Chinese company emails US company about buying a few million dollars of the US company’s product.  The terms of the deal are quickly worked out and the Chinese company suggests the American company go to China to sign the contract and celebrate the consummation of the deal.  The American gets to China (usually some fairly out of the way city in China) and is treated to what appears to the American to be a really expensive meal at which the contract is signed. At which point, the American company is told that Chinese custom requires that it buy the Chinese CEO an expensive gift and pay the notarization fee. The American is then either taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the notarization fee. Sometimes the American just gives the Chinese company people cash to go off and buy the gift on the American company’s behalf.

It isn’t until weeks later that the American learns that there is no deal and, in fact, there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend less than $10,000 more to seal the deal.

This China business scam was really popular four or five years ago, but it seemed to have really declined since then, presumably because word had spread among American manufacturers.

It appears China has found a new set of victims.

CMM-Intelligence (a must-read for anyone in a media related business) just did a story entitled, “WARNING: Alleged Fraud Scheme by Chinese Company Targets International Media Companies,” on how this scam (with a slightly new twist) is being played on foreign media companies:

CMM-I last week became aware of an alleged fraud scheme that currently appears to be prominent in Mainland China. A Chinese company that claims to be a Zhengzhou-based investment firm contacts Western media companies involved in video production via email to signal interest in co-producing a TV documentary series about the foreign party’s home country. Once the deal terms are negotiated the foreign company is invited to come to Zhengzhou, Henan Province, to sign the contract. At the signing ceremony the Chinese reveal to the foreign representatives that the latter are expected to pay a certain “notarization” fee. Moreover, the foreigners are “encouraged” to purchase presents worth several thousand Euros in order to “save face” vis-a-vis the Chinese company’s CEO.

CMM-I is aware of two German companies that have fallen victim to this alleged scam thus far. In addition, several Austrian companies seem to have been targeted. We post this message here to warn our subscribers and business partners — as well as their associates and partners — of this alleged fraud, and we will continue to contribute to putting a stop to such shady games to the best of our ability.

I find it very interesting that the companies that have fallen prey to the scam are German and Austrian and to a certain extent, that does not surprise me. American companies, far more than German companies (fairly or not, I am just going to assume Austrian companies are more like German companies than like US companies) tend to work closely with their lawyers. It would be the rare American company that enters into a big international deal without working with their international legal counsel.  That being the case, I would think that the American company would have been warned by their lawyer before going to China of the possibility of such a scam (we have done that a few times with our clients) or have called their lawyer to ask about the legitimacy of the Chinese company’s payment request. Just a thought….

What are you seeing/hearing out there?

Update:  A reader sent me a link to an article, Beware: B2B Scam from China, listing out more people/companies (mostly European) hit by this scam.  This article names a company allegedly propagating the scam.  I would stress that most of the time when we have researched/investigated China scams such as this one, the named company is not actually involved at all.  The scammer has simply traded off the name of a legitimate company as part of the scam.

As a China lawyer, I hate Decembers. I love them because they are always one of our firm’s busiest months (which is true in spades this year), but I hate them because they are also the month when we get the most contacts regarding frauds and scams (which is also true in spades this year).  December is fraud month because that seems to be when Chinese companies seem to decide whether they plan to continue operating as a viable business or not and oftentimes those who choose “not,” will decide at the same time to go out with all guns blazing. December is also a great month for consumer scams coming out of China.

I hate getting the scam/fraud calls because 99 times out of 100, the best we can do for the caller is to tell them to be more careful the next time; it just does not make sense to pay a lawyer to chase a phantom. 

Here is a composite of the latest one we have been seeing:

You are a United States company that buys its product from China. You are really in a rush to get your product in time for the Christmas season so maybe you are not being as careful as you usually are. You get a call from someone who purports to be from your China manufacturer (and this person probably is). They tell you that they have changed bank accounts due to “tax reasons” or because of “a government loan” and ask you to please make your next payment to the new account. You want your product and you want it fast and so you do so. Then the company calls you a few days later and says it will not ship you your product until you pay it. You then call a law firm who tells you that you have a really really difficult case and who are you going to sue? The company who you never paid and can with a very straight face say they have no clue who called you about the new bank account and why the hell did you pay some person so much money who you do not even know? Or the person you just paid who probably barely exists by this point? 

Be careful out there.

