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DIY China Employment Law. Really?

Posted in Basics of China Business Law, China Business
Do you feel lucky?

                                     Do you feel lucky?

Our China lawyers often get appreciative emails from non-lawyers saying our blog has helped them do x, y or z on their own. We love the good vibes, but emails like these are sometimes a bit troubling. At the risk of being blunt, this blog should not be read as a DIY advice column like “This Old House” or “Dear Abby.” Certainly our goal is to illuminate the real-world legal issues faced by companies doing business in China, but a blog post should not be taken as individualized legal advice. If you learn anything from reading this blog, it should be that the legal terrain in China is complex and changing rapidly.

Take employment law (on which I spend much of my time). Chinese employment law is governed by an almost overwhelming number of laws, regulations, measures, policies, circulars, meeting minutes and other dictums. The rules may be national, regional, provincial, city-wide, or just district-wide within a particular city. Many are unwritten and can only be known by direct communication with the local labor bureau.

The increased availability of translated PRC laws has, in some ways, made the problem worse, because — even assuming the law is still valid and the translation is accurate — a single law, standing alone, paints an incomplete picture and often implies a course of action that is just plain wrong. Some of the worst-positioned employment cases we get are where the client has made key decisions based on their understanding of a single translated law. Far too often these decisions directly contravene local rules, which are rarely translated and often unknown to anyone not doing  employment work. In China, the local rules can be highly differentiated. A policy that works fine in one city could get your company into hot water in another. For example: non-compete agreements that do not specify the amount of compensation are likely enforceable in Shanghai but not in Guangdong.

A friend of mine works as the in-house employment lawyer for a massive technology company in China, and he admitted to me that he frequently wakes up in the middle of the night to double-check his work; he has to deal with so many cities in China, and is constantly worried that he may have missed something. I empathize with him; there are so many rules and they change so often. And even if you find the applicable rules, you still need to analyze how they apply to the specific situation. I am on the phone nearly every day with local labor law agencies across China, asking questions about their interpretation of a given law/regulation/rule/etc. Anyone who knows China knows that if a rule clearly appears to say one thing but the local authorities believe it says something else, your reliance on the clear meaning will be for naught.

As with most things, the trick is knowing when you need a lawyer and when you don’t. For more on this, check out Inexpensive China Lawyers. Really?

China Employment Contracts: Ten Things To Consider

Posted in Basics of China Business Law, Legal News

China Employment Contracts

Following in the footsteps of our recent post Forming a China WFOE: Ten Things To Consider, I present to you: China Employment Contracts: Ten Things to Consider. Here goes, the top ten things you should consider when employing anyone in China.

  1. Term of employment. China’s employment system is a contract employment system. This means each employee must be hired pursuant to a written contract and this also means that it is very difficult to fire an employee during the term of that contract. After the initial contract term expires, you may re-hire the employee pursuant to a second fixed term contract. In most places in China the employee will automatically be converted into an employee with an open contract term at the end of the fixed term. This means you have only one chance to hire an employee on a fixed term basis and so you should be sure to use an appropriate initial employment term. We usually (but not always!) recommend an initial term of three years because that allows you to provide a six month probation period (the longest period permitted under Chinese law), during which time you can relatively easily terminate an employee and because it delays the onset of the open term period for a period long enough to allow you to determine whether it makes sense to convert the employee to an open-term employee.
  1. Salary. Your written employment contract must set forth a salary. One issue to consider here is whether to pay a 13th month in salary, which is customary in many parts of China, and is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for receiving this 13th month salary or you may have to pay this bonus forever even though you wanted to preserve your option to do otherwise.
  1. Bonus. If you are going to have a bonus system for your employees, you should set out its parameters in the employment contracts.
  1. Vacation. The statutory vacation period is based on years of service, as follows:
    • More than 1 and less than 10 years service: 5 days vacation
    • More than 10 and less than 20 years service: 10 days vacation
    • More than 20 years service: 15 days vacation

    If you want to provide more vacation time than set forth above, you should so specify in the contract.

