Suspicious China Business Practices

The following cases are illustrative of dubious business schemes taking place in China. While not fraudulent in and of themselves, American businesses should be highly cautious when encountering such scenarios. If you recognize these scenarios, we encourage you to contact the China Business Information Center or CS China. 

These pages include details on suspicious business schemes, red flags, cautionary measures, and names of questionable Chinese entities. There are many aggressive trading companies that directly approach American businesses.  A basic rule of thumb is do not provide cash, no matter what the scenario, to obtain a questionable contract.  Use of CS China services can help differentiate between questionable and reputable Chinese entities. 

Business Schemes

Advance Payment Scheme

Chinese entity requests “contract registration fee” in the amount of a certain percentage of contract value based on a claim that such fees are required by Chinese government regulations.  This may also include a “customs registration or expediting fee.”

Gift Lists

Chinese entity requests specific gifts and suggests its value may be hidden in the contract by increasing the transaction value.

Padding of Banquets

Chinese entity requests cash in advance for hosting a banquet for its staff.  The amount requested is far in excess of a typical banquet cost.  The difference between the actual cost and cash advance may be pocketed by the Chinese company.

Travel Expenses

Chinese entity requests cash to cover its travel expenses to the U.S. claiming that a meeting in the U.S. is essential to concluding the contract.

Import Export Company Requests Quote on Schematics

Chinese Export Import company provides a detailed schematic to entice the American businessman to China whereupon schemes listed above are employed.

Red Flags

In the larger scheme, the points below warrant caution and more thorough partner and/or transaction due diligence.

 

·         Unfamiliarity with the product application.

·         Limited details or unwillingness to provide information on the project in which the materials will be applied or the end user.

·         Discrepancies on business cards that cannot be clarified.

·         Incomplete information on the purpose of the ‘fees’ outlined in the contract

·         Inability to specifically explain the regulations or government entities that are allegedly imposing certain fees.

·         Offers to sell certain internal government information or sensitive commercial information

·         Rented cell phones.

·         Location of office space in residential areas.

·         Less than one year of operation history with very young leadership.

·         Insistence on paying for a banquet in cash to the Chinese entity prior to concluding contract.

·         Cash requested for cost of hosting a banquet is far in excess of typical costs.  [While banquets are a traditional business activity, the U.S. entity can arrange for a banquet through their hotel.  While costs very, a nice event for 10 at a local restaurant (non-western hotel) might run $200.]

·         Unusually large product volume or urgency to purchase.

·         Insistence that the contract is only legitimate if signed in China.

·         Requests for an invitation letter to visit the U.S. facility prior to any substantive communication about purchase terms or exchange of company background information.

·         Insistence upon attending a banquet prior to concluding a contract later in the evening. [referring to getting the foreigner intoxicated in an effort to finalize contract terms more favorable to the Chinese buyer.]

Other Red Flag indicators provided by the Bureau of Industry and Security can be viewed at:  http://www.bis.doc.gov/enforcement/redflags.htm

 

Cautionary Measures

As with any international business partner, due diligence is paramount.

• Request a copy of the business license; check validity of address and phone number, license validity date, name of registered representative.
• Request a copy of the company’s certificate of import / export authority.
• Verify the company’s international trade experience and avoid firms that have less than two years of experience.
• Seek multiple references and check them. Request referrals to both suppliers and customers.
• Order an International Company Profile report through the US Commercial Service.
• Engage investigative research firms or international law firms for independent verifications. Several business service providers are listed on the Commercial Service-China web site at  <http://www.buyusa.gov/china/en/bsp.html> or as a Key Contact in the Contact China publication < http://www.buyusa.gov/china/en/contactchina.html>.
• Accept only secured forms of payment such as letter of credit or direct telegraphic transfer (T/T or wire transfer).
• While in country, hire your own driver and interpreter. Be alert and keep important phone numbers on hand and always carry a charged mobile phone.
• Acquire knowledge of traditional business practices and business etiquette through publications such as the Country Commercial Guide. Some websites featuring this information include:

 

Business & Travel Etiquette in China

http://www.econ.state.or.us/oregontrade/chinabt.htm

Business Culture Guide

http://goasia.about.com/gi/dynamic/offsite.htm?site=http%3A%2F%2Fwww.executiveplanet.com%2Fcommunity%2Fdefault.asp%3Fsection%3Dchina

Appearance, Behavior Communication

http://www.cyborlink.com/besite/china.htm

Chinese Etiquette & Protocol

http://chineseculture.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=chineseculture&zu=http%3A%2F%2Fwww.protocolprofessionals.com%2Farticles_china_print.htm

Chinese Business Culture

http://www.doingbusinesschina.com/sitemap.htm

Business Etiquette from California State University

http://www.calstatela.edu/centers/apbi/business_etiquette_in_china.htm

Basic Due Diligence

Collecting your own business intelligence can be challenging.  Basic questions to help assess the legitimacy of the Chinese entity might include:

1.  Can you provide a copy of your State Administration for Industry & Commerce (AIC) registration certificate?

2. Can you provide three international trade reference contacts including the company name and street address, contact name, title, telephone and email address? These are foreign firms you have purchased product from in the past.

3. Who will you be selling the finished product to?  (Or if your product is a subcomponent) Can you provide details on the ultimate application?

4. How did you learn of our firm’s products?  [If the internet, is the progression of information requests and communication typical of your industry?]

5. What are your company’s typical international finance terms? [Although these vary and are negotiable, does it demonstrate the firm has experience in such matters.]

6. If there is tremendous urgency, firmly asking for cash up front may help identify dubious entities. Those looking to scam are less likely to engage in continued negotiation.

 Foreign Corrupt Practices Act

U.S. exporters should be aware of an obligation to comply with the Foreign Corrupt Practices Act, which prohibits payments to foreign government officials for the purpose of influencing decisions in a manner that may favor the U.S. company’s commercial interests such as awarding contracts, issuing business licenses, issuing safety and quality certifications, customs valuation, or import license approval.  A detailed explanation may be found at the following websites:

http://www.usdoj.gov/criminal/fraud/fcpa/dojdocb.htm

http://www.usdoj.gov/criminal/fraud/fcpa/fcpa.html