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Anatomy Of A China Scam. Part I. Just The Facts.

Posted in China Business, Legal News

Many months ago, a friend of mine at Samsara Biopharma Consulting told me of a matter his company had taken on to try to help a company that appeared to have been scammed by a Chinese chemical seller. I frequently hear of such scams in the chemical industry so I asked my friend if he would write a post for us on this matter once it was concluded. The below is the first part of that post, written by Jennie Shi, Felix Zhang, Wendy Zheng and Robert Walsh of Samsara:

About 2 years ago we were asked by a friend of a friend to source some specialty chemicals for his US-based inks company.  As a courtesy, and because we were in the middle of a similar exercise for another client, we went ahead and added the request to the list of what we were already working on.

After a few weeks we found sources of what the inks company was looking for, and went a few steps further to vet the suppliers and get lowest reference prices.  When we passed these to the inks company, they pointed out that the prices were not that much lower than the suppliers they were currently using, and decided to pass on the offers.

A year passes, and we get a call from this same company, this time asking for help in untangling a mess they’ve waded into with a new set of Chinese suppliers.

It seems that the inks company had responded to an unsolicited offer from a pair of Hebei chemical companies, who’d contacted them through Alibaba.  The prices offered for the same subset of chemicals we’d previously sourced for them were significantly lower, say, by 30% or more.  The inks company requested and received samples from the Hebei companies. Needless to say, these samples were right on spec.

Subsequently, the US inks company places a sizable order with the two Hebei companies, and the terms demanded are payment by 100% irrevocable LC at sight, which the US company agrees to.

A few months later, a number of containers are delivered to the US inks company’s facility, and upon opening are found to contain 44 tons of some mysterious white powder (not what they ordered) and blue plastic barrels of water.  The US company initially contacts the Hebei companies to demand an explanation and repayment, but after a few email exchanges, the Hebei companies stop responding.

At about this time, the US inks company remembers our company, and calls us for help.  We don’t do this sort of thing, but then we are regularly asked to do stuff nobody else has any idea how to do.  We agree to help the US inks company track down the Hebei companies and attempt to get some resolution.

The inks company sent us all related documents, as well as email correspondence dating back to their first contact with the two Hebei companies.  A number of things stood out right away:

  • The seals/chops used by both companies were quite similar, and also in no way conformed to the legal convention for such instruments in China, so it was unlikely that either company was actually  registered.
  • The personalities at the Hebei companies seemed to change frequently, with everybody using weird foreign first names.
  • The companies’ websites were registered to a person who had also registered a number of other chemical company websites.
  • As for the shipping documents, we could see no indication that what was shipped had left China having gone through commodities inspection.  The classes of materials shipped should have gone through this procedure.
  • The inks company’s set of pictures taken after opening up the shipping containers revealed that none of the barrels or bags had been properly marked with product descriptions, which is another curious thing pointing to a lack of outbound customs inspection.

We initially tried contacting both Hebei companies, and at first had some success, but after a few days, all signs were that thei mobile and fax lines had been disconnected.  Elvis had left the building.

Eventually we decided to send people to Hebei to look into things.

We Visit AIC

Our first stop was the local office of the Administration for Industry & Commerce (AIC), to check on the validity and standing of the two companies’ registrations. The report from our AIC visit noted the following:

From Company #1’s registration information, we concluded the following:

  1. Company #1  is a small company established in year 2009.
  2. Company #1’s’s scope of business is limited to trade. They don’t have any manufacturing facilities, contrary to what is shown on their website.
  3. Company #1’s’s registration address is a small apartment in a residential community. The address on their website eliminates the room number and building number so as to make them appear to be a big company.
  4. If you look carefully at the picture of Company #1’s’s entrance on its website, you will see that they added the company name to the picture by Photoshop. “

From Company 2′s registration information, we concluded the following:

  1. Company #2 is a small company established in 2010 not 1994 as stated on its website
  2. Company #2’s scope of business is limited to trade. Company #2 doesn’t have any manufacturing facilities, contrary to what they show on their website.
  3. Company #2’s registration address is a small apartment in a residential community. Their website eliminates the room number and building number so as to look like a big company. fact easily.