  1. Other benefits. Your company’s rules and regulations typically provide for the statutory minimum and apply to all employees. If you want to provide additional benefits to a particular employee, you should put that in the employment contract with that employee. If you wish to provide other benefits beyond the statutory minimum to all of your employees, it usually makes sense for you to spell that out in your rules and regulations.
  1. Travel. If your employees will travel domestically or internationally, you should have a written travel expense policy.
  1. Overtime. You will generally be required to pay overtime to any employee who works beyond the normal working time of eight hours a day and five days a week. If this standard system does not work for you, you should consider adopting an alternative working hours system for a given employee. See China’s Forty Hour Work Week Is Mandatory. Except When It’s NotChina’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part II and China’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part III.
  1. Trade Secrets/IP Protection. If IP is important to you (and most of the time it most certainly should be), you should have a separate Trade Secrecy and IP protection agreement with your employees.
  1. Rules and Regulations. You must have one. You will also want to make sure that your employees acknowledge in writing that they have received this document and that they agree to abide by it.
  1. It’s complicated and it’s local. I don’t mean to scare you here (actually I do!), but Chinese employment laws and regulations often change and often are local and your employment contracts should always be in Chinese. If this doesn’t scare you….

 

Don’t Sign Informal Documents on the Run in China

Posted in Basics of China Business Law, China Business, China Film Industry
There is a right way and a wrong way to do business with China

                 There is a right way and a wrong way

I meet a lot of foreigners skipping through China on business. Many of them are delegates on trade missions or attendees at festivals or summits. They frequently allow their Chinese friends to pressure them to sign little documents while they’re in town. The foreigners think there can’t be much harm in signing short, “informal” documents with harmless sounding names like “LOI”, “MOU” or “HOA”. The artificial deadline tactic always seems to work for the Chinese whenever they try it on. Often there’s a kind of ceremony with officials in attendance and some nice banners in the background. Lots of photo opps. There may even be a banquet or two with the obligatory over-consumption of baijiu. More photo opps. It’s lots of fun and the foreigner goes home with a sense of achievement. They signed a deal in China!

Then we get two types of calls.

In the first type of call, the foreigner is shocked to find that their Chinese friends are resisting a long-form document by which the foreigner wishes to replace that harmless little LOI. The long-form is invariably written entirely in English and is full of common law irrelevancies and foreign standards that make it entirely unsuitable for China, not to mention disrespectful. Even if it ever gets signed it will take ages — ages during which there is good reason for the Chinese to stall in making any expected payments. Or the Chinese may even threaten to take action based on the foreigner’s negligence in the contracting process. But that’s all beside the point. The point is that the Chinese got what they wanted in their first pass so there’s no need for them to sign another document. The foreigner gave too much away in the beginning. My favorite examples in the film industry are the foreign producers who give away Greater China distribution rights without any mention of distribution costs and an appropriate waterfall. There are many more such examples across all industries.

Then there’s the second type of call.

The foreigner is disappointed that six months have gone by and nothing has happened since that harmless little LOI was signed. Emails are going unanswered. Phone calls unreturned. Suddenly, nobody speaks English any more. What the foreigner didn’t grasp was that the ceremony, with its banners and officials and photographs, was all the Chinese ever wanted from the relationship. There was no deal. The Chinese hit all their KPIs for that quarter by holding a little ceremony. The higher ups are happy and everyone in China has long ago moved on.

So, you need to decide from the outset whether you want an enforceable agreement or an unenforceable document. Do you want a real deal or do you just want to be able to tell people about some ceremony you attended.

If you want an enforceable agreement there is no reason why you can’t enter a proper agreement covering everything right from the start. Agreements in China tend to be shorter and less complicated in any case. That’s not to say that they can’t cover everything.

