China Fraud Season Starts Early This Year

In China Payment Fraud, we wrote how it has “become somewhat of a December tradition to write about China payment scams in December because history shows this is the biggest month for those.

This year it seems China fraud season has started earlier than usual for those doing business with China and, near as I can tell from my completely unscientific non-survey, it seems the diversity and ingenuity and number of scams is way up as well. In other words, don’t say we didn’t warn you.

We are seeing the following old scams in quantity this year:

1.  “The come to China to celebrate our deal scam”
In this scam, a Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service. The terms of the deal are quickly worked out and the Chinese company suggests the foreign company come to China to sign the contract and to celebrate the two parties having cooperated so well in inking their deal. The foreigner(s) gets to China (usually some fairly out of the way city in China) and is treated to what appears to the foreigner to be a really expensive meal at which the contract is signed. At which point, the foreign company is told how Chinese custom requires the foreigner buy the Chinese CEO an expensive gift and pay the notarization fee. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go off and buy the CEO gift on the foreign company’s behalf.

Weeks later, the foreigner learns there is no deal and there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend USD$3,000 to $8,000 more to seal the deal.
I keep getting emails from people asking me if “their” deal looks real to me. My answer is always the same: I have no idea but before getting on a plane, I would do some due diligence on the company AND if the company shows up as real, I would contact them to make sure they are really the ones with whom you are dealing. Sometimes just one email to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated.

It should go without saying, but real Chinese companies are a heckuva lot less likely to perpetrate this sort of scam than someone posing as a real Chinese company.

2.  “The new bank account to pay us scam.”  This is the scam on which we focused last year and it is still around and scary as ever. I hate this scam because I have seen far too many smart companies fall for it and I view it as maybe the most difficult to detect.

This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is for Hong Kong.What is the scheme here? Well, it is always possible your Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment. In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company. The Chinese company would get the money in Hong Kong and then claim you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them.

Then last year this scam became even more sophisticated when computer hackers started hacking into Chinese companies’ computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud?  Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies tend to be very loyal to their banks and so you should view with suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact by telephone someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

My law firm recently drafted a settlement agreement between an American company that had been tricked by someone (presumably outside the Chinese company) into sending a six figure payment to a “new” Hong Kong bank account. The Chinese company continued to seek payment from the American company for product the Chinese company had produced and delivered to the American company. Initially, the Chinese company sought full payment, but it agreed to compromise both because we argued it had been  negligent in allowing its computers to get hacked and because it wanted to maintain its relationship with the American company.

3.  “The fake company scam.”
This is a tried and true favorite and it comes back in new forms every year.  My personal favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website appears proclaiming really cheap trademark, copyright and patent registrations in China. Foreign company sends some money and nothing ever gets filed. There are two variations on this one, one much more sophisticated and harmful than the other.The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows it still needs to register its IP in China.Under the more sophisticated version, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers eventually send the foreign company a fake trademark registration certificate or copyright registration certificate (I am personally not aware of this having gone so far with a patent registration, but I would not doubt that it has). The foreign company then thinks it is covered for its China IP registrations and does not learn for many years later that it is not. By that point, of course, there are no further traces that might lead to the scammers.This year’s most popular edition of the fake company scam seems to be that of fake freight forwarders.  I did some research on this scam after getting my second email on it in a week and came across this article, Forwarders put on alert over new Chinese freight scam.  One version of this scam is not all that different from the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing:

Fraudulent forwarders pose as legitimate companies with spare capacity. They arrive on-time to collect loads and then disappear.

Another frequently seen scam involves organized gangs creating their own websites and advertising themselves as freight forwarders. These sites are characterized by very basic information, free email accounts, and mobile phone or Skype contacts only, Mr Yarwood warned.

A third type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit.

Many years ago, a company came to us after its multi-million dollar cargo had disappeared. All we had to do was look at the shipper’s business license to know it was a complete fake.What is the best way to prevent falling victim to this scam? Pretty much the same as with most other scams. Make sure you know with whom you are doing business. In other words, do your due diligence and if you do not know how to conduct due diligence in China, retain someone who does.One of our China lawyers (who has researched and written dozens of China company due diligence reports) just finished reading a very thorough and systematic book on China Due Diligence, called, Due Diligence in China: Beyond the Checklists and she very much liked it.

What are you-all seeing out there?

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