Though we’ve written about this many times previously, I’m writing about it again today because my law firm’s China lawyers have been seeing a lot more of this lately, especially as against European companies.
We have been getting a number of emails lately from companies asking us if what their Chinese counter-parties are asking them to do is is legitimate or not and, unfortunately, a number of emails from companies telling us what happened to them and asking us to help them and/or. to write about it on here. These companies often ask us to name the Chinese companies that scammed them, but we do not do that because scammers often usurp the names of legitimate Chinese companies and the last thing we want to do is stigmatize innocent companies.
The scam we are seeing is pretty much the oldest (certainly the most utilized) China scam against foreign companies. It works like this. Chinese company emails foreign company expressing interest in buying products or services from foreign company and then quickly negotiates a contract with the foreign company to do exactly that. Once the contract has been agreed to, the Chinese company tells the foreign company that it must go to China to meet the Chinese company CEO and/or some government officials for a contract signing ceremony.
The below are some of the emails we have gotten in the last month or so:
We are a small company in _________Spain [my law firm has offices in Spain and our website is in Spanish and some of our blog posts are in Spanish so we get a disproportionate number of emails from Spanish companies] and I was just victimized by a “come to China to sign the contract” scam. I read about these scams on your blog, but only after it happened to me. We are a small education company and we lost nearly $10,000 so would you please tell me whether it is possible for you to recover any of this money for us.
We spent weeks working out the terms of our contract with them and then another couple weeks planning our visit to Chengdu to meet with them.
I believed they were real because they never asked us for any money before our trip. Two of us from my company worked on this project and I have to admit we never suspected anything.
We researched the company thoroughly and they appeared to be a real company with a real website and a real domain name and their emails came from that domain name and our phone calls to them were to the telephone number on their website.
But after we signed the contract with them in Chengdu, we were asked to pay for a dinner to celebrate. We did not feel that we could say no because we had gone all this way and they told us it was important we pay because there would be government officials there. They even told us they would make the first payment early if we did. Our dinner was absurdly expensive and when it came time to check out, the not so nice hotel they put us in was absurdly expensive as well.
By the time we got back to Spain, the Chinese company’s website was gone and I then was certain we had been scammed. They don’t answer my emails anymore.
We looked up the the Chinese company and it never existed. This took us less than five minutes and had this Spanish company had us do this before beginning its negotiations, it would have known this. I am writing about this scam because the other ones would have been a bit more difficult to spot because they used the names of real Chinese companies, but changed the email addresses slightly and gave different phone numbers. In one case, the city in China which the meeting took place was about 1000 kilometers from the home city of the real Chinese company.
The thing that makes these scams so insidious and so successful is that the amounts stolen usually range between USD$5,000 and $10,000. And here’s the thing about amounts like this. Few people care. The police in China don’t really care because they have more important things to do. The police in the foreign country don’t care because they have more important things to do. And we lawyers cannot take these cases because there is so little at stake and the odds of ever getting anything are incredibly slim.
My law firm’s international litigation team has taken on many multi-million dollar international fraud litigation cases (mostly involving companies that paid millions of dollars for products they never received or invested millions of dollars in projects that were never real) and those typically take at least $10,000 in attorney time just for basic investigatory work to determine whether there is any real shot of recovery. So the sad bottom line with these scams is that the scammers virtually always get away with them and this means they remain free to operate and to keep perpetrating them.
Here are some basic rules to follow when negotiating any sort of deal with a Chinese company, especially one where the Chinese company is claiming it will be paying you money:
1. Conduct due diligence on your Chinese counter-party before you spend any time or money. Don’t be afraid to ask them for a copy of their business license and then have someone who knows what they are doing look at it.
2. Always book your own travel to China, especially your hotel.
3. Don’t go to China for a signing ceremony. Our law firm has drafted thousands of contracts between Western companies and Chinese companies and I do not think there has been a single time where anyone was asked to go to China to sign the contract. This is true of big Chinese companies (both SOEs and privately held entities) and small Chinese companies.
Most importantly, don’t get too greedy, don’t move too fast, don’t be anything but super careful, and don’t be afraid to challenge your Chinese counter-party on what they are telling you. Legitimate Chinese companies rarely resent having to prove themselves; in fact most welcome it.
What are you seeing out there?