The Bank Account Switch Scam
The bank switch scam involves your regular product supplier asking you to make a payment to a new bank account or a new supplier asking you to make your first payment. After you make the payment, your supplier insists you still owe the full amount because it never received your payment. When you explain that you did, in fact, send the payment, you learn that your supplier never received it because you sent it to someone else’s bank account.
The Wall Street Journal sounded the alarm on this scam in 2016, and it’s been going strong — off and on –ever since. Most emphatically, we are in an active phase right now, as my law firm has received at least ten times the usual number of frantic bank switch calls in the last three months as is typical.
The WSJ described this scam as follows:
When the buyer sends an order, the scammers step in, ultimately intercepting the seller’s invoice and changing payment instructions before sending it back to the buyer. With the modified invoice, funds are sent to the criminals instead of to the seller.
In an analysis of 44 recent fraudulent transfers, 84% of the transfers went to accounts in China and Hong Kong where it is more difficult for victims to recover their money, the FBI alert said, and complaints about these scams more than tripled last year.
For those who have fallen victim to this scam, our international fraud lawyers typically do the following:
1. We determine whether insurance claims can be made. We then help by explaining to the insurance company how the scam happened and why our client is entitled to coverage under its policy, and we get the Chinese supplier to help as well.
2. We seek (and usually get) some monetary contribution from the Chinese supplier by convincing it that their computer system was hacked, and therefore it should pay at least some of our client’s loss.
3. We work with our client to minimize problems with its Chinese supplier. If that relationship needs to be severed, our manufacturing lawyers counsel them on how to do that without creating new problems. See Why Changing China Suppliers Is So Risky.
4. We determine whether there is a chance to recover anything from the perpetrator. Doing this helps in dealing with the Chinese supplier and with our client’s insurance company, neither of whom will pay anything until they are convinced that our client has done everything it can to try to recover from the crooks themselves.
How to Avoid This Scam
Conduct Due Diligence on Your Suppliers
By verifying the legitimacy of your suppliers, their banking details, and their business practices, you can ensure you’re dealing with a reputable entity. This includes background checks, verifying business licenses through government databases, and regularly communicating with your suppliers through trusted channels, such as established email addresses and landline phone numbers. Establishing a strong relationship and understanding their operational protocols, including how they handle changes in banking information, can help identify any red flags early on, reducing the risk of fraudulent activities. See China Due Diligence: NOT Optional.
Have a Good Manufacturing Contract
Having a well-drafted manufacturing contract with your suppliers can also significantly help prevent the bank account switch scam. A good contract should include clear terms regarding payment procedures, verification processes for any changes in banking details (e.g., requiring written confirmation via trusted channels from both parties), and penalties for non-compliance. It should also stipulate the methods of communication to be used for financial transactions and any amendments to the contract. By clearly outlining these terms, both parties are better protected, and any attempts at fraudulent activities can be quickly identified and addressed. See International Manufacturing Contracts: The Basics.
Do the Following
1. If you don’t speak Chinese, get to know the people at your suppliers who speak English 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. Check your bank account every day, maybe even twice a day. If you catch a wire early enough you can sometimes stop it.
4. Do a first small wire to confirm the account.
5. If possible, pay your Chinese suppliers to their bank accounts in mainland China, as that is generally safer than paying them overseas, be it Hong Kong, Taiwan or anywhere else.
6. Have a special procedure set up with your suppliers for confirming bank account changes.
7. Have an internal procedure for confirming all payments over a certain amount.
8. Get an insurance policy that covers computer hacking or fraud and make sure it covers this sort of scam. We have been able to quite easily get insurance companies to pay off on such policies.
Conclusion
The dramatic resurgence of the bank account switch scam underscores the importance of vigilance in international business transactions. By implementing the preventative measures outlined above, and partnering with experienced international legal counsel, you can significantly reduce your risk of falling victim to this deceptive scheme.