If all you want is an unenforceable document then you’ve got to wonder why you should sign anything at all. There’s an art to signing meaningless and unenforceable documents just as there is an art to signing something enforceable. But is it really worth it?

Forming a China WFOE: Ten Things To Consider

Posted in Basics of China Business Law, China Business

How to Form a China WFOE

By popular demand (one email to one of our China lawyers) we are reprising our “Ten Things To Consider” series, starting anew with forming a China WFOE. Here goes.

  1. Make Sure Your Business Scope is Legal. Too many WFOEs never get past the starting line. A number of industries are restricted to foreign-invested companies, so before you sign a lease in Shanghai or Shenzhen or Shenyang, make sure you can actually do what you propose to do in China. There’s a reason Hollywood studios and production companies enter into joint ventures in China instead of forming WFOEs, and it’s not just because they need local know-how. See How to Form a WFOE in China: It’s the Business Scope, Stupid.
  1. Make Sure Your Business Scope is Accurate. A corollary to the above point is that some foreign companies will form a WFOE with a business scope narrower than what it actually intends to do. Not a good idea. In America, you can always form a company (no, sadly, this is not the beginning of a Yakov Smirnoff joke). You do not need a laundry list of approvals, and you can usually complete the entire thing online in about 10 minutes. But after you form a U.S. company you must then come into compliance with a variety of applicable laws. In China, it is very difficult to form a company, not least because you must come into compliance with a variety of applicable laws before gaining approval for the company formation. And all of these approvals are based on the business scope of your WFOE. If you want to go into a different line of business, you need to change the scope of your WFOE, and for that you need approval. And that approval could take as long as it took to form your WFOE in the first place. So it is imperative that you get this right the first time around, and not just form the easiest company possible just so the people forming your company for you on a flat fee basis can do as little work as possible.
  1. Pick Several Possible Chinese-Language Names. Many clients delegate the job of naming their WFOE to a Chinese employee. This is not necessarily a bad idea, but chances are good that the employee will draw from a relatively small subset of positive-connotation Chinese characters used for transliterations and translations. And when you consider that a huge number of companies have already been formed in China, the odds are high that your first choice for your company name will be rejected. And your second, third, and fourth choices too. To avoid wasting time, have a bunch of possible names at the ready when you file your application and consider using a legitimate and series branding company to assist.
  1. Settle on the Location For Your WFOE Before You Start the Process. Again, this is completely different from America, where you can use your parents’ house or your lawyer’s office as the address for your company until you figure out where you actually want to lease space. In China, you must determine the city and the district where your WFOE will be located before even starting the process, because the rules governing the formation process differ by city and often even by district. Moreover, most locations require that you submit a signed lease as part of the final application – and sometimes that lease must be signed by the WFOE. Yes, it’s just as weird as it sounds. Certain authorities require – require! – that a lease be executed by an entity that doesn’t exist yet, and may never exist. You also need to confirm that the lease space is suitable for use by a WFOE with the proposed business scope. And we haven’t even touched on the substantive provisions of the lease. In short: location matters. It matters a lot.
  1. Do You Want To Be in a Free Trade Zone? Well, Do You? The bloom is off the rose (or maybe it was more of a bachelor’s button) with respect to the much-ballyhooed free trade zones, but for certain businesses conducting certain kinds of business – especially customs-intensive businesses – a FTZ might make sense. But before you can make a rational decision about this, you need to decide what your WFOE will do.
  1. Will Your General Manager Be Local or Foreign? A WFOE’s general manager is in charge of the WFOE’s day-to-day operations, and is the initial point of contact in China for everything from employees to the landlord to taxes. Often, the general manager is also in possession of the company chops, giving him or her even more de facto power. Accordingly, many foreign companies prefer to have someone from the home office serve as the general manager. At the same time, companies (especially smaller ones) can find it difficult to identify someone in the home office who is both willing to relocate and has enough China know-how to handle the day-to-day operations. One common compromise is to hire a Chinese national as the general manager, and have the WFOE’s China accountant retain possession of the seals. You have a lot of options here but it is important that you choose wisely.
  1. Hire a Good Local Accountant. Many foreign companies feel like they need to hire one of the Big Four companies to handle the day-to-day accounting for their 4-person China WFOE. Certainly the big boys can handle this work, but it might also be overkill. China has many reputable accounting firms, and many are better suited to handling the day-to-day operations of a smaller entity. To say nothing of being a lot less expensive. But don’t pick someone just because they’re cheap. We maintain a top secret list of really good accounting firms that can help our clients with both their China and their international taxes and charge 25% to 35% less than the Big Four, though sometimes the Big Four make sense.
  1. Single Director or a Board of Directors? This is not the biggest decision you will make, but it could have meaningful logistical repercussions. Let’s put it this way: when forming a WFOE, or making changes to a WFOE, a lot of documents need to be signed, and usually in a very specific way. The fewer people that need to sign those documents, the better.
  1. Will You Have Foreign Employees? My colleague Grace Yang writes eloquently and often about Chinese employment law. One issue that comes up with surprising regularity is the disconnect with foreign employees who expect to be treated exactly the same as in their foreign jurisdiction. With very few exceptions, foreign employees of a WFOE are governed by Chinese labor law. This should not be surprising. Would you expect workers at a Chinese-owned factory in America to operate under Chinese labor law? But the disconnect can play out in surprising ways. For instance, one WFOE had an extremely difficult time bringing a specific employee over to China, because this employee was over 60 and therefore past the mandatory retirement age for the particular industry.
  1. Make Financial Projections Before Starting the WFOE Formation Process. You know that thing you have to do when you ask potential investors for money? That thing called making a business plan? Think of the Chinese authorities like potential investors. They aren’t going to hold you to quite the same standards – for one, no pie charts – but they will want to see that you’ve spent more than five minutes thinking about what you’re going to do in China and that you will have sufficient funds to last long enough to pay your employees and your vendors. That means producing reasonable projections of your income and expenses over the first few years, and providing a narrative explanation of (1) your WFOE’s business, (2) how it fits into the existing market, and (3) why it is not going to be an abject failure. You want your WFOE to be approved, right?

