A foreign company who got caught in a commercial fraud perpetrated here in Qingdao recently contacted me. The basic trick is as follows. A non-Chinese trading company offers “Chinese” manufactured goods at a very low price. The trading company then issues numerous confusing invoices and receipts. Eventually, the trading company convinces the foreign buyer to make most or all of the payment for the goods to a bank account located outside of China. When the foreign buyer demands delivery of the product, the trading company either disappears or claims that no payment was ever received. The claim that no payment was made is based on the fact that the payment was made to a bank outside of China and to a payee with a name different from that of the trading company. The buyer is then left holding the bag: no product, no money and no one to sue in China.
These types of fraud cases are common and should be fairly easy to spot. It surprises me that foreign buyers still fall for this basic form of fraud. Here are some of the issues you should consider to avoid becoming a victim:
1. Since the payment is made to a foreign bank account, the party committing the fraud is usually not Chinese. This particular fraud appears to have been committed by a Korean company. Russian companies have committed earlier frauds of this type in Shandong and Liaoning provinces. Consider carefully with whom you are dealing with when operating with a trading company. A simple Google search will usually tell you that you are dealing with a questionable party.
2. The fraud in this case was committed by a trading company; the actual manufacturer of the product did not commit the fraud. For manufactured industrial products, the use of trading companies has become unusual in China. Any potential purchase of manufactured industrial products from a trading company should therefore always be viewed with at least some suspicion. For various reasons, it is usually better to deal directly with the manufacturer. If the manufacturer (or you) want to bring in a trading company to facilitate payment or shipment, you will be much better positioned if you require that your main contract remains with the manufacturer.
3. I have dealt with dozens of frauds in my legal career and in virtually every instance there were various giveaways that showed the transaction was a fraud. In this case, the three invoices issued by the trading company were a dead giveaway based on the following:
- The address and the name of the seller on each invoice was different from the next. Chinese companies are very careful with their invoices. Their invoices are always exactly the same. Where an invoice varies in the address or the name of the seller, you can be pretty sure there is something wrong.
- Each invoice provided for payment to a different bank account. This virtually never happens in a legitimate transaction. Even though the seller address on the invoices was Qingdao, the payee’s bank was located in first Shanghai, then Shenzhen and then Korea. The payee for each bank was a different company than the seller. This is almost always a dead giveaway for fraud. Legitimate Chinese companies take payment in a bank in their hometown with the Chinese company itself, not a third party.
- The final payment provided for payment to a Korean bank. Again, legitimate commercial sales transactions in China do not provide for payment to a foreign country.
- The invoices were signed with a stamped signature with no company seal. Legitimate Chinese invoices will be stamped with a standard round, red, registered company seal. A signature is a sure sign of a problem, particularly if the signature is a stamp.
4. The final mistake of this buyer was to pay before receiving a bill of lading. It is always best never to make a payment for product until you receive a bill of lading from a reputable carrier issued in the name of the seller. Even bills of lading can be forged, so it is important to ensure that a reputable carrier issues the bill of lading and that an agent or other intermediary has not issued it. I say reputable carrier for a reason. For this type of fraud, the product is often bulky and not subject to containerization. The carrier is then often a non-standard bulk carrier. View any transaction with a tramper or bulk-carrier with suspicion.
Of course, the ultimate reason that the buyer was deceived in this case (and in most of those that we see) is that the fraudulent trading company was offering the product at about half the normal commercial price for this product. External market forces determine prices in China for simple industrial goods and it is nearly impossible for a trading company to acquire product for abnormally low prices. Beware the “too good to be true” price. We are constantly seeing this type of fraud, particularly with bulk goods like chemicals and basic manufactured products like steel and glass. When the price is too low, the result is never good. The product either never shows up at all or the product delivered is of such poor quality as to be unusable.
Be careful out there.
