China lawyers

Our China lawyers get a steady stream of emails from companies seeking our help in recovering money lost in China scams or just telling us about the scams and asking us to report the scammers to “the police, the government, the State Department, the Embassy, and/or the consulate. Many of these emails also request that we write about the particular scammer on our blog or on our China Law Blog Facebook page.

Less than one percent of the time we probe a little further to see if there is any chance at all of a financial recovery, and we do so only in those matters where the losses are in the six figures or higher. We never report anyone to anyone and we never name names here on the blog.

Why not?

We don’t report anyone to anyone because if we did so we would be spending hours a day doing so and all without pay. We cannot just take what someone tells us and go to anyone with it as their lawyers. Our job as lawyers is to do our best to determine what is true and what isn’t and to dig into the facts to come up with as much as possible that might be helpful to government and law enforcement authorities in finding the culprits. Equally important, I have serious doubts that any government body in any country does much with these scams. So instead we tell the writers that they should do these things on their own.

Why though do we not name names here on the blog? Why don’t we have a list of scammers on here? For the following two reasons.

In many cases of alleged fraud, it is not clear at all that there has been a fraud. Here is one recent example. A Mexican company bought $60,000 in t-shirts from a Chinese clothing company. The Chinese clothing company sent the requisite quantity of t-shirts and the Mexican company alleges that they were of such poor quality as to be a scam. Was it a scam? I have no idea. Did the Mexican company have a written contract with the Chinese company specifying the quality of t-shirts it would be buying? I have no idea. Did the Mexican company spend $10 per t-shirt or $1 per t-shirt? I have no idea.

In many (most?) cases of alleged fraud, the name of the company is NOT the company that committed the fraud. Fraudsters often claim to be with a particular legitimate Chinese company but they really are not and a quick check of their email address reveals this. Guess what, people. It is extremely unlikely that a legitimate Alibaba employee will be emailing you from a qq email account. Many times the person behind the fraud is not Chinese and is not based in China; they are simply claiming to be with a Chinese company to pull off the fraud. We are not going to list company names when we have zero clue whether the names of the companies listed had anything at all to do with the alleged fraud.

I do note though that there are many sites that do name names and it does make sense to do an internet search before you send it money. Indeed, in most cases, additional due diligence is warranted.  See China Business Due Diligence.

Your thoughts?

China lawyers

Though we’ve written about this many times previously, I’m writing about it again today because my law firm’s China lawyers have been seeing a lot more of this lately, especially as against European companies. I am not sure why the increase. Anyone have any clues?

Anyway, we have been getting a number of emails lately from companies asking us if what their Chinese counter-parties are asking them to do is is legitimate or not and, unfortunately, a number of emails from companies telling us what happened to them and asking us to write about it on here. I note that these companies have asked us to name the Chinese companies that scammed them, but we do not do that for the simple reason that many scammers usurp the names of legitimate Chinese companies and the last thing we want to do is stigmatize those innocent companies.

The scam we are seeing is pretty much the oldest (certainly the most utilized) China scam against foreign companies. It works like this. Chinese company emails foreign company expressing interest in buying products or services from foreign company and then quickly negotiates a contract with the foreign company do exactly that. Once the contract has been agreed to, the Chinese company tells the foreign company that it must go to China to meet the Chinese company CEO and/or some government officials for a contract signing ceremony.

The below are some of the emails we have gotten in the last month or so:

We are a small company in _________Spain [we have offices in Spain and our website is in Spanish and some of our blog posts are in Spanish so we get a disproportionate number of emails from Spanish companies) and I was just victimized by a “come to China to sign the contract” scam. I read about these scams on your blog, but only after it happened to me. We are a small education company and we lost nearly $10,000 so would you please tell me whether it is possible for you to recover any of this money for us.

We spent weeks working out the terms of our contract with them and then another couple of weeks planning our visit to Chengdu to meet with them. our time.

I believed they were real because they never asked us for any money before our trip to China. Two of us from my company worked on this project and I have to admit we never suspected anything.

We researched the company thoroughly and they appeared to be a real company with a real website and a real domain name and their emails came from that domain name and our phone calls to them were to the telephone number on their website.

But after we signed the contract with them in Chengdu, we were asked to pay for a dinner to celebrate. We did not feel that we could say no because we had gone all this way and they told us that it was important that we pay because there would be government officials there. They even told us that they would make the first payment early if we did. Our dinner was absurdly expensive and when it came time to check out, the not so nice hotel they put us in was as well.

