It’s become somewhat of a December tradition to write about China payment scams in December because history shows this is the biggest month for those.  Last December, it was Ancient China Business Scam. Back With A Vengeance This Season.  This year, I asked my co-blogger, Steve Dickinson, to report on what he is seeing and hearing on that front these days. The following is his report:

We are frequently contacted to deal with the following issue. A foreign company has been making purchases from a Chinese company for an extended period. Payments are made pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the Chinese company sends an email 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.

The question we are asked is whether the request to make payment to a different account should be honored. Our answer always is no. Ignore the request. Make payment as provided in the original PO or don’t make payment at all. In the past, I have made this statement because it is not uncommon for rogue employees in Chinese companies to set up alternative bank accounts using forged company documents. These employees are noted for having stolen substantial sums using these techniques.

It now turns out that foreign criminal gangs have entered the field, making the situation even more dangerous. China Daily reported today on such a foreign operated fraud.  The foreign gang worked with a network of 9 foreign nationals living in China. The scheme worked as follows:

  •  The China team investigated Chinese trading companies making sales to foreign companies operating in 27 foreign jurisdictions.
  • After locating the target Chinese companies, the gang installed Trojan horse software on the computer systems of the Chinese companies. They used the Trojan horse to intercept email communications between the Chinese and foreign companies.
  • The gang then sent out false emails to the foreign buyers, requesting that they send funds to bank accounts different than those provided in the applicable purchase orders. These accounts were opened in China by the China resident members of the gang. The accounts were emptied immediately, leaving only small sums behind to reward the local gang members.
  • Nine local gang members were arrested. However, since the majority of the funds were sent overseas to unknown parties, the stolen funds were not recovered.

How can you avoid getting caught up in this type of fraud:

  • As you can see from this story, 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 are very loyal to their bank and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider 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.

As China opens to world, this kind of international fraud will become even more common. Constant diligence is required to avoid being taken in.

You have been warned.

What are you seeing out there this season?

I love it when a blog post just lands in my lap, and one just did. It is a couple of emails from two of my firm’s lawyers to two different clients, both of whom recently retained us to draft OEM Agreements for production of product by factories in China. Both clients are in the process of changing their Chinese manufacturers and this time around they want a strong and enforceable supplier agreement with their new Chinese manufacturer.

I am doing this post to give an idea of some of what should go into a Chinese manufacturing agreement.

Since we have a fairly standard initial questionnaire we send to our clients when we being working on China OEM manufacturing agreements, I have combined the two emails into one, further camouflaging the companies involved. Here are the questions posed by the emails:

  • What is the name and contact information of the Chinese manufacturer?
  • What sort of products will the Chinese manufacturer be making? Do you anticipate that these products will change over time? Will the volume change over time?
  • Where do you anticipate selling your products In particular, will you be selling it in China?
  • What are you expecting regarding shipping terms?
  • Will you be using this OEM agreement only with this specific Chinese manufacturer, or will you be wanting to re-use it with others?
  • What arrangements will be made for packaging prior to shipment?
  • Are you concerned about your manufacturer going around you by directly selling a competing product your customers?
  • Exactly what will you want to be  done with any defective product?
  • Do you have an existing purchase order (PO) that you intend to use for your product orders from this manufacturer? If so, please provide us with a copy.
  • How are you anticipating pricing and other terms will be negotiated? On a purchase order basis? On an annual basis? Some other way?  If you submit a purchase order and is not accepted by the Chinese side, what happens? In other words, is the Chinese side bound for some period to make a certain amount of product at a certain price, or is the Chinese side only obligated to make product for you after it accepts your purchase order?
  • How many of the deal terms have been negotiated at this point? From the documents you have sent us, it appears that only the very basics have been negotiated: 40% down, 60% before delivery/shipping, plus certain quantity discounts. These are not great terms from your standpoint, but fairly typical for deals with manufacturers in Southern China (i.e., Shenzhen, Guangdong, etc.).
  • What sort of arrangements have you made for inspection and quality control, and what sort of warranty terms have you negotiated? This question is particularly important in that many manufacturers in the south of China insist on a no-warranty provision.
  • What are your main concerns in this deal? I ask this both so I can focus on the provisions that matter to you, and because it can help determine the choice of law and the choice of venue. From what I know so far, your main concerns seem to be twofold: (1) getting a high quality product and (2) protecting your intellectual property (i.e., ensuring that the Chinese manufacturer does not sell your product behind your back and/or steal your tooling).
  • What exactly is the tooling for this product? Does the Chinese manufacturer already have all of the tooling in question?
  • Has the Chinese manufacturer already signed an sort of agreement/memorandum of understanding (MOU) with you, even if only in English?
  • Are there any unresolved issues involving your previous manufacturer ? For instance: have you gotten all of the tooling back from the previous factory? Are there any outstanding invoices or payments due?

After we get answers to the above questions, we virtually always write back with a whole slew of follow-ups.

For more on what it takes to have/create a good OEM Agreement, please check out the following: