In recent months we have noted growing problems with the reliability of companies located in Tianjin, Shijiazhuang and Xi’an. There is no shade of doubt that experienced importers know how to protect themselves and minimize risks associated with cooperation with Chinese companies by ensuring a verification of a given company, signing a commercial contract, visiting factories and controlling the quality of goods (the so-called on-site checks). Of course, not every Chinese company is an organized crime group, yet many inexperienced importers forget to do background checks of their suppliers, which is even riskier if a given company is located in one of the above-mentioned cities.
This year we noted growing problems with the reliability of companies located in Xi’an, Tianjin, Shijiazhuang and unfortunately, in the majority of the cases, the problems consisted in common fraud.
The fraud schemes and methods of operation used by swindlers suggest that they were targeting American and European companies. There are two recurring patterns of extortions, nevertheless, the first step is always the same. Contact with a Chinese company is established via the Internet. Usually, an American company finds a supplier on Alibaba, a popular B2B website (we should be particularly suspicious of Gold Supplier). Sometimes Chinese companies find the victim themselves and contact American entrepreneurs; it is particularly true for US food manufacturers and exporters.
1. We import goods from China
A US based company wishing to start importing from China establishes contact with a potential Chinese supplier. Contacting the company and the negotiation stage run smoothly. More often than not, Chinese companies send samples of goods which meet the expectations of the US client. The problems start after the Chinese company has received a deposit or the total payment – it disappears into thin air.
Running verification of the Chinese company in question is an effective way of protecting ourselves and avoiding fraud. Only by running an independent check of the company in the register can we make sure whether such an entity exists and only after seeing a valid register entry should we decide whether to cooperate with them or not. Many companies from Xi’an are not registered, and swindlers who register their companies usually do so only to be able to scam others. Such entities are normally not registered in the most important offices, have 1-2 employees and do not have paid-up share capital. It is also worth mentioning that usually, these are newly created companies, registered only a couple of weeks before the scam.
We need to keep in mind that we should always verify the company before transferring any money to China.
2. A Chinese company wants to buy our goods
American export to China is increasing every year, especially in the food industry, where companies are becoming very successful in the Chinese market. When we participate in fairs in China or establish business contacts via the Internet, we should always remain cautious.
This scam scheme, also known as “The Chinese Big Order Scam”, is very common. Every month we perform verifications of dozens of Chinese companies which committed this kind of fraud.
American companies negotiate with swindlers for a certain period of time and the Chinese company agrees to all terms, including 100% advance payment. At the end of a very fast negotiation process, the Chinese partner invites the company’s representatives to come to Xi’an to sign the commercial contract. When USA entrepreneurs go to China, they are asked to split fictional notarial fees amounting to EUR 400 – 10.000. Of course, these fees are fictional.
Many companies confirm that the scam followed this scenario. The Chinese insist on the fees being handed over in cash, in EUR or USD, and they do not agree to go to the notary nor to cover the payment even if the American party offers a discount for the ordered goods, the amount of which significantly exceeds the amount of the notary fees.
If we do not want to go to China, the notarial fees can be transferred to the bank account of the Chinese company which promises to pay for the notary. Once such a transfer is made, there is no further contact with the company and the contract is not concluded.
Verify Chinese companies. We need to remember that we should verify every new company we encountered in China, regardless of the way we entered into the business relationship. We can check not only whether it exists or not, and also if it is a manufacturer or intermediary, the number of the company’s employees, its bank accounts, when it was incorporated, how long it has existed and a lot more.