So both Company #1 and Company #2 are real companies and their business statuses in Administration for Industry & Commerce’s records are normal. But their behavior is well-planned scammer’s behavior….”

We Visit Company Premises

We noted that the addresses on the websites and in the correspondence for both companies were different from their registered addresses.  We went to all four places to make sure we weren’t missing something.

In the case of Company #1, the address listed on the website turned out to be the staff activities center for a well-known power company, replete with all sorts of sports facilities.  The registered address was in a middle-class apartment complex. The actual apartment had no company sign and it did not appear to be occupied during business hours.

As for Company #2, the address listed on the website was in a decidedly down-market set of apartments Again, no sign on the door, but there was a lattice window through which we saw nothing but a table, some chairs, and a whiteboard.  No activity during normal business hours was noted.

We Visit the Commodities Inspection Bureau

We next visited the Chemical and Mineral Department of the local Commodities Inspection Bureau (CIB) where we were met with a genuinely warm and interested reception by the officers of this bureau.  What we found from this visit was the following:

  • Neither company submitted required samples for CIB inspection.
  • Neither company was even registered with the CIB as an exporter of the materials in question.
  • The CIB officers told us that the companies probably deliberately mislabeled the material to duck proper inspection.
  • The officers flatly rejected the idea that any Chinese company could manufacture or sell such material at the quoted price since the only qualified manufacturer of the material in China of which the officers were aware sold the same product at more than 30 percent more.

We Visit the Bank of China, Hebei Branch

The bank would not give us any information regarding either companys’ accounts without being under the orders of the police or the court to do so.

We Visit the Police

We next met with the Municipal PSB, who while sympathetic, referred us to the individual district-level PSB stations with jurisdiction over the two Chinese companies. With respect to Company #1, we met with an informative and helpful officer who immediately recognized the case for the commercial fraud that it is.  Interestingly enough, he had handled a number of similar cases, some for the very same chemicals involved in this one.  He provided us with a list of materials he’d need to initiate a case against Company #1 and to take action. He said we would need the following:

  • An authorization letter and copy of an ID card or passport of the authorized person
  • Purchase contract. In this case, that would be the Proforma Invoice
  • Documentary evidence proving that Company #1 recieved payment for the goods
  • The Bill of lading
  • The inspection report
  • Documentary evidence proving that the Inspection report is for the production sample of Company #1
  • Pictures of received material

We must translate all of the above documents into Chinese stamp them with the inks company’s company seal on every page. Notarization is not required.

The officer representing the PSB station in Company #2’s district gave us similar guidance.  As luck would have it, he had just cracked a similar case in which an Indian company was defrauded.  In this instance, the Indian CEO and an interpreter came personally to present facts and evidence.

In Part II of this series, Anatomy Of A China Scam. Part II. Conclusion And Advice, Samsara will discuss what ended up happening on this particular case, analyze how the inks company could have better handled this particular case, and give recommendations on how to prevent this sort of thing from happening to you.

  • http://www.procurasia.com Etienne

    Really well documented case. I cannot wait to read the next part.

    • R Kunze

       I fully agree. We also were victims of some chinese scmmers. The only way o avoid  touble is: to insist on a performance bond when opening a L/C this would at least cover the cost for the L/C fee. If you open L/C maybe 3 times the “advantage2 of cheaper chines products are eaten ip with the bank’s fee

  • Robert Walsh

    The excellent documentation worked very much in our favor, and the victim company had kept meticulous records and a chronology of the event. However, for one of the chemicals, we had trouble getting certified (e.g., stamped, signed, sealed, unequivocal) lab reports, as the testing lab was not set up for legal forensic work. We couldn’t find a lab in the US on short notice willing to do this.