By the time we got back, their website was gone and I then was certain we had been scammed. They don’t answer my emails anymore.

We looked up the the Chinese company and it never existed. This took us less than five minutes and had this Spanish company done this before beginning its negotiations (as it should have done), it would have known this. I am writing about this scam because the other ones would have been a bit more difficult to spot because they used the names of real Chinese companies, but changed the email addresses slightly and gave different phone numbers. In one case, the city in China which the meeting took place was about 1000 kilometers from the home city of the real Chinese company.

The thing that makes these scams so insidious and so successful is the amounts that are taken. Usually they are between USD$5,000 and $10,000. Here’s the thing about amounts like this. Few people care. By this I mean the police in China don’t really care because they have more important things to do. The police in the foreign country don’t care because they have more important things to do. And the lawyers can’t take these cases because there is so little at stake and the odds of ever getting anything are incredibly slim. Our firm has taken on many multi-million dollar international fraud cases (mostly involving companies that paid millions of dollars for products they never received or invested millions of dollars in projects that were never real) and, generally, it takes at least $10,000 in attorney time (usually at least double this) for basic investigatory work to determine whether there is a real shot of recovering. So the sad bottom line with these scams is that the scammers virtually always get away with them and are free to operate and keep perpetrating them. In other words, these scammers are no doubt still out there and with each scam they hone their craft.

Here are some basic rules to follow when negotiating any sort of deal with a Chinese company, especially one where the Chinese company is claiming it will be paying you money:

  1. Do at least really basic due diligence on your Chinese counter-party before you spend any time or money. Don’t be afraid to ask them for a copy of their business license and then have someone who knows what they are doing look at it. I am just guessing here, but it seems like most of the time if you ask for this the scamming Chinese company will just move on to an easier mark.
  2. Always book your own travel to China, especially your hotel.
  3. Don’t go to China at all for a signing ceremony. Our law firm has drafted literally thousands of contracts between Western companies and Chinese companies and I don’t think there has been a single time where anyone was asked to go to China to sign the contract and I don’t think there has been a single time where any of our clients have done so. This is true of big Chinese companies (both SOEs and privately held entities) and small Chinese companies.

Most important of all, don’t get too greedy, don’t move too fast, and don’t be anything but super careful. Lastly, don’t be afraid to challenge your Chinese counter-party on what they are telling you. The legitimate Chinese companies rarely resent having to prove themselves; in fact most welcome it.

What are you seeing out there?

China and Hong Kong legal systems
For commercial law purposes, think of Hong Kong as a different jurisdiction from the Mainland

Sometimes when we write posts we except a slew of emails and comments and get none. Other times we expect none and get a ton. I had no expectations regarding the post I did earlier this year on splitting expat employee pay between the PRC and Hong Kong — China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous but we are still getting emails on that one, mostly from people who got burned by just such a split.

I started that post by noting how our China employment lawyers are seeing increasing instances of expat employees in China having their salaries “split” by their Chinese or foreign company employers. I then mentioned how we “strongly counsel our employer clients against doing this sort of salary splitting and we even more strongly counsel against expat employees accepting such splitting. For one very simple reason: it is illegal and it puts you at great risk.”

I had no idea how common this salary splitting is and how common it is for Chinese companies to insist on how it is perfectly legal. Since that post I alone must have received at least a half dozen emails from expats asking if there might be something different about their employment situation that would lead their potential China employer to insist that their salary splitting was fully legal.
Many of these people who wrote me did so after using my blog post to insist that the salary splitting being proposed was illegal.

In my post I talked about how Chinese companies usually respond when questioned regarding the legality of salary splitting with Hong Kong:

This has also led Chinese companies to come up with some very creative justifications for their illegal actions, in an attempt to quell any expat disquiet about participating in tax fraud. Their first “line of defense” is usually to say “everyone does this and your American lawyers simply don’t know China.” When this doesn’t work, they often propose the expat employee become a director or an officer of the Chinese company’s Hong Kong entity and get paid the $70,000 for doing that. Yeah right. Anyone who knows China law enforcement, especially China tax law enforcement, knows this is never going to fly. See this Forbes article, China’s Tax Authorities Want You.

Now here’s the funniest part: two people who emailed me put my blog post in front of their potential China employers as proof that salary splitting is not legal and their potential China employers responded that we are “just American lawyers and we don’t know China.” Our lead China employment lawyer, Grace Yang, is Chinese and she graduated from Beijing University Law School and I have zero doubt that she 1) knows China employment law ten times better than the Chinese companies trying to cheat their expat employees and that she 2) is going to be a helluva lot more objective on this issue than the Chinese companies that profit from it.

