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How to conquer China payment scams

By Dan Harris

Watch your money closely.

Our China lawyers are getting a new wave of American (and one European) companies contacting us about having fallen victim to what we call the China bank switch scam. The amounts lost have ranged from $22,000 to $285,000.

Our general response to these is as follows:

“I am sorry this has happened to you, especially since your chances of getting back all of your money are very low.

If you were to retain us, we would charge you by the hour to do the following:

1. Work with your insurance broker and your insurance company to see if it will cover you for this loss. This is usually your best chance of recovering all that you have lost. We can help by explaining how these scams happen and why you are entitled to coverage under your policy, assuming that is indeed the case.

2. Try to get some monetary contribution from your Chinese supplier by letting it know that it was their computer system that the scammer hacked and therefore it should pay at least some of your loss. This works maybe half the time in getting maybe half of the money back, usually over time. Much will depend on your existing relationship with your Chinese supplier and on what it perceives its future relationship with you will be. If you have already corresponded with your supplier regarding this situation, we will want to examine that correspondence.

3. Try to determine if there is any chance in recovering anything from the perpetrator. This is a very expensive and time-consuming process and it makes sense only when you have lost a lot of money.

The bank switch scam is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening. And even though the business relationship is between a Chinese company and a Western company, the perpetrator of the scam oftentimes is in Nigeria or in some country other than China.

This scam usually involves your regular Chinese supplier asking you to make a payment or payments 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 or payments, your China supplier insists you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.

This all happened because your Chinese supplier got hacked, either by someone outside or within the company and you indeed have yet to pay it. Or maybe it was you who got hacked.

I wish that I had some new method of preventing this scam (just as I wish that everyone who does business internationally would read this post so that this scam never happens again). But I must resort to saying what we have been saying all along.

We are constantly writing about this scam on here in an effort (failing, I’m afraid) to prevent it from happening again. This is a scam that can happen to YOU. We have seen many smart, worldly, sophisticated companies of all sizes get caught up in this scam.

I am writing this post today not just because our China attorneys are again getting a bunch of China bank scam emails and phone calls, but also because a loyal reader sent me a great article, entitled, Mattel fought elusive cyber-thieves to get $3M out of China, regarding how this happened to Mattel and how, by acting quickly Mattel was able to get its money back.

The article starts by setting the scene of how it was that Mattel sent $3 million dollars to a scammer’s bank account:

“The email seemed unremarkable: a routine request by Mattel Inc.’s chief executive for a new vendor payment to China.

It was well-timed, arriving on Thursday, April 30, during a tumultuous period for the Los-Angeles based maker of Barbie dolls. Barbie was bombing, particularly overseas, and the CEO, Christopher Sinclair, had officially taken over only that month. Mattel had fired his predecessor.

The finance executive who got the note was naturally eager to please her new boss. She double-checked protocol. Fund transfers required approval from two high-ranking managers. She qualified and so did the CEO, according to a person familiar with the investigation who spoke on condition of anonymity because he was not authorized to speak about the matter. He declined to reveal the finance executive’s name.

Satisfied, the executive wired over $3 million to the Bank of Wenzhou, in China.

Hours later, she mentioned the payment to Sinclair.

But he hadn’t made any such request.

Realizing it had been duped, Mattel acted quickly by calling their U.S. bank, the police and the FBI, all of whom told Mattel it was “out of luck” because the money is already in China.

Note that this version of the scam is a bit different than that I outlined above. This is a variant known as the “fake CEO” or “fake president” scam, and it is — not surprisingly — more commonly experienced by massive companies than by SMEs:

“Mattel’s millions were swept up in a tide of dirty money that passes through China and that Western police are only beginning to understand. The scam the company fell victim to — known as the fake CEO or fake president scam — has cost companies, many of them American, over $1.8 billion, according to the FBI. Most of the stolen money passes through banks in China or Hong Kong, the FBI said.

China has become a popular destination for such scammed funds because cooperation between U.S. and China law enforcement is so weak. The criminals attacking Mattel in this instance had the $3 million sent to Wenzhou, “a gritty enclave on China’s eastern coast that is emerging as a significant transit point in global money laundering networks. The city is the destination for 90 percent of the funds stolen through fake CEO scams in Europe, according to an intelligence memo reviewed by the AP. Wenzhou city officials declined to comment.”

Mattel quickly notified Chinese police, “who quickly launched a criminal investigation, according to a letter from Mattel thanking Chinese authorities, which was obtained by the AP”:

“When the Bank of Wenzhou opened the following Monday, a China-based anti-fraud executive from Mattel strode past the sculpted lions that flank the entrance to the bank’s headquarters, marched upstairs to the International Business Department and presented a letter from the FBI, according to two people familiar with the investigation who were not authorized to speak publicly.

Chinese police froze the account that very morning. Two days later, on May 6, Mattel got its money back, according to the letter.

Mattel wrote that the Wenzhou police “showed a great sense of responsibility and enforcement capability.”

“We hereby reiterate our appreciation,” Mattel wrote. “We also hope that this case can pave the way for future international cooperation in fighting similar transnational crimes.”

*     *    *    *

It’s still not clear who was behind the scam.

What can you do to prevent it from happening to you? Do the following:

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, be it Hong Kong, Taiwan or anywhere else.

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.

7. Have an internal procedure for confirming all payments over a certain amount.

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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