  • http://www.ipdraughts.wordpress.com Mark Anderson

    Gripping story…

  • http://www.clearbore.com.au john Stokes

    We are a small Australian company and were scammed by The Tianjin ______ Chemicals Co Ltd on the purchse of an FCL of oxalic acid, we contracted for 99.6% purity and paid by irrevocable LoC at the sighting of documents. When we received the goods and began our production it became apparent the oxalic wasn’t up to specs and further testing showed it to be 16.7% purity the rest made up of magnesium oxalte. All attempts to have the issue resolved have come up against a brick wall I even engaged the office of our Foreign Affairs Minister Kevin Rudd and the Embassy of the Peoples Republic of China in Canberra for assistance. I also had an exchange of correspondance with the Tianjin Commission of Commerce who were very helpful by supplying the name of the company owner which I passed on to a legal firm in Tianjin I engaged to follow the matter up again to no avail it is now in the hands of the police. I’m not holding my breath!

    • R Kunze

       Hello John, is the second name Tianxilai?

      • John Stokes

        Hello, sorry it has taken so long to reply I was just checking the blog name for another letter to our government. The name was —-Co Ltd. We’ve done our money but with our government talking about a free trade deal with China it makes my blood boil.

  • http://chinese-culture-symbols.com/ Sam Reeves

    Bravo!
    I’d just like to point out to anyone who hasn’t lived in China and had experience of Chinese bureaucracy and the culture (which are inextricably linked), and the language, how incredibly difficult doing all of the above can be.
    It may seem perfunctory to a westerner, but getting all of the above done, not to mention culturally knowing how to deal with people in positions of power in China, would be incredibly time consuming, not to mention complex.
    Well done… I look forward to the next installment.

  • http://www.eastinfo.eu Andras Kuntner

    Yes, I totaly agree with the writer. We have many years experiences about similar cases. We always put emphases on prevention even the participants of similar deals often get into the business without precaution. However we are specialized in prevention many companies get carried away with the promise of advantegous deal and profit and people try to save the cost of consulting although it is not a cost but it is an investment in a long term business. We have also to say not every chinese deal finishes with trouble but I think in doing business with the Chinese its better to spend on prevention than on buying insurance policy which always cost more the prevention.

  • Robert Walsh

    As we point out, we’d already done an acceptable (by our standards) supplier search for the inks company, and the vetted sources could not give appreciably better prices than the inks company’s current suppliers.
    Had we been quoted really good prices, suspiciously low ones, we would have moved to run a full audit before recommending that an order be placed, and we’d have been there at loading time, and seen the containers off.
    It’s a tremendous pain in the ass, but some unscrupulous Chinese companies are more than happy to take full advantage of customers who have what we call “faith-based supply chain practices”.
    Again, this is out of our normal line of business, but we figured we’d learn something useful along the way, if we did the job thoroughly enough. So we’re sharing what we learned here.

  • http://www.clearbore.com.au John Stokes

    It concerns me that nothing seems to be done to the unscrupulous Chinese traders who only serve to give honest ones a bad name. I have resolved to stop buying goods made in China but with China being Australia’s biggest trading partner it takes longer to shop for goods even food in some supermarkets. It isn’t much and won’t alter the situation but it makes me feel better.

  • http://www.chinaperformancegroup.com Buck

    One aspect of this story that maybe wasn’t given much attention was the role Alibaba played in connecting the businesses in question and the seeming willingness of the scammed company to engage in business with them. Does anyone remember the not too long passed scandal regarding the so called gold rated suppliers on Alibaba? I’m wondering why the Chemicals company agreed to demanded terms of 100% irrevocable. Were they rated well on Alibaba which together with the good samples made it seem worth it?

  • Ken Chan

    We develop Western Technology companies in China, and our teams are always very very cautious, and we do not use Alibaba or anyone else for contacts and networks. Read a history book, titled….. “Ali Baba and the 40 thieves”.

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  • R Kunze

    We are also victims of Chines chemical scammers. The last one was a company called Tianjin ________Chemical Co. Ltd. We signed sales contract for LDPE virgin resins opened a L/C but insisted that we entrust sgs with the inspection. Now they disappeared, changed responsible persons. The sales manager are all persons with a female name such as Kim or Jenny blblabla. I don’t understand why they do this. The don’t have any benefit, they can’t convert the L/C into cash without documents so what is the deeper sense of these kinds of scam?? If they could claim advance payment i can understand but in this case we are secure. The only bad thing is: our money is blocked and we have to wait until L/C bounces back. And we loose the fee for the L/C….