In that post I stated that I saw this salary splitting as designed more to cheat the employee than the Chinese tax authorities:

This sort of non-payment has become so common I am now of the view that many (most?) China company employers that split salary payments do so not so much to engage in fraud as against the Chinese tax authorities, but rather to engage in fraud as against their expat employee. More than half the time when we get an email from an employee seeking our help in getting their $70,000 split fee payment, the employee has been working for her or his China employer for more than a year and that means their China employer saved about $100,000 over the last year (the $70,000 salary plus the approximately $28,000 in employer taxes and benefits it never had to pay) without violating a single law.

It’s like the perfect crime but it is not a crime at all. The employer simply managed to convince the expat to work at super low wages and there is no contractual record indicating otherwise. Sometimes there may be an email record, but the smart employer has made clear in its employment contract that the employment contract supersedes any prior written or oral promises or agreements. But even without that, Chinese law so favors the written and signed and chopped contract that not having such a provision likely won’t make any difference anyway. Many employers tell their employees they will make the $70,000 payment in one lump sum 6 or 12 months after the expat employee begins work, but then they never actually make the payment. Even without this promise, the expat employee does not want to quit because he or she believes doing so will mean they will never get the $70,000 — not realizing that continuing to work only puts them even deeper in the hole.

Then there are the instances where the employer does pay the employee out of country but stops for a while and then stops paying the out of China portion or fires the employee. The employee contacts our China employment lawyers believing he or she can sue his or her employer for damages based on a $100,000 salary. But how can they do this when their employment contract says their salary is $30,000? Are they going to stand up in a Chinese court and say, “excuse me, your honor, I know the contract says only $30,000 and I know my taxes show I have been paying income taxes on only $30,000” but this employer and I were together engaging in tax fraud against the Chinese government and so I just really feel like I am entitled to have this court enforce the oral agreement my employer and I used to defraud the Chinese government. Yeah, right.

All this very much reminds me of how in the old days when foreigners were not allowed to own real property in China they would buy real property in the name of their Chinese citizen girlfriends (it was pretty much always guys) to get around this prohibition. Then, once the girlfriend had the property, she would break up with her foreign boyfriend and keep the property, insisting that it was a gift. The foreigners would then contact my law firm wanting to sue their exes and we would have to tell them how we viewed that as folly because they would need to argue to the Chinese court that they had bought the real estate not as a gift to their girlfriends, but to have their girlfriends illegally hold the property in a sort of trust for them. Yeah, right.

I am more convinced than ever that there are a bunch of Chinese companies out there that are hiring foreigners as employees on these split contracts with the plan to underpay them and then fire them. I say this based on the emails I have received saying essentially this. The following two are representative:
  • “Good article. A friend of mine working for a large Chinese tooling and injection molding company had something similar happen last week. His contract was with a Hong Kong company, but he worked in China under a China business visa.  His employer did not honor his contract (after 10 years of employment) by not paying his 2017 commissions and then terminating him without paying him any of the severance to which he would have been entitled had he been a legitimate China employee.”
  • Pretty much what you described happened to me. I was hired for $118,000 and told that $70,000 would be paid to me from Hong Kong six months at a time. After my first six months I did not get my $35,000 payment and after four months of my complaining about that they fired me, without paying me anything from Hong Kong ever. My written employment agreement said that my pay was $70,000 a year (no mention of money coming from Hong Kong). I went to an employment lawyer in Shanghai and he did not like my case even though I had emails vaguely talking about my “additional salary.” Lesson learned.

Like I said in my last post on this topic, be careful out there. But be careful not just with the Hong Kong scam involving employment contracts, but be careful any time you are doing any sort of deal with a Mainland China company and a Hong Kong company or component gets tossed into the deal. We see this all the time on all sorts of deals (especially licensing and manufacturing transactions) and they always introduce new risks. I will be writing on that fairly soon. In the meantime, check out Hong Kong: Toto, We’re Not in Mainland China anymore.

 

Best books on China businessOver the years we’ve often been asked by both our readers and our clients what books they should read “to better understand China.” And over the years we have reviewed a ton of books on China. Yet I for one am never quite sure how to answer the question so I do the lawyer thing and flip the question on the questioner by asking them what they want to get out of the book. Their answers tend to vary. Greatly.