Oh, and one more thing. The above ten (and more) matter a lot because if you don’t get your WFOE approved the first time around, the odds of you ever getting approval go way way down.

Is Your IP China-Ready: A Free Webinar on April 27

Posted in Uncategorized

China IP seminarOn April 27, I and my friend Randall Lewis, Vice President and International Counsel for ConAgra Foods, will be sharing a virtual podium for a free webinar. This webinar is being put on by LexisNexis and in it we will together be discussing the following:

  • How to choose a good Chinese partner
  • How to identify the IP assets you need to protect
  • How to structure your deal to protect your IP
  • How to conducting China due diligence
  • How to drafting China contracts to protect your IP
  • How to choose how your dispute resolution forum

LexisNexis describes it as follows:

Too many American companies go into China or start doing business with Chinese companies, without really knowing the varied risks China poses to their valuable intellectual property and trade secrets,” said Dan Harris, author of the China Law Blog. “These risks should be of utmost concern to anyone whose interests intersect with China. We will show you how to prepare your deals, avoid costly thefts and litigation and defend your IP.

Join Dan Harris of Harris Moure and Randall Lewis, Vice President, International Counsel at ConAgra Foods, as they share strategies and real-life tales that will help government agencies craft regulations and oversight provisions and in-house and outside counsel protect IP and deal with the litigation that results when things go south.

It  will begin at 2 p.m. Eastern time and go for about 90 minutes. Go here for more information and go here to register. Not only will this webinar be free, but it also qualifies for 1.5 CLE credits!

