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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.

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Common traits of scams

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.

Tips

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:

Tips

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:

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.

Tips

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:

Report frauds and scams

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