Some want a “how to” on doing business on China. Some want a book that will help them avoid legal pitfalls. Some want a book that 2ill simply give them a better feel for China as a whole. So clearly there is no one right answer.

Well maybe there is. We looked at all the China books bought by readers of this blog through Amazon and eight of them seemed to dominate sales as compared to the rest. These eight books tend to share two things in common: they are all short and they all lean towards the practical/relevant. These are not for the most part deep-think books or books that will take you weeks to read. They are instead crisply written briefs with a specific purpose or goal. Most importantly, they are the books our own readers are choosing to read.

So without further ado, our readers’ eight most popular books chosen strictly on the numbers and in no particular order, along with my one sentence review of each.

 

 

China import duties
                          Kanye has it right

If you are importing product originally from China covered by or even maybe covered by an antidumping or countervailing duty order, you must be very careful, no matter the country from you are directly importing the product. Two recent U.S. Commerce Department decisions to expand antidumping (“AD”) and countervailing duty (“CVD”) orders on hardwood plywood to cover ready to assemble cabinets highlight this problem.

Earlier this month the U.S. Commerce Department issued a final scope ruling on Ready To Assemble (“RTA”) Cabinets in the Hardwood Plywood AD and CVD case, finding no exclusion for RTA cabinets. Commerce held that this exclusion from AD and CVD duties applies only to cabinets sold to an ultimate end user (the consumer) and not to RTA cabinets sold to contractors that then install them. With this ruling Commerce effectively expanded the AD and CVD orders to cover RTA cabinets sold to the construction industry, which many (most? importers previously believed were excluded by language in the AD and CVD orders.

The RTA kitchen cabinet exclusion does not expressly address the manner in which RTA kitchen cabinets must be packaged to be suitable for purchase nor does it expressly define the term “end-user.” Nevertheless, the exclusion’s requirements require RTA kitchen cabinets be “packaged for sale for ultimate purchase by an end-user” and be packaged with “instructions providing guidance on the assembly of a finished unit of cabinetry.”

This decision exposes US importers of RTA cabinets to millions of dollars in retroactive liability for AD and CVD duties. U.S. cabinet importers that stuck their head in the sand while this AD/CVD exclusion case was pending will likely soon be hit with an enormous bill from the US government.

Years ago, my firm’s international trade lawyers handled a review investigation involving high tech products from China covered by an AD and CVD Order for a Chinese exporter/producer company. Much to the Chinese company’s surprise, the Commerce Department had determined that this small Chinese company was a mandatory respondent and that meant it would need to respond to the entire Commerce questionnaire and be subject to verification.

The Chinese company explained that it had never exported these high tech products to the United States because but it admitted to having sold its products to a Canadian customer. It had no knowledge of what this Canadian customer did with its products and it did not know whether the Canadian company exported the products to the US from Canada.

Under United States AD and CVD law, sales made by a Chinese company and imported into the United states are generally considered to be U.S. sales by the Chinese company if the Chinese company knew when it made the sales that its products were destined for the U.S.  In other cases, Chinese companies have been found to be respondents in AD and CVD cases if their packaging revealed that their products were ultimately destined for the U.S.

The problem for the Canadian companies and the U.S. importers in these situations is that the Chinese company that has made these Canada sales of products that go to the United States will usually just give up and not participate in the AD and CVD review investigation.  But the US importer of the products from Canada (which often has some affiliation with the Canadian company) will find itself owing substantial AD and CVD duties to the US government. I can remember a Canadian company that had to shut down its entire U.S. operations because it had exported chemical products from Canada to the United States that were covered by U.S. AD and CVD orders.  All of a sudden, the U.S. subsidiary was hit with millions of dollars in retroactive liability because of an AD and CVD case.

US importers that import products from Canada or anywhere else in the world that are originally from China need to be careful right now because their products may be covered by United States AD and CVD orders. These companies could wake up one morning and find themselves liable for millions in dollars in retroactive AD and CVD duties. This is truly the sort of situation where an ounce of prevention is worth a pound of cure. Now is the time to review your supply chain for its China vulnerabilities, whether you import directly from China or not.

China employment law

Residents of Taiwan, Hong Kong and Macau no longer need a work permit to work in mainland China. The PRC Ministry of Human Resources and Social Security earlier this month issued this notice that will obviously make it easier for residents from these three regions to work in mainland China. This means Taiwan, Hong Kong and Macau citizens will — for employment purposes — be treated (almost) the same as mainland residents.

