A Seemingly Legitimate... Fraud?

Your big break has finally come. A new Chinese client has just placed a sales order so huge, with terms so favorable, that it leaves your boss envious, the lawyers numbed and you breathless about how to spend your obscene year-end bonus. What are you waiting for?

Welcome to the new world of fraud, Chinese style. You may be a victim and you are not alone.

So what went wrong?

A new kind of commercial fraud has recently evolved and become commonplace in China – the masterminds are shady Chinese companies and the victims are usually unsuspecting foreign parties. Its design is so simple, ordinary and yet elegant and the payoffs are so limitless that you wonder why no one has ever thought of it before.

The good news is that strangely, it may cost you nothing. The bad news is that the authorities might come knocking on your doors soon because of your potential involvement in a commercial crime. You may be the victim of a scheme that has nothing to do with you.

We came upon recent cases in which some companies received orders from new prospective clients in far-flung parts of China. The initial exchange goes well and the buyers have legal and legitimate documents to demonstrate their credentials. The potential seven-digit US-dollars contracts are properly and professionally drafted and the seller’s legal teams have no issue with them. The payment terms are very good, with at least half paid up front. It is in many ways business better than usual.

Many companies have fallen for the scheme although in some cases, the potential sellers were still uncomfortable enough to ask for some due diligence and background checks. A party in one case said he knew all the buyers of his products in the Asian market and was thus suspicious of a huge order from a "new" player. The company finally decided to seek assurance and comfort through some background checks and investigations into the counterparties. A wise move indeed. Nor is that party alone. Several sought investigations.

What we found was that the Chinese companies are merely using the foreign parties as facilitators for their kickbacks, "gifts" and other illegal activities. All they need is a legally binding document to cover their tracks from the eyes of management, auditors and the authorities. And with many thanks, they get what they need through the huge invoiced contractual agreements signed by the more-than-keen foreign sellers - no more fake letters of credit. That was an old fashioned trick.

Everything appears legitimate here with all legally signed documents in place – except that you will never get your money and you will never need to deliver your goods. They are not interested in your products, all they want is your signature and stamp on the contract.

The buyers can even use these contracts as collaterals to tap credit arrangements from the banks.

To make matters worse for the foreign parties, they are often asked to visit China on the lure of further negotiations for the pending or other contracts, meeting other people, building guangxi, etc. They meet the Chinese buyers before the scheduled meeting at the buyer’s office, but the visitors are then asked to pay some small administrative fees at some local notary offices, which the they usually do unquestioningly – the usual Chinese red tape anyway, they figure.

That is the last they hear or see of their hosts. The visitors find to their shock that all the contact coordinates they have of the buyers suddenly lead them nowhere: the office address is either fake or misleading. It may exist, but may belong to a huge residential block with no sign of their hosts, or the building has been torn down. The phone numbers no longer operate (the SIM cards are possibly discarded), emails are either unanswered or bounce back as delivery failures, the company web site is pulled down, etc. It is a master piece of disappearing act.

All in all, the foreigners are simply taken for a ride. The impact appears small, there are few or no financial losses, just a lot of wasted time, inconvenience and definitely a lingering mystery. What the Chinese company gets out of it is a bill of lading or other documents showing it has transacted a, say, US$2 million deal despite the fact that no transaction has taken place. That gives the nonexistent or temporary company legitimacy. It can then use that legitimacy any way it chooses with the Chinese authorities.

But the nightmare may not be over. The foreign company is now an official part of a scheme of commercial crime and could be investigated in the future - should the culprits be caught one day when the relevant authorities and forensic accountants comb through a pile of documents and find them.

"There may be no financial loss now that I found the truth first but hey, why should I be used by them?" That was the response from a potential victim in one such case – in this particular matter, the Chinese company was found to have been registered just two months before the contractual agreement was to be signed, despite a claim by the Chinese "buyer" that it had been around for close to two decades. That was sufficient evidence and justification for the potential seller to pull the plug immediately.

By no means do these cases suggest that sellers should ignore a sudden huge order from a new, unknown client. It may be difficult to turn down a big account but it is wise to be prudent and do your homework before you sign on the dotted line. Check and compare the facts first. The cost of doing so is a small price to pay for peace of mind and all the unnecessary trouble.

Vanson Soo is a Hong Kong-based expert in business intelligence and commercial investigations with a special focus on the Greater China region. He can be reached at vansonsoo@gmail.com