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China Due Diligence. Review The Chinese Company Seal Cause It Matters.

Posted in China Business, Legal News

Nearly a year ago, we wrote about the importance of including “seal confirmation” in your China due diligence:

One of our recurring themes is the need for due diligence when working on any business matters in China. Most foreign companies think of due diligence only when they are planning to make an investment. Most companies are not aware that due diligence is required whenever you do any kind of business with a Chinese company. If you do not already know the Chinese company with which you will be conducting business, you must confirm that the company really does exist and that you are dealing with the actual company and not an impostor.

I want to share a conversation I had yesterday with some young Chinese lawyers who work for the one of the largest and best law firms in Shandong province. I was discussing with them the question of whether or not the company seal on a particular document was valid or not. It seemed like a simple matter. The resulting conversation was not so simple.

When asked how they go about confirming the validity of a seal, the lawyers told me that “you have to go the town where the company is located.” Once there, you then have to determine if the seal is registered. Often the seal is not registered as registration of seals is not mandatory in China. Then you inspect various documents filed with the local authorities to determine if the same seal was used on those documents. If the seal is registered, or if the same seal was used on all company documents filed with the local authorities, you know that the seal is valid.

Even this is not enough. Even though the seal is valid, you still have to determine if the seal is being used in an authorized manner. Just on the surface, there are two possible issues. First, an impostor may have created a fake company seal. Second, someone within the company may be using the seal in an unauthorized manner. The only way to resolve these issues is to actually visit the company at its headquarters and to ask: is the person who stamped this document employed at your company? If the answer to this is yes, you then must ask whether the person is authorized to do this particular business.

An affirmative answer to both these questions is the only way you can be assured that the signature and the seal on your document are valid and will effectively bind the company. There is no other way to do it: a visit to the relevant  government office and to the company office is required. There is no service available to do the work. You have to hire a Chinese licensed attorney to do it. A Chinese attorney is normally required because local governments rarely open their files to a private person and they certainly will not open their files to a foreigner.

My first response to all of this was to say that this is far too expensive a procedure for normal commercial transactions. The Chinese lawyers looked at me with a mixture of amusement and contempt. They said that they understand my response since it is typical of their North American and European clients. They further stated that they are amazed at the naivete of their foreign clients on the need for basic due diligence in commercial transactions. One lawyer looked at me and said: “What do you think we do all day at this law firm. Most of our young lawyers and legal assistants are primarily engaged in basic due diligence about potential business partners of our Chinese clients. We travel to the local offices and we charge for the expense. Our Chinese clients willingly pay the fee because they know the risk is too great to act in any other way. We constantly see foreign companies enter into contracts without doing any such investigation and it continues to surprise us. You say that our form of due diligence is too expensive. We say that being cheated is far more expensive. Given that the chance of being cheated in China is extremely high, it makes no sense to us to take the risk. Our Chinese clients would never enter into an important contract without a personal investigation of the other side and we find it very strange that these foreign clients who know even less about China will willingly take a risk that virtually no Chinese company would take.”

It makes sense to take seriously what these young Chinese lawyers are saying. Let me give you just one example of what can go wrong in China. Say you are dealing with a large and well established Chinese company. There is no question that this company exists and that it makes the product that you wish to purchase. Now ask yourself this: are you really dealing with that big company? Or are you dealing with an impostor? How do you know?

It is easy in China to fake company seals, business cards, bank accounts and even a website. The unsuspecting foreigner makes a deal with the impostor and sends funds to the bank account. Product never arrives. The foreigner contacts the well established Chinese company and that company truthfully responds by saying “we have never heard of you.” It turns out the foreigner had been dealing with a fake, virtual company the entire time. This happens all the the time in China. Trust me when I tell you we see instances of this at least once a month.

One of the services we are constantly providing for our clients is what I call the “first pass review” of a company seal. In this review, one of our China lawyers who is fluent in Chinese and very experienced with Chinese contracts will review a seal for our client. This review consists of pretty much nothing more than looking at it to determine whether it may be fake or not. If this review cannot determine that the seal is fake, we then suggest our client conduct a more thorough review to confirm that it is real. This is because our first pass review is good at spotting obvious fakes, but it certainly is not good at making sure that a seal is real or that the seal really did come from the company it represents or that it really was authorized by the right company. But as a gratis first pass, it does have its benefits. Shockingly often in fact.

Let me explain.

As stated in the post above, at least once a month we come across an instance where there is something very wrong with the seal/Chinese company with whom our client is thinking of entering into a  deal. My favorites are when we detect that the seal is a fake, which has been happening more often in the last six months than in the past — it is amazing how direct and quick a correlation we see between a declining economy and a rising incidence of fraud. Just last week, I was cc’ed on some emails between two of our lawyers doing a first pass review of an alleged company seal. The email exchange was as follows:

First email:  Attached please find one of our OEM agreements, signed and stamped by the Chinese side. Please note the following that seem out of whack to me:

1. The seal is in blue and not red ink
2. The seal is rectangular and not circular
3. The seal is almost illegible — does that matter?
4. The signature is the Chinese manufacturer representative’s English name

Also, the client tells me that he signed it and scanned it to them for their signature, but they sent back a copy with their signature but without his, and asked him to sign the copy they had signed. Is that normal?

Second email:  None of this is normal or legally binding. The seal should be circular, the ink should be red, and the company name should be entirely in Chinese. The seal should also always be completely legible.  And why is the manufacturer signing with his English name?  A lot is not right here and you should so instruct the client.

Aww snap. You didn’t know?

  • G. Lee

    You have a LI group, but you do not have a LI button to post your articles to all the rest of LI?

  • Chris

    Amazing how often this happens. The company I worked for just fired a departmental manager for signing a ‘contract’ with a client using a fake company contract and seal.