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China signs of fraud

by Dan Harris

American companies are always asking the China lawyers at my firm how they can avoid getting scammed by a Chinese company. There is no one answer and sometimes it involves “instinct” as much as science. We see so much fraud/attempted fraud in our practice that we can usually (but not always) spot a fraud within minutes just by looking at the documents the victim or potential victim has been provided. I previously wrote about some of the ones I have come across:

  • Because China due diligence should not be optional.Company claimed to have a multi-million dollar account at a non-existent bank. It was a bank in Australia and five minutes on Google revealed that bank did not exist. What caused us to look was that we thought its name (an Ocean not contiguous with Australia) was very strange for a bank in Australia.
  • Company documents showed a subsidiary in the Marshall Islands, yet always spelled the country as Marshal Island. It had no such subsidiary. Why would a company not know how to spell one of its locations correctly? I mean, come on.
  • Company claimed to have a branch office in a particular city, yet its documents on that branch office (including supposed government documents) put that city in the wrong province. Again, come on.
  • Company claimed to be bringing in twice as much product as physically possible on a particular ship. When I first saw the amount of product involved I thought “this must be a massive ship.” I then thought, gosh, I didn’t realize Cambodia had ships of this size. So I spent about five minutes checking out this particular ship and realized that it was not nearly large enough to carry the cargo it claimed it had carried.
  • Company claimed to have been shipping out product on a particular ship that did not exist during the first few years when the product was allegedly being shipped.
  • Company claimed to have won an IP lawsuit in a country’s Supreme Court (they produced the Supreme Court’s decision and everything), but there had never been such a case. Had a lawyer friend check this out in the applicable country (Russia).

Many months ago, a company sent me some documents to get an estimate from us on what we would charge to represent it on a deal. Within ten minutes I wrote back saying that we would not be interested in taking on the contract writing because I thought that the alleged Chinese company was a scam and we did not want to in any way participate in it. I instead suggested that this company retain us to conduct basic due diligence on the company to determine its bona fides. The potential client (who no doubt had dollar signs in its eyes) seemed a bit offended and sought to challenge my suspicions of fraud. My response to his challenge (with some key identifiers changed) was as follows:

I spent less than ten minutes looking at just the proposed contract you sent me and from that one document and in that short amount of time I noticed the following:

  • If a company is named China, it is almost always huge. Massive. Very unlikely that sort of company would have reached out to you out of nowhere for a $350,000 order when there are so many other potential sellers in other countries (including within China) it could have contacted. This makes no sense. I strongly suspect that the person reaching out to you is not with this Chinese company.
  • The Chinese company with this name is in the X business. Why would a company in the X business be looking to buy Y product? Makes no sense. I strongly suspect that the person reaching out to you is not with this Chinese company.
  • The bank is in Shenzhen. The company is in Shandong Province. It would be like you in Nashville using a small bank in Seattle for your banking. Makes no sense. I strongly suspect that the person reaching out to you is not with this Chinese company.
  •  Your contract is not a contract at all. That standing alone is not a sign of fraud but it does not make sense for a large company (which this company purports to be) to send out a document like this because it is not even close to being a real contract. I strongly suspect that the person reaching out to you is not with this Chinese company.

After the American company got over their anger at my questioning their deal (which they saw as the start of something big), they had us conduct due diligence on the company and the situation and within a week, they too were convinced that they had been scammed. No deal, but no massive losses either.

For more on China due diligence, check out the following:

China Due Diligence. The Most Basic Things To Do.

China Business Due Diligence

Giving China Due Diligence Its Due

Oh, and be careful out there, especially if you get a contact out of the blue from a Chinese company purportedly wanting to buy your product or your service.

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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