Doing Business in China: Don’t Bribe Anyone, Even Indirectly

Posted in Basics of China Business Law

Because this blog is more than ten years old, there is hardly a China business or law situation of which we have not written at least once. Last week, one of our China lawyers got an email from a company wanting to hire us because they needed help finding someone to bribe someone in China because “it would be too risky for us to do it ourselves.”

It reminded me of a previous email (which had not been to me, but which I thought I remembered from a blog post, and I was right. That post was from April, 2014, and it was entitled, Dude, Didn’t Your Mamma Tell You Not To Engage in China Bribery Through Intermediaries? Rather than craft a new blog post, I will simply borrow from the old one, because nothing has changed. Or one might say that a lot has changed because China itself has massively stepped up its own anti-corruption enforcement.

That post involved a similar email:

After repeated attempts by our ________ [in China] to retrieve the goods/money by bribes and threats without success, we must now look at other options.

A younger me was incensed:

Are you kidding me? Are you friggin kidding me?

I immediately wrote back to say that my firm had no interest in working on the case because it did not make economic sense to hire us to pursue the amount at issue and also to sternly warn him (it was a male) that using an agent to pay a bribe is blatantly illegal. I also strongly suggested that he contact an attorney in his home country to figure out his best course of action for dealing with what he had already done in terms by using an intermediary to pay a bribe.

I then explained the issues in paying bribes, even through intermediaries:

Using intermediaries to pay bribes is illegal under every country’s anti-corruption act of which I am aware and it is certainly illegal in the 40 countries that have ratified the OECD Anti-Bribery Convention and under China’s anti-corruption laws. To oversimplify, you are bound by the anti-bribery laws of all of the countries in which you conduct business.

In bribery law terms, an “intermediary” can be roughly defined as any third party who assists in some aspect of your foreign business. This can (and usually does) include your sales agent, your joint venture partner, your distributer or reseller and even sometimes your OEM manufacturer.

Using intermediaries overseas does not protect you from the risk of going to jail for corruption, it INCREASES that risk. Most corruption cases involve conduct by third parties.

You should be conducting reasonable due diligence on those with whom you conduct your business to determine that they are not involved in corruption. You also should be making clear to the third parties with whom you deal (both in writing and otherwise) that you will brook no corruption on their part — especially on your behalf. And you should record all of this so that if you are ever investigated, you have something to show the government (whatever government that may be) all that you did.

 

‘Nough said.

China, Indiegogo, Kickstarter, The Internet of Things, Marshall Goldsmith, and Suing Your Lawyers and Sourcing Agents Because It Is Getting Really Really Bad Out There

Posted in China Manufacturing, Internet, Legal News
Increase your odds of hanging on to your IP

              Increase your odds of hanging on to your IP

One of our internet of things hardware clients recently told me how none of what he has learned about the need to protect his intellectual property from China had ever been even hinted at in any of the many IoT seminars he had attended nor in the Indiegogo Hardware Handbook he had “religiously consulted” before he did his first IoT product.

I am about halfway through Marshall Goldsmith’s truly stellar book, What Got You Here Won’t Get You There, so I was quickly able to provide a compelling exclamation for why this was the case:

Everything in an organization is designed to demonstrate commitment to positive action — and couched in terms of doing something.

Likewise, the recognition and reward systems in most organizations are totally geared to acknowledge the doing of something. We get credit for doing something good. We rarely get credit for ceasing to do something bad.

CEOs don’t proudly announce that they decided not to acquire another company or go into another country or event that they just went another month without having their IP ripped off by China. Those at seminars and at Indiegogo (and I have no reason to believe Kickstarter is any different) are essentially boosters encouraging their troops. Talking about the need to protect IP is just too negative.

A lawyer’s role is different. Our job is to figure out and minimize risks. And these days, the biggest risk our China lawyers see, day in and day out, is Western companies losing their IP to China — especially tech companies and even more especially Internet of Things companies.