A few quick highlights:

  1. Residents from these three regions can use their Taiwan/Hong Kong/Macau residence cards and mainland travel permits to seek or take up employment in the PRC. The following will now be deemed to constitute proof of employment in the PRC: a business license, an employment contract, a wage payment voucher and/or a social insurance payment record.
  2. Residents from Taiwan/Hong Kong/Macau can now register for and receive unemployment benefits in mainland China.
  3. Improvements will be made to public employment services, such as policy advising, information on job opportunities, and business incubation in an effort to help Taiwan/Hong Kong/Macau residents who wish to work in mainland China better navigate China’s employment system and gain access to more job-related services.
  4. Local governments are expected to offer more support to local employers and to Taiwan/Hong Kong/Macau residents and to protect the employment rights and interest of these residents so as to create a suitable environment for such residents working in China.
  5. Effective July 28, 2018, residents from these regions no longer need a work permit to work in mainland China. Starting August 23, 2018, applications for such a work permit will not be accepted and if an employer has submitted an application but no permit has yet issued, the relevant authorities will inform the employer that it need no longer pursue its application.
  6. Up until December 31, 2018, still valid work permits still within the validity period can still be used as evidence of employment.

One thing that has not and will not change is that regardless of where you are from, if you are looking to work in China, you should have your employment contracts thoroughly reviewed before you signing them.

China IP theftIn a very short and very helpful video — The big secret in Chinese/Western negotiations? — China negotiation expert Andrew Hupert explains two things of which you should be aware when negotiating with Chinese companies.

The first is to realize that most Chinese companies are not so much looking to do a long-term deal with you, but rather, to secure your IP. In our “free look scheme” series we wrote about how Chinese companies will feign interest in doing a deal with you when what they really want is your IP for as little cost as possible. Essentially, China free look schemes are methods employed by Chinese companies to get a “free look” at your intellectual property and trade secrets. In part 1 of this series, we looked at how Chinese companies use their purported interest in investing in a foreign company to convince the foreign company to give the Chinese company access to the foreign company’s IP. In part 2, we explained how Chinese companies use Memoranda of Understanding (MOUs) to get free looks at foreign technology. In part 3, we explained how Chinese companies use Joint Ventures (real, fake and non-existent) to get at foreign technology without paying for it. In part 4, we noted how there are plenty of legitimate Chinese companies seeking legitimate deals with foreign companies and then explained how to determine whether the Chinese company with which you are dealing is serious about doing a real deal or is just trying to get a free look at your IP. And in part 5, we addressed how best to deal with the risk of a China company free look scheme.

This is sort of part 6 and it deals with how to negotiate away from a free look scheme.

Hubert starts by noting how once you have been “partners” with a Chinese company for more than six months your China partner probably thinks it can earn more without you. Hupert goes on to say that Chinese learning curves are much steeper than western learning curves and because of this, Chinese companies are usually not terribly afraid of you leaving them and going it alone. Once they see your IP, they are over-confident about their ability to make use of it. I completely agree with Hupert and would only add that Western companies tend to be over-confident about the ability of their Chinese counterparts to take what little IP the Western company gives and run away with it and start competing.

Hupert then discusses how your Chinese partner likely believes that without its help, you will not be able to function in China and once it sees your technology it typically believes it is “competing on a more or less even playing field with you as far as the product is concerned.” I love how Hupert says that if (as is so often the case) it seems that your Chinese counter-party is spending most of its time trying to uncover your intellectual property and asking questions about your business processes, it’s because they are. Again, I completely agree. I can remember many times where one of our clients did not believe its Chinese counter-party was seeking to take its IP and was eventually proven wrong, but I cannot remember a single time where a client believed its Chinese counter-party was seeking to take its IP and that was not the case.

Per Hupert, the second thing of which you should be aware is that to protect your interests, you want your Chinese counter-party to work with you all the while believing you will provide new technology and even more valuable ideas to it in the future. But at the same time, you also want your Chinese counter-party to fear that you may team up with a different Chinese partner. “This hope-fear dynamic is your best best for building a good, healthy relationship in China.” Again, I completely agree and in fact, I add the following PowerPoint slide to nearly all of the talks I give on China:

How to Structure Your China Deal

I put this PowerPoint slide in nearly all of my China talks because — like Hupert — I see this as the key to negotiating deals with Chinese companies that work.

For more on negotiating with Chinese companies check out the following:

Or go all out and spend $4.99 for the Kindle version of Hupert’s book on negotiating with Chinese companies, 10 Common China Negotiating Mistakes: A Survival Guide for Front Line Negotiators and Team Leaders.