In 2014 China to Crack Down More on Foreign Corruption

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1 LAW OFFICES OF DAVID D. MURRAY 1300 Bristol Street North, Suite 100 Newport Beach, CA Tel: +(1)(949) Web: In 2014 China to Crack Down More on Foreign Corruption There s no need to crack open the fortune cookie. In 2013 there were four trends predicted: (1) China will step up its crackdown on foreigners violating visa laws; (2) it will intensify efforts to shut down illegal and unregistered foreign businesses; (3) the country will step up tax collection efforts and, (4) China will increase litigation. In fact these predictions have carried over from year to year, retrospectively and prospectively. The trends are obvious and repetitive, but this year there are two new items to add to the laundry list. (1) China s crackdown on corruption, particularly as against foreigners, is real and is not going to go away and the current president won t be stopping his campaign to sweat out corruption, and (2) Chinese lawyers are hungry for whistleblowing clients, to reap the benefits of large American rewards. Also predicted for 2014 is that the number of scams against foreign companies will increase and continue to get more sophisticated.

2 So anyone intending to do business in China should throw away those fortune cookies, and throw themselves into due diligence. Expect the following scams to continue this year: 1. The fake freight forwarder scam. This year s most popular edition of the fake company scam seems to be that of fake freight forwarders. One version of this scam is not all that different from the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing. The fraudulent forwarders pose as legitimate companies with spare cargo capacity. Their truck arrives on-time to collect the freight and then disappears, never again to be seen. To accomplish this fraud, organized gangs create their own websites, advertising themselves as freight forwarders. These sites are characterized by very basic information, fre accounts like Yahoo, Hotmail and Gmail rather than a company address, and mobile phone or Skype contacts only. Freight forwarders themselves are falling victim to real but fraudulent Chinese freight forwarders who ship freight, purportedly at very low rates, and then demand ransoms of thousands of dollars to release bills of lading. The British International Freight Association (Bifa) warned operators to be wary of s from unknown Chinese forwarders, looking for UK partners and offering cheap ocean rates. Here is how it works: Once a signed and sealed agency agreement is in place between both parties and business starts, all appears to be normal. This is until the cargo arrives at the port and no-one has received the original bill of lading from the forwarder in China. When contacted, the forwarder demands a large ransom for the release of the original bill of lading. Companies which refuse to pay find themselves on an expensive rollercoaster ride of meetings with customers, lawyers, insurers and shipping lines in order to obtain the original bill of lading so the cargo can be released. By spreading shipments around a number of shipping lines, fraudulent forwarders can make this recovery process even more onerous. These forwarders may be real companies who are just out for the quick kill, or fraudulent companies that are not registered in China at all as a freight forwarder, making it more difficult to take any recourse. For a reliable reputable freight forwarder, registered with the U.S Federal Maritime Commission as an NVOCC (Non-vessel Owned Common Carrier) and registered as an NVOCC in China with the MOC, visit the website of WheelSky Logistics, Inc. at 2. The come to China to celebrate our deal scam. In this scam an alleged Chinese company s a foreign company to express a desire to buy a few million dollars of the foreign company s product or service. The terms of the deal are quickly worked out and the Chinese company suggests that a representative of the foreign company come to China to sign the contract and to celebrate the two parties having cooperated so well in inking their deal. The foreigner(s) gets to China (usually some fairly out of the way city in China) and is treated to what appears to the foreigner to be a really expensive meal at which the contract is signed. At this point, the foreign company is told that Chinese custom requires that the foreigner buy the Chinese CEO an expensive gift and pay a notarization fee. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand

3 dollars for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go off and buy the CEO gift on the foreign company s behalf. It isn t until weeks later that the foreigner learns that there is no deal and, in fact, there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else s expense, and then be too cheap to spend USD$3,000 to $8,000 more to seal the deal. Before getting on a plane, do some due diligence on the company AND if the company shows up as real, contact them to make sure that they are really the ones with whom you are dealing. Sometimes just one to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated. 3. The new bank account to pay us scam. Too many smart companies fall for this and may be one of the most difficult to detect. This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the Chinese company (note the quote marks here) sends an to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often it is in Hong Kong. What is the scheme here? It is always possible that the Chinese company has changed its bank account, but you had better be quite certain of this before you switch your payment. In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company. The Chinese company would get the money in Hong Kong and then claim that you had never paid and that you still owed them money because it was completely your fault for having made the payment to someone other than to them. Last year this scam became even more sophisticated when computer hackers started hacking into Chinese companies computers and sending out invoices that purported to be on behalf of the Chinese company. How can you avoid getting caught up in this type of fraud? Take note of the following: The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an communication from a Chinese company. is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies. Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.

4 Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam. The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored. 4. The fake IP registration company scam. This is a tried and true favorite and it comes back in new forms every year. A favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website proclaims really cheap trademark, copyright and patent registrations in China. The foreign company sends money and nothing ever gets filed. There are two variations on this one, one much more sophisticated and harmful than the other. The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows that it still needs to register its IP in China. Under the more sophisticated version, however, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate (I am personally not aware of this having gone so far with a patent registration, but I would not doubt that it has). The foreign company then thinks it is covered for its China IP registrations and does not learn for many years later that it is not. By that point, of course, there are no further traces that might lead to the scammers. 5. The fake company scam. Another type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit. One company suffered a multi-million dollar loss after cargo disappeared. Simply looking at the shipper s business license would have revealed that it was a complete fake. What is the best way to prevent falling victim to this scam? It is much the same as with most other scams. Make sure that you know with whom you are doing business. In other words, do your due diligence. For more on what that means, check out the following: How To Conduct China Due Diligence. Just Ask Effective Due Diligence In China China Due Diligence. Not Optional Seven Rules of China Due Diligence China Due Diligence. It Is Different

5 Let Me Tell You About China Due Diligence Giving China Due Diligence Its Due China M&A. The Extreme Basics On Due Diligence How To Really Really Investigate A Chinese Company Giving China Due Diligence Its Due, Part II. Don t Be A Sucker For a thorough and systematic book on China Due Diligence, see: Due Diligence in China. 江 山 易 改 本 性 難 移 可 不 是 福 壽 綿 長