Less than a month ago, in China and the Internet of Things and How to Destroy your Own Company, I wrote on how our China lawyers are getting inundated with hardware and technology companies coming to us after they have lost or badly compromised their intellectual property and their hardware product and their company. To use farm-speak, they are asking us to close the barn door after at least some of the pigs have already left the farm.

Last week, in Worthless China Contracts: First, Let’s Sue All The American Lawyers, I wrote about how the lawyers for these companies deserve a large chunk of the blame. I am now adding the crowdfunding companies and the hardware consultants and as complicit in ignoring the intellectual property risks inherent in giving your IP to Chinese companies with nothing more than an essentially worthless US-Style NDA.

In China and the Internet of Things and How to Destroy your Own Company, I wrote about the China attorneys at my firm having been contacted by companies with the following issues:

  • A European company with a highly profitable product is being threatened with a patent infringement claim by its Chinese manufacturer angry about the European company’s plans to diversify its manufacturing risk by finding an additional manufacturer.
  • An American company with high profitable technology came to us with an illegal joint venture arrangement such that we have our doubts that there is anything that can be done to fix it or, more importantly, fix the various problems the joint venture is inflicting on this American company.
  • A few more instances of American companies having signed what they believed to be non-binding MOUs with their Chinese manufacturers that are actually binding contracts that give their manufacturers all or some rights in the American companies IP.

We recently took on two new matters where sourcing agents shopped our clients product around China and then signed up less than reputable Chinese manufacturers, all without any IP protection in place. And guess what, our clients are now scrambling to try to save what they have. In my post calling out American lawyers for failing to protect their clients I suggested that companies that have lost their IP to China consider suing their lawyers for the damages caused. I am not suggesting anyone sue Indiegogo for its handbook or any of the seminars or its participants for their failure to discuss IP. But it has definitely reached the stage where we are suggesting to our clients that they consider suing their sourcing agents. Nearly a decade ago (yes, you read that right), in China Consultant, Protect Thyself, I wrote about the “huge liabilities” China consultants were inadvertently taking upon themselves by doing the following:

  • If you take a sample to China and start showing it to potential manufacturers without FIRST putting in place various safeguards, you are courting disaster. The sample could be used for counterfeiting. We had a consultant call one of our China lawyers in a panic after returning from China to learn that one of the manufacturers to which he had shown a sample had already started manufacturing the product for someone else using the consultant client’s trademark which it had gleaned from the Internet. The Solution: Never show a sample or product plan or reveal your trade name(s) without first making the Chinese manufacturer sign a China-centric NNN Agreement (essentially a hopped up NDA that protects against competition, circumvention and disclosure). Chinese manufacturers tend to be quite familiar with NNN agreements and if you give them a simple and reasonable one, in Chinese, they will sign it.

  • You the consultant must do more than simply negotiate the price and delivery dates or you should at least make clear in writing that these are your only tasks. Typically, product sourcing consultants oversee the OEM contract with the manufacturer and by doing so, they face major liability issues if that contract is not up to snuff. You are the “China guy” and your client is counting on you to guide it through China’s business minefields. You are the one who is supposed to know anything and everything about what it takes to do business in China. Equally importantly, with the manufacturing of its product, your client is probably turning over to the manufacturer all sorts of critical intellectual property. Your client probably thinks that its existing patents, trademarks and copyrights will protect it in China, but a court will expect you as the China expert to know better. The Solution: Put in writing with your client that you will not be providing it with legal advice and that it will need to retain its own lawyer to draft the OEM agreement with the Chinese manufacturer. Put in writing that it is your client’s responsibility to protect its intellectual property in China and that to do so, it must register its IP in China, either through a lawyer with whom you connect them or independently).

Just remember that your client sees you as the expert at doing business in China and it is looking to you for help in all areas and if you fall short in any way, you are at risk for a lawsuit.

