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Over the past few years there have been repeated cases of fraud in trade relations with China. In recent months, however, the frequency of such cases has increased significantly, which is why we should again warn against the most common scams at this point. Victims are not only opportunity buyers of supposedly cheap goods from China, but increasingly also companies with many years of business experience in and with China. In the following we briefly outline the three most common forms of fraud and give advice on the measures that can be taken to reduce the risk of becoming a victim of fraud.
1. A container full of junk
This type of fraud, which has been occurring very often and for a very long time, targets Occasional buyer of goods and raw materials from China from. The victims are almost exclusively first-time buyers who have made contact with the seller on trading platforms on the Internet. Before ordering, samples are usually delivered for test purposes and found to be good by the buyer, after which the order is placed. Payment is then made in advance or L / C upon presentation of the loading papers at the port of departure. Upon arrival of the goods, the buyer then notices that the container contains inferior goods, rejects or even goods other than those ordered (but all without economic value). The goods are very often chemicals or raw materials for which the defectiveness of the goods cannot be immediately recognized by an unfamiliar person just by looking at them.
In most cases, the companies represented as sellers do not even exist and the bank accounts are very often opened in the name of mailbox companies from Hong Kong. Most contact is made by email and mobile phone. This makes it very difficult to identify the scammers; legal prosecution is usually futile as a result. In addition, the transaction values are usually around USD 25,000 to USD 50,000, which is relatively too low to justify a very expensive legal prosecution with an uncertain result.
This makes it all the more important to reduce the risk of becoming a victim of fraud before entering into a transaction. Before the transaction, the seller should be examined more closely with relatively simple means. Here are a few pointers and suggestions:
* Raise suspicion if the address of the partner is unclear and the place of the seat does not correspond to the place of the bank account (or the bank is not in the next bigger city, but in another province or even in Hong Kong - a look at the map can be informative here).
* Let the seller know that you are performing a “Know-Your-Business-Partner” check and request copies of the company's registration (“Business License”) and a copy of the legal guardian's ID card.
* Have a simple credit report prepared for the seller and check whether the information researched by third parties matches the information provided to you by the seller (such a report from established providers costs around 200 euros and is also in English in about 2 weeks created).
* Ideally, the goods should be checked by your own employees or a service provider directly before shipment.
* At least a simple contract document should be used so that the essential elements of the agreement (type and specification / quality of the goods, price, method of payment, names and registered offices of the parties and their representatives, as well as bank information, choice of law and arbitration agreement) are recorded in one document, which should also be signed (and stamped by the seller in the case of companies in the People's Republic).
Although these simple and relatively inexpensive measures are not 100% protection against fraudsters, they have a significant deterrent effect on any black sheep, so that they will mostly end the negotiations under a pretext out of fear of the increased risk for the fraudsters and become easier prey search.
2. The (real or supposed) hacker attack
Caution: Your company is receiving fake e-mails: Allegedly, the account details of your Chinese business partner for the upcoming billing have changed!
This scam has also been very common for a long time, but cases of such fraud have been increasing recently. In contrast to the case described above, victims are usually companies that already have existing business relationships in China and have been purchasing goods from established partners in China for some time, either permanently or once every few years.
In the event of real hacker attacks, the fraudsters take advantage of the poor IT security of Chinese companies, gain illegal access to e-mail correspondence and take it over at the last moment, i.e. shortly after an order has been placed. Fake e-mails are then sent notifying a change in the bank details for this transaction on which the deposit is to be made. Often the new bank accounts mentioned here are not in mainland China, but elsewhere (such as Hong Kong). After the down payment has been made, there is often a confirmation of the receipt of payment with the information that the goods are now being produced. If after some time the buyer asks what the stand is like, he learns that the money has never arrived and that the goods have not yet been made available / produced. The fraudsters or owners of the accounts can usually not be found here, so that the Chinese police are usually not willing to act here, as the perpetrator cannot be clearly identified.
Recently, we have also seen an increasing number of cases in which there are considerable doubts that they are actually hacker attacks and the suspicion arises that employees of the seller are involved and use their insider knowledge to only fake such a hacker attack . This suspicion arises particularly when the fraudster can also provide detailed information about the product here.
Protection against such fraud is quite easy in the case of real hacker attacks, since a fax or a call to confirm a change in bank details or other parts of the contract can help. In the case of fake hacker attacks, this is not so easy, but communication in other ways also helps here, because this greatly increases the risk for the fraudster, so that he may abandon his plan in order not to expose himself too much. In any case, it helps to define the most important parts of the contract in a simple contract and to create several independent communication channels (ideally with an escalation mechanism from the clerk to the manager). At least in the case of subsequent changes to substantial contents of the agreement, a reconfirmation should always be sought in an alternative way.
3. The "secret China project"
Caution: Your employees will be asked by phone / email by the CEO / CFO or the alleged legal advisor to transfer a (secret) company project to China.
This quite new form of fraud is very complex and in the last few months at least four cases have come to our knowledge in which fraudsters - some successfully - have swindled funds in the range of EUR 1.5 million to EUR 15 million. It seems that the significantly larger potential prey justifies the high expense for the fraudsters. The victims here are mostly companies with a somewhat more complex organization, but with less strict structures, such as larger SMEs.
The perpetrators spend some time and energy to spy out the internals of a company (usually with an existing or planned line of business in China). First of all, an employee is identified who is himself in a comparatively prominent position as an assistant or instructor, but who does not have much of his own decision-making authority. This employee then suddenly receives urgent emails - supposedly from one of the company's senior managers (who at this time is mostly on a business trip or on vacation and is therefore not easily accessible). After that, to save a business in China or to secure an investment, a large amount must be transferred quickly to mainland China or Hong Kong. Since the matter is very confidential (or, alternatively, the tax authorities should not know about it), the employee is obliged to maintain strict confidentiality. It is also announced that an external advisor overseeing the transaction would be in touch with the details. This supposed external consultant then usually gets in touch by phone (occasionally also by e-mail) and gives the impression of considerable urgency. The authorizations for the money transfer (e.g. transfer form) with the (forged) signatures of the managers are then sent by e-mail, which the employee should take to the bank immediately (depending on the type of payment and position of the employee, there are different variants).
As soon as the money has been transferred, communication usually falls silent, although we are also aware of cases in which, after a successful transfer, an attempt was made to initiate further transfers in the same way. The recipient accounts were often opened with forged documents from companies that do not exist or no longer exist, i.e. it is very difficult or completely impossible to identify the perpetrators.
Only if such payments are recognized quickly does the bank have a chance of preventing the funds from being paid out to the recipient.
Protection is only possible here through clear internal structures and the agreement of strict processes with the banks involved, as well as a system of reconfirmation of certain decisions. The appropriate processes should be discussed preventively with your own bankers, who are probably not unfamiliar with such cases.
Matthias Müller, lawyer and partner, Beiten Burkhardt Shanghai
* This article is the slightly modified version of an English contribution by the author in the Beiten Burkhardt Asia News - Newsletter from May 2015
Immediate action in the event of fraud
Unfortunately, there are no recommendations that generally lead to the desired success in China. Often the injured companies can no longer get the money back in China and the behavior of the authorities varies depending on the province and the case. Immediate action is necessary as the funds in China are immediately transferred on.
The following measures should be taken immediately in the event of damage:
* Attempt to transfer back via the sender bank in Germany
* Criminal complaint to the responsible authorities in Germany
* if necessary Representation by local lawyers in China to file a criminal complaint here. Contact placement, further advice and support can be obtained from the responsible German diplomatic mission abroad (consulate, embassy)
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