Though we have written about this scam a few times previously, I HAVE to write about it again because it just keeps happening, in even greater numbers and in even more diverse circumstances. And this is the one fraud to which I have time and time again seen extremely savvy and sophisticated companies fall prey.

And not only that, I learned a whole lot new about it at my lunch today with a local insurance coverage lawyer.

But first, more on the scam itself. I call it “the new bank account scam” and we described it as follows in a previous post:

“The new bank account to pay us scam.”  This is the scam on which we focused last year and it is still around and scarier than ever. I really really hate this scam because I have seen far too many smart companies fall for it and I view it as maybe the most difficult to detect.

This scam is usually employed against a foreign company that has been making purchases from a Chinese company (or any international company, as I learned at lunch today) for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is for Hong Kong.

What is the scheme here? Well, it is always possible that the Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment. In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company.  The Chinese company would get the money in Hong Kong and then claim that you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them.

Then last year this scam became even more sophisticated when computer hackers started hacking into computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud? Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam. The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

If you think you are immune to this scam, you are just flat out wrong.  This scam is hitting serious, savvy, large, internationally experienced companies and it is doing so because it is just so hard to stop. Our client who got hit with it was dealing with a large multi-national company based overseas (not in China). This company’s email got hacked and my client received an email with the PROPER invoice and a message saying that the company was consolidating its payment processing and going forward all payments should be made through its Guangdong office and to the following Guangdong bank account. Someone at my client’s company did exactly as told and now there is a problem between my client and this multi-national.

Now, about my lunch. This coverage lawyer told me that he is building up a cottage industry representing companies that have been hit with this scam. He said that he alone has taken on about a half dozen of these matters in just the last six months. And if he has taken on about a half dozen of these, that almost certainly means that he has reviewed about a dozen. What he is doing is going to the insurance company of the company that has been scammed and demanding that they reimburse his client for the money that they lost. This lawyer tells me that the insurance company’s initial reaction is to call his client an idiot, but as I pointed out, even if true (and I vehemently deny that it is), I have yet to see an insurance policy with an “idiot exclusion.”  This lawyer then convinces the insurance company that what happened is plain and simple employee negligence and that the insurance company must provide coverage.

Interestingly, most of his cases have involved the maritime industry and Korea and Russia, not China manufacturing.

Has he been able to get the insurance companies to pay his clients? Well let’s just say that he was thrilled to learn that I would be writing this post, so that ought to tell you something. So if you have been victimized by this now all too common scam, you should check your insurance policy and call an insurance coverage lawyer because all may not be lost after all.