Fraud and Scams in China
This page contains scenarios frequently reported to the Trade Commissioner Service. Scammers are creative in their tactics. Even if the example scenarios do not apply to your situation, you should nevertheless conduct appropriate due diligence on all of your China business projects. Consult the TCS' Due Diligence website for more information.
1. The “Come to China Scam”
“Hello, my friend! We are pleased to inform you of our interest in your product and would like to make a purchase worth $250,000. Please come to China to discuss with us further and sign our contract as soon as possible. We look forward to seeing you!”
The Canadian Trade Commissioner Service (TCS) in China has seen many cases in which a Canadian company is approached by an unknown Chinese “company” offering a lucrative business deal. The Chinese “company ”asks the Canadian company to send representatives to China to sign a contract. Once in China, the Canadian representatives are told that it is customary for them to throw a banquet for the host “company”, pay a notary fee, and buy gifts for the “company” officials.
By now, you have probably realized that the Canadian company is not dealing with a legitimate Chinese company. In fact, once they return home, the Canadian representatives will discover that there was no legitimate deal. Instead, they were conned into flying to China, buying gifts, and paying a notary fee. Furthermore, they do not have a company to sue in China.
How to avoid the “Come to China” scam? Before you board a plane to China, make sure you conduct rigorous due diligence on the “Chinese company”. Even when your investigation reveals that the company is registered, contact the Chinese company to confirm the identities of those who have approached you and ensure that they have the authority to conclude a deal with you.
2. The “New Bank Account Scam”
“Dear regular customer! We will ship your recently placed order once we receive the balance of $25,000 as per our long-standing arrangement. For tax reasons, we would like you to pay in a different account than our usual one. Many thanks!”
The Canadian TCS in China has come across many cases in which a Canadian company is asked by their legitimate and long-standing Chinese business partner to make a payment to a different bank account than the one normally used. Different reasons could be given to explain this unusual request: taxes, government loans, the need to secure foreign funds outside China, etc. After the money transfer, the Chinese company would deny that any payment has been made. In many cases, the Chinese company truthfully did not receive the payment from the Canadian company.
We have heard of different motives surrounding this scam, including:
- 1. A rogue employee from your Chinese manufacturer aiming at making a quick buck.
- 2. Hackers who infiltrated your Chinese partner’s email account (possibly with the help of rogue employees)
How to avoid the “New Bank Account” scam? Before making a payment to an unfamiliar bank account, confirm with someone with supervisory authority from the Chinese company that the payment request is valid and ask for a detailed explanation. Given the insecure nature of most email services, use the phone!
3. The “Fake Company Scam”
“Hello my friend! We would like to warn you that someone is trying to register your trademark in China. Our firm can help you prevent this from happening for $25,000, if we act quickly. Please contact us as soon as possible to protect your intellectual property.”
The Canadian TCS is aware of Chinese entities pretending to be legitimate legal or due diligence firms, trademark, copyright, domain registration or patent agents, and freight forwarders. Scammers can be creative and use other identities. There are many variations of this scam. One of the more sophisticated scams even involves non-Chinese individuals acting as employees of the fake Chinese company. Regardless of the difference in tactics, the scammers’ goal is to extract money from the Canadian company without providing anything in return.
How to avoid the “Fake Company” scam? Always conduct thorough due diligence on your potential Chinese partners.
4. The “Paper Tiger” or the “Parasite” Company
“Dear Sir, we saw your product at a tradeshow last month and are very interested in distributing it in China. Our company is one of the largest in China and we have excellent relations with the local government officials as well as many potential clients.”
The Canadian TCS has been informed of cases where, in order to secure lucrative contracts, Chinese companies, often distributors, boast that they are industry leaders with great networks of potential clients or government contacts. In most cases, these companies actually exist and basic due diligence will confirm that they are legitimate. However, unless comprehensive investigation is conducted at the beginning of the relationship, Canadian companies will not find out until later that their new partner doesn’t much clout. While the scammers’ exaggerations may take different forms, the objective is simple: to persuade the Canadian entity to commit to an exclusive distribution agreement and as to secure better contract terms.
On the other hand, a “Parasite” company possesses excellent relationship with a governmental decision-maker, but relies exclusively on that relationship for its business activities. Having good a relationship is not a bad thing for business. But being overly dependent could be problematic and risky, especially when a company relies on a single influential figure for its success. The company may find itself operating in a legally grey area.
How to avoid partnering with a “Paper Tiger” or a “Parasite” company? You guessed it! Always conduct meticulous due diligence on prospective Chinese partners. Do not hesitate to ask the company for examples to substantiate their claims or for references from previous foreign partners. Consult informally with other companies in the industry to get a real sense of your potential Chinese business partner.
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