by Dan Harris in 'China Law Blog'
Many months ago, a friend of mine at Samsara Biopharma Consulting told me of a matter his company had taken on to try to help a company that appeared to have been scammed by a Chinese chemical seller. I frequently hear of such scams in the chemical industry so I asked my friend if he would write a post for us on this matter once it was concluded. The below is the first part of that post, written by Jennie Shi, Felix Zhang, Wendy Zheng and Robert Walsh of Samsara:
About 2 years ago we were asked by a friend of a friend to source some specialty chemicals for his US-based inks company. As a courtesy, and because we were in the middle of a similar exercise for another client, we went ahead and added the request to the list of what we were already working on.
After a few weeks we found sources of what the inks company was looking for, and went a few steps further to vet the suppliers and get lowest reference prices. When we passed these to the inks company, they pointed out that the prices were not that much lower than the suppliers they were currently using, and decided to pass on the offers.
A year passes, and we get a call from this same company, this time asking for help in untangling a mess they’ve waded into with a new set of Chinese suppliers.
It seems that the inks company had responded to an unsolicited offer from a pair of Hebei chemical companies, who’d contacted them through Alibaba. The prices offered for the same subset of chemicals we’d previously sourced for them were significantly lower, say, by 30% or more. The inks company requested and received samples from the Hebei companies. Needless to say, these samples were right on spec.
Subsequently, the US inks company places a sizable order with the two Hebei companies, and the terms demanded are payment by 100% irrevocable LC at sight, which the US company agrees to.
A few months later, a number of containers are delivered to the US inks company’s facility, and upon opening are found to contain 44 tons of some mysterious white powder (not what they ordered) and blue plastic barrels of water. The US company initially contacts the Hebei companies to demand an explanation and repayment, but after a few email exchanges, the Hebei companies stop responding.
At about this time, the US inks company remembers our company, and calls us for help. We don’t do this sort of thing, but then we are regularly asked to do stuff nobody else has any idea how to do. We agree to help the US inks company track down the Hebei companies and attempt to get some resolution.
The inks company sent us all related documents, as well as email correspondence dating back to their first contact with the two Hebei companies. A number of things stood out right away:
We initially tried contacting both Hebei companies, and at first had some success, but after a few days, all signs were that their mobile and fax lines had been disconnected. Elvis had left the building.
Eventually we decided to send people to Hebei to look into things.
We Visit AIC
Our first stop was the local office of the Administration for Industry & Commerce (AIC), to check on the validity and standing of the two companies’ registrations. The report from our AIC visit noted the following:
From Company #1’s registration information, we concluded the following:
From Company 2′s registration information, we concluded the following:
So both Company #1 and Company #2 are real companies and their business statuses in Administration for Industry & Commerce’s records are normal. But their behavior is well-planned scammer’s behavior….”
We Visit Company Premises
We noted that the addresses on the websites and in the correspondence for both companies were different from their registered addresses. We went to all four places to make sure we weren’t missing something.
In the case of Company #1, the address listed on the website turned out to be the staff activities center for a well-known power company, replete with all sorts of sports facilities. The registered address was in a middle-class apartment complex. The actual apartment had no company sign and it did not appear to be occupied during business hours.
As for Company #2, the address listed on the website was in a decidedly down-market set of apartments Again, no sign on the door, but there was a lattice window through which we saw nothing but a table, some chairs, and a whiteboard. No activity during normal business hours was noted.
We Visit the Commodities Inspection Bureau
We next visited the Chemical and Mineral Department of the local Commodities Inspection Bureau (CIB) where we were met with a genuinely warm and interested reception by the officers of this bureau. What we found from this visit was the following:
We Visit the Bank of China, Hebei Branch
The bank would not give us any information regarding either companys’ accounts without being under the orders of the police or the court to do so.
We Visit the Police
We next met with the Municipal PSB, who while sympathetic, referred us to the individual district-level PSB stations with jurisdiction over the two Chinese companies. With respect to Company #1, we met with an informative and helpful officer who immediately recognized the case for the commercial fraud that it is. Interestingly enough, he had handled a number of similar cases, some for the very same chemicals involved in this one. He provided us with a list of materials he’d need to initiate a case against Company #1 and to take action. He said we would need the following:
We must translate all of the above documents into Chinese stamp them with the inks company’s company seal on every page. Notarization is not required.
The officer representing the PSB station in Company #2’s district gave us similar guidance. As luck would have it, he had just cracked a similar case in which an Indian company was defrauded. In this instance, the Indian CEO and an interpreter came personally to present facts and evidence.
In Part II of this series, Samara will discuss what ended up happening on this particular case, analyze how the inks company could have better handled this particular case, and give recommendations on how to prevent this sort of thing from happening to you.
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.