Three Classic Business Fraud Types in China
While business fraud remains more the exception rather than the rule when dealing with a Chinese company, it’s important to be vigilant about the potential types of scams that could derail an otherwise successful partnership.
Understanding the nature of the various scams and using that knowledge as part of your fact-finding and due diligence work up front can help you progress through your business affairs with confidence.
As we’ve discussed in many other articles, small- and medium-sized businesses need to be aware of the potential for fraudulent activity associated with establishing and sustaining a business relationship with a Chinese company. While business fraud remains more the exception rather than the rule, it’s important to be vigilant about the potential types of scams that could derail an otherwise successful partnership. Understanding the nature of the various scams and using that knowledge as part of your fact-finding and due diligence work up front can help you progress through your business affairs with confidence.
We’ve identified three primary scams:
- The “Fake Deal Sealer” Scam
- The “New Bank Account” Scam
- The “Fake Company” Scam
The “Fake Deal Sealer” Scam
This scam centers around inviting the would-be foreign business partner to China to finalize the details and logistics of a proposed deal or relationship with the Chinese company. Upon arrival, the Chinese company informs the would-be foreign business partner that it needs to make payments or send gifts – bribes, essentially – to various individuals and offices as incentives to receive preferential treatment and expedite processes around the proposed deal. Once the foreign business makes payments and sends gifts, the relationship or deal disappears and the proposed Chinese company vanishes.
The “New Bank Account” Scam
This scam is as simple as its title implies. A Chinese company sends an email to its existing customer alerting that customer of new bank account details. The Chinese company asks that payments now be made to the new bank account. More often than not, the “new” bank account is a personal bank account and can be registered at a separate location from the company’s official headquarters. The perpetrators of the scam could be any of the following entities: the company itself, individuals with positions inside the company, outsiders who have hacked into the company’s communications systems, or a completely random outside entity with no link to the company at all but who is an imposter. Email remains the contact method of choice in this type of scam, as it’s the easiest channel that can be hacked or spoofed because of its relative insecurity within Chinese systems. As we’ve covered in a related article, you should only make payments to an official business bank account that has an associated bank account certificate.
The “Fake Company” Scam
This scam is very basic: a company pretends to sell a product or offer a service, it accepts payment for the goods or services, and then never delivers. The best way to protect yourself against this kind of scam is to conduct research and carry out due diligence before engaging in any transaction by verifying a number of core documents that certify a Chinese company, including:
Foreign trade registration certificates
Customs registration certificates
You can take some initial steps to verify a Chinese company as part of your research. In addition, you should review the list of documents you should request from a Chinese manufacturer before signing a contract, and certify that these documents are authentic.
Additional Resources
We know verifying Chinese business certificates and licenses is difficult and time-consuming… especially when you don’t know where to start. Nuna Network helps you navigate the complexities of partnering with Chinese companies, providing information on everything you need to know before you do business together.