised that we will continue buying from them, and have agreed to cover all of the storage fines. But they are insisting on $135,000 plus the $15,000.

On my end, how do I know that their employee didn’t secretly steal the money? Or that they are just pocketing as a company? HSBC HongKong confirmed 100% that the money is received since January and as of now are refusing to return the money to our bank so we can redirect it. And why should I pay another $60,000 because “their email was hacked”?

What do you recommend?

In various responses, I wrote the following:

It will likely not make sense for you to take “legal action” in the United States against your Chinese manufacturer unless it has assets in the United States or in some country outside China that enforces U.S. court judgments. It is the rare Chinese manufacturer that has assets outside China and China almost  certainly will not enforce your US judgment. If you sue in China, you will almost certainly lose because the court is more likely to fault you for paying someone in Hong Kong without confirming with your Mainland China manufacturer than to fault your manufacturer for allowing itself to get hacked.

Your Chinese manufacturer is not going to cover you for your full loss as it likely faults you for having paid someone other than them. In our experience, the best way to handle these situations is to try to strike as good a deal as you possibly can with your supplier and then at that point decide whether to pay or not. I also strongly suggest trying to get covered for this by your insurance company. You claim employee negligence caused you damages and you ask for insurance coverage for your loss. Our lawyers can help you with all of this.

As for your logo, for us to know how we can help, if at all, we first need to know where you have registered it as a trademark. Have you registered it as a trademark in China? Have you registered it as a trademark in the United States? Where else do you sell your widgets? Have you registered it as a trademark in those other countries? I strongly suggest that we discuss your current trademark registrations both for this pending matter and to help prevent future problems.

Again, I want to stress that we are seeing smart, worldly, sophisticated companies of all sizes get caught up in this scam. How can you prevent it from happening to you? Do the following (h/t to Renaud Anjoran for these):

  1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.
  2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.
  3. Ask your suppliers to fax you their invoice and make sure the sending fax number belongs to your supplier’s company.
  4. Do a first small wire to confirm the account.
  5. Have a special procedure for confirming the company name. Note also “that paying a Chinese company in mainland China is safer for you” than paying them overseas in Hong Kong, Taiwan or elsewhere.
  6. Have a special procedure for confirming bank account changes. “Follow the same procedure as point 5, but also call several people in the company. They will understand your attitude if you tell them you are worried about the “different bank account scam” — they are also a victim when it happens to their customers.

Be careful out there.