China joint venture lawyers
Smile. The fake China joint venture scam is easily avoided.

Our China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am writing (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner. Part 5 involved a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.

This part 6 post is on what we call the fake China Joint Venture, and it is an oldy but a goody and — dare I say it — one of my favorites. The reason I say it is one of my favorites is because anyone who falls prey to it brings it on themselves, at least in part. Our China lawyers have seen this one quite often and as far as I know, it has always involved an American company, which I fear says something about American naïveté.

This scam is really very simple and it pretty much always goes down the same way. It starts with a Chinese company convincing a foreign company to do a joint venture. The foreign company then contributes something to the joint venture to secure its ownership stake in it. This contribution virtually always consists of money, but it also often involves other assets as well, such as intellectual property, equipment, personnel (usually unpaid) or know-how. The Chinese company says it will handle the setting up of the joint venture and the foreign company readily agrees to this.

But instead of actually setting up a real joint venture with the foreign company having an actual ownership stake in the new company, the Chinese side simply takes the assets from the foreign company and does nothing official towards forming a joint venture. Most of the time the Chinese company never even sends the foreign company any remotely official documents regarding the alleged joint venture, but sometimes it sends fakes. Either way, the end result is that the foreign company believes it to be the part-owner of a China joint venture and it starts acting accordingly.

Usually for years everything is fine, but then the foreign company begins to wonder why it has never received any money whatsoever from the joint venture when it now seems to be doing so well. So they contact their supposed joint venture partner (the Chinese company) and then when they fail to get any answers, they contact a China lawyer to look into bringing a lawsuit. The China lawyer does some quick research (and by quick, I mean really quick) and then realizes there is no joint venture.

In some circumstances it may be possible to sue individuals and companies outside China for fraud but for that to work you need for the foreign country to have subject matter and personal jurisdiction and even if both of these jurisdictions are present, one must still effect service of process under the Hague Convention and, perhaps most importantly, have some means of collecting on any judgment awarded. Foreign courts are not going to be quick to claim jurisdiction over the ownership of a company in China and Chinese courts are certainly not going to be very quick to say that a foreign court has the power to determine ownership of Chinese companies. All this combines to mean that in most instances the duped party has no good recourse.

How do you avoid this scam happening to you? Very very simple. You retain a qualified lawyer early on to make sure a real joint venture gets formed with your company as one of its owners.