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Fraud and Scams in China
While the China market offers many business opportunities, scammers preying on unsuspecting business persons is a reality. Bear in mind that an out-of-the-blue deal from an unknown Chinese entity may not always be as it appears.
This page contains scenarios frequently reported to the Canadian Trade Commissioner Service in China. We advise you conduct appropriate due diligence on all of your China business projects.
On this page
- Common traits of scams
- The “come to China” scam
- The “representative” scam
- The “new bank account” scam
- The “fake company” scam
- The “paper tiger” or the “parasite” company
- How to avoid fraud and scams
- For victims of frauds and scams
- Report frauds and scams
Common traits of scams
- The local company contacts a random foreign company
- The local company is reluctant to provide any verifiable references
- The local company often wants to buy products in large quantity
- The local company insists that representatives travel to China to sign the contract without seeing the actual products
The “come to China” scam
“Hello, my friend! We are pleased to inform you of our interest in your product and would like to make a purchase worth $250,000. Please come to China to discuss with us further and sign our contract as soon as possible. We look forward to seeing you!”
We’ve seen many cases in which a Canadian company is approached by an unknown Chinese “company” offering a lucrative business deal. The Chinese “company” asks the Canadian company to send representatives to China to sign a contract. Once in China, the Canadian representatives are told that it is customary for them to throw a banquet for the host “company”, pay a notary fee, and buy gifts for the “company” officials. Once the money has been paid, the Chinese company disappears without a trace.
- Conduct rigorous due diligence on the “Chinese company”
- If your investigation reveals that the company is registered, contact the company to confirm the identity and authority of those who have approached you
The “representative” scam
A Canadian company may receive an unsolicited email from a Chinese company which, it turns out, is actually not based in China. The company is seeking Canada-based representatives to establish a business presence in Canada, and more importantly, to transfer payments from Canadian or U.S. customers. In exchange, the Chinese company promises five to ten percent of the payments as a commission. These cases are invariably fraudulent and should be regarded with appropriate caution.
The “new bank account” scam
“Dear regular customer! We will ship your recently placed order once we receive the balance of $25,000 as per our long-standing arrangement. For tax reasons, we would like you to pay in a different account than our usual one. Many thanks!”
Sometimes a Canadian company may be asked by their legitimate and long-standing Chinese business partner to make a payment to a different bank account than the one normally used. Different reasons could be given to explain this unusual request: taxes, government loans, the need to secure foreign funds outside China, etc. After the money transfer, the Chinese company denies that any payment has been made. In many cases, the Chinese company truthfully did not receive the payment, but it has in fact been diverted elsewhere.
Different motives of this scam:
- Rogue employees from your Chinese partner aiming to make a quick buck
- Hackers have infiltrated your Chinese partner’s email account, possibly assisted by rogue employees
Before making a payment to an unfamiliar bank account, confirm with someone with supervisory authority from the Chinese company that the payment request is valid with a detailed explanation. Given the insecure nature of most email services, use the phone!
The “fake company” scam
“Hello my friend! We would like to warn you that someone is trying to register your trademark in China. Our firm can help you prevent this from happening for $25,000, if we act quickly. Please contact us as soon as possible to protect your intellectual property.”
Chinese entities may pretend to be legitimate legal or due diligence firms, trademark, copyright, domain registration or patent agents, freight forwarders, etc. There are many variations of this scam. One of the more sophisticated scams even involves non-Chinese individuals acting as employees of the fake Chinese company. Regardless of the difference in tactics, the scammers’ goal is to extract money from the Canadian company without providing anything in return.
To properly protect your trademark, register it with legitimate local law firm or trademark agent.
The “paper tiger” or the “parasite” company
“Dear Sir, we saw your product at a tradeshow last month and are very interested in distributing it in China. Our company is one of the largest in China and we have excellent relations with the local government officials as well as many potential clients.”
In order to secure lucrative contracts, some Chinese companies, often distributors, boast that they are industry leaders with great networks of potential clients or government contacts. In most cases, these companies actually exist and basic due diligence will confirm that they are legitimate. However, unless a comprehensive investigation is conducted early on, Canadian companies will not find out until later that their new partner doesn’t hold much clout. While the scammers’ exaggerations may take different forms, the objectives are simple:
- to persuade the Canadian entity to commit to an exclusive distribution agreement
- to secure better contract terms
On the other hand, a “parasite” company possesses an excellent relationship with an influential governmental figure, but relies exclusively on that relationship for its success, which could be problematic and risky. The company may operate in a legally grey area.
- Conduct meticulous due diligence
- Ask the company for examples to substantiate their claims or for references from previous foreign partners
- Consult informally with other companies in the industry to get a real sense of your potential Chinese business partner.
- Proceed slowly and cautiously
- Ensure that funds are not advanced and that travel expenses are not incurred without due caution being exercised
- Check the Little Black Book of Scams published by the Competition Bureau Canada for guidance on protection against fraud
- Contact our office to perform a basic due diligence investigation
- Contact our office to find legitimate prospects in your industry
- View our list of firms which specialize in investigations and due diligence
- Use industry associations and other contacts you might have to develop a local network to know better your partners
How to avoid fraud and scams
Sales of product (through orders or agreements) should be insured through Export Development Canada or via letters of credit from financial institutions, both of whom check out firms via their Chinese banking channels.
For victims of frauds and scams
The Government of Canada cannot intervene in private disputes that are strictly commercial in nature. However, here’s some guidance for you to seek a resolution:
- The Chinese Ministry of Commerce operates a complaint line in English for firms to register complaints about Chinese businesses. You can lodge complains and request assistance through their online service (English language only)
- The China Council for the Promotion of International Trade (CCPIT), a Chinese government organization can help resolve commercial disputes (Chinese language only). CCPIT has an office in Toronto which you may consult with as a start
- If you decide to take legal action, you can consult with a firm from our list of legal services
- Canadian Anti-Fraud Centre
- Canadian Trade Commissioner Service in China
Report frauds and scams
- Contact the police service of jurisdiction in your area
- Canadian Anti-Fraud Centre
- Canadian Trade Commissioner Service in China
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