by Dan Harris in 'China Law Blog'
Someone should have told me that April is China scam month, because I always thought it was December (see Ancient China Business Scam. Back With A Vengeance This Season).
My firm has gotten more emails and phone calls this month from foreign companies scammed by Chinese manufacturers than any month ever. Since I am guessing this is attributable more to the downturn in Chinese business than to anything related to this particular month, I am writing this post as a warning.
What we are seeing so much of this month is the very basic, very much tired and true, bank account switch scam. We got two of these already this week (and it is only Tuesday). In both cases the parties were out six figures, yet we told both of them not to bother hiring us to try to get their money back. Not surprisingly, both cases involved purported chemical companies. (See our posts Anatomy Of A China Scam. Part I. Just The Facts. and Anatomy Of A China Scam. Part II. Conclusion And Advice., both involving a large chemical company scam).
Here is how the scam works.
Chinese Company secures orders from foreign company. In the past, these orders were almost exclusively secured over the internet, but we have recently been hearing of many cases where the Chinese company actually goes to a trade fair (and not just in China) to secure its orders. Foreign Company starts feeling good about Chinese Company. The person who allegedly works for Chinese Company (I say allegedly because it is quite possible, nay, even probable, that the person at the trade fair who claims to be with Chinese Company actually has no connection with Chinese Company) speaks good English and is a quite reasonable person. The person who works for Chinese Company offers reasonable (but not amazing) prices and, most importantly, he or she (unlike most of their competitors) is willing to ship the product with only a minimal (typically 20% to 30%) down payment.
So foreign Company really likes Chinese Company, which has been responsive as all get out. Foreign Company then places a large order (to secure the greatest discount) with Chinese Company and then sends the money as instructed.
This is where the problem begins. The person who Foreign Company believes to work for Chinese Company instructs foreign company to send the funds to a bank account (oftentimes one outside China) that belongs either to an individual or to some company other than Chinese Company. The person who claims to work for Chinese Company usually says that Foreign Company must send the money to that other company for “tax reasons” or because that other company owns Chinese Company.
Foreign Company sends the money to Chinese Company and never receives a thing. It then wants to sue Chinese Company but it has a really tough case. It has a tough case because Chinese Company will claim that it never communicated with Foreign Company and it certainly never contracted with Foreign Company either. Foreign Company has a great lawsuit against the actual scammer, but by this point the actual scammer is, of course, nowhere to be found.
Please, please, please people, stop falling for this scam.
To avoid falling for this scam, you must do at least some (better yet all) of the following:
To grossly simplify China’s laws and regulations, a company’s corporate seal on legal documents (including most contracts) means that the company is bound and the lack of a company seal means that the company is well-positioned to argue that it is not bound. So it always makes sense to get your Chinese counter-party to seal any contract you enter with it. But how can you tell if the company seal is real or not? I China Due Diligence. Not Optional, we talk about what it takes to be sure.
You have been warned.
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 ChinaLawBlog.com as a source of China legal and business information.