Just read an interesting China Confidential post regarding how a lack of transparency in China’s banks has permitted them to engage in fraudulent activity.  Entitled, “Big Bank Fraud Problem Looms in China,” the post posits that Chinese banks grossly under-report their bad loan problems and overstate their cash reserves.  The article is a bit sketchy on facts, but it seems to have been written more as a warning of what is to come than as a real analysis of the issues.  The post seems to be saying that the fraud problem goes beyond banks to involve many of China’s publicly traded companies:

“We’re going to see some serious scandals involving Chinese public companies,” an American securities lawyer, who insisted on speaking anonymously, told China Confidential. “If American and European companies can succumb to temptation to post phantom profits and revenues, as they have in recent years, imagine what we’re going to see coming out of China.”

China Confidential has our attention with this one and we will be waiting and watching for the follow up.

By: Steve Dickinson

in “Amazing Lawyers And The Criminal Side of China Business,” we talked about the need to be careful regarding business activities the Chinese government considers criminal that are not typically seen as such in the United States or in Europe.  A reader posted a comment asking us to give some examples as it “would be monumentally inconvenient” were he to be charged with a crime in China.  I agree, so here goes.

In the U.S. and in Europe, it is quite uncommon for a dispute between two business people to become subject to criminal law enforcement. This is not true in China. In doing business in China, you need to be aware of two things: the scope of economic crime there is far broader than you probably expect and the Chinese party with whom you are conducting business is far more likely to pursue a criminal complaint than you would expect.

China has developed an elaborate set of laws concerning ‘economic crimes’ that parallels its civil law system. The area of economic crime is quite extensive. My Chinese textbook on economic crime is over 1500 pages long and it describes 105 separate crimes, divided into eight categories. Dealing with economic crimes has become an increasingly large portion of the workload of the average Chinese court. Many of these crimes are garden variety crimes, such as smuggling or passing bad checks, that would be considered a crime in any jurisdiction. However, a whole host of crimes applies to areas most Western business people would think would be dealt with by private litigation. For example, one general area of crime is “Disturbing the Market Order.” Another is called “Damaging the Management Order of a Company or Enterprise.” Crimes in these categories can be very broadly described and can often be applied in areas that are surprising to a Western business person. For example, criminal fraud is very hard to prove in the United States.  It is exactly the opposite in China.

Here are some examples of the ways Western business people can find themselves in China’s criminal system:

There is a sale of product. The Chinese party complains that the product is defective. The foreign seller insists the product meets standards and it is the buyer’s own processing that caused the problem. This normal business dispute may be transformed into the crime of sale of defective products.

A Chinese company pays a substantial deposit to a foreign service provider to develop a sophisticated market access program for the United States. There is a dispute over the quality of the service provided by the foreign provider. The foreign provider does not collect the remainder of his fee, but refuses to refund the deposit. This normal business dispute may be transformed into the crime of contract fraud.

A Chinese company insists on a guarantee of payment from a foreign seller through deposit of promissory notes issued by a foreign party. When the Chinese party attempts to collect on the notes it cannot do so due to banking regulation or some other technical matter. The foreign seller does not make alternative arrangements for payment. This normal business dispute may be transformed into the crime of financial fraud.

The offended Chinese business person is also much more likely to pursue a criminal complaint than his Western counterpart. This is particularly true outside of the major cities, where the private court system is less developed. There are a number of reasons for this. First, there is the longstanding tradition in China that law is basically a criminal matter. Many Chinese judges are more comfortable in handing out criminal sanctions than deciding the merits of private commercial activity.  Second, many Chine businesspeople are more comfortable beseeching the police, the prosecutors, and/or the courts for justice than pursuing justice on their own. Third, there is an economic incentive. If the state pursues the claim, the offended person or company saves on the expense of hiring a lawyer. Fourth, as part of the criminal action, the state will seek to force the defendant to pay redress to the offended party. In China, the state is more likely than a private party to be able to obtain assets from a defendant.

Bottom Line: If you are involved in a business dispute in China, you should immediately consider the risk it will be transformed into a criminal matter. If the other side in a business dispute threatens criminal sanctions against you, you should take this very seriously. You need to make sure you are completely prepared to deal with the issues. Moreover, you need to be completely sure that what you consider to be an entirely innocent commercial dispute is not in fact a potential crime under the wide application of economic crime applied in China.