As China and its companies seek to move up the product and innovation value chain, things are only going to keep getting worse. It is as bad as we have ever seen it out there and there is plenty of blame to go around.

China Trademark Registration: Keep it Real

Posted in Basics of China Business Law

 

When registering your China IP, don't use a fake

Just got off the phone with a U.S. company that just learned that the Chinese company (they cannot even remember who it was) it paid to register its trademark in China 3-4 years ago never did so — though it received what it now realizes is a fake China trademark registration certificate. I can’t tell you more about this case because it is so new, but it very much reminds me of the following case study in The Sovereign Group’s 2015 China Market Entry Handbook (which I have in my office because one of our China lawyers wrote the IP section for it) entitled, The Case of the Shanzhai IP Agent:

A North American food company that had become quite successful selling its food product in China learned that a company in Beijing was selling counterfeits of its product. Believing it had registered its trademark in China, the North American company began preparing to sue the Beijing company. In the process of doing so, the North American company learned that while it had retained and paid a purported trademark agent to file a trademark, they had never received a trademark certificate, and the “trademark agent” had in fact taken their money and done nothing.

Without a registered trademark in China, the North American company was powerless to stop the counterfeiter. Its only option was to register its brand name as a trademark, wait more than a year until the trademark proceeded to registration, and then send out a cease and desist letter.

The best way to protect your brand name in China has not changed: register the brand name as a China trademark now, so that when you need to defend it, you already have the registered trademark in hand. And don’t be afraid to ask for references. Reputable service providers will not hesitate to give them.

 

It was true then and it apparently is true now. Register your trademarks in China, but do so through someone you can trust, or maybe don’t bother at all?

How to Conquer China Payment Scams

Posted in China Business
Watch your money closely.

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.

 

China Work Injury Insurance: A Few New Rules

Posted in Legal News

China Work Injury Insurance

Late last month, China’s Ministry of Human Resources and Social Security (“MOHRSS”) implemented  Opinions on Several Issues Concerning the Implementation of the Regulation on Work Related Injury Insurance (II)(人力资源社会保障部关于执行《工伤保险条例》若干问题的意见(二))(the “Opinions”). The Opinions offer some (but as is fairly typical, not enough ) clarification on various current regulations. This post highlights a few key aspects of the Opinions.

The Opinions make clear that an employer who continues to employ someone who has reached his or her statutory retirement age (this age depends on the specific industry and position — the usual retirement age is 60 for male workers and 50 for female workers; however note that China is currently discussing increasing its ages for retirement) is responsible for providing work injury insurance for any such employee. In other words, even an employee who has reached the statutory retirement age suffers a work-related injury or occupational disease during employment and the employer has been contributing to work injury insurance on a project basis, the Regulation on Work Related Injury Insurance will apply. Though this only makes sense, this was formerly unclear.

The Opinions also state that the reasonable route an employee takes between his or her employer’s location and the employee’s residence for purposes of going to or from work will be considered “on the way to/from work” for purposes of the law and will not be covered by work injury insurance. This includes routes employees take when the employee works overtime.

An employee who suffers an injury while participating in an activity held by another entity and such activity is related to the employee’s work duties, it will be deemed to be work related injury.

If the employee is based out of town for work reasons and has a permanent address and a definitive work and rest schedule, for purposes of determining the employee’s work injury, the rules in the location where the employee is actually based shall be used.

An employer that does not operate from its place of registration usually  should contribute to the employee’s work injury insurance in the place where the employer is registered. For dispatched employees assigned to work in a location other than the place where the dispatch agency is registered, the dispatched employee’s social insurance must be paid in the place where the company that uses the employee is located.

Employers in the construction business that contribute to their workers’ social insurance on a project basis must get work injury insurance in the location of the construction project.

Bottom line: Regardless of where your employees are based, if you are a China employer, you must (and you should) contribute to social insurance for your employees. And depending on your location, you may also need to contribute to social insurance for your expat employees as well.