Small businesses that import from Asia fall victim to scams on a daily basis. You’ve heard of it, so it’s probably not new to you. Most people assume that if you are scammed by a fake supplier, you cannot have recourse.
Yet, I know two Chinese lawyers who disagree with this theory.
This week, we’re publishing a handy “guide” to reporting scams directly to the Chinese authorities and getting your money back.
The co-authors are Kai Xue and Li Xianun, two lawyers working in Beijing for the DeHeng Law Offices.
In this article, Kai and Li explain how you should deal with fraud, how you should deal with scammers, and how to file a complaint (which will actually be accepted) to the police.
Kai Xue and Li Xianyun, tell us a little about your previous experiences and the role you play at the DeHeng Law Offices
Kai Xue (Read more) is a transnational lawyer, mainly dealing with cross-border finance and mergers and acquisitions abroad.
Li Xianyun (Read More) is a lawyer specializing in financial litigation and represents his clients in arbitration or commercial litigation, including disputes arising from foreign trade.
In addition to our professional interest in getting involved in legal matters, we pride ourselves on providing the best public information on conducting business in China and, if necessary, getting the bad guys arrested.
Suppose I am an importer. I make a transfer and my supplier does not deliver the goods that comply with my quality requirements. What is the first thing I have to do?
In cases where you have a commercial dispute, based on unsatisfactory quality, rather than experiencing outright fraud from the seller, the importer must first inform the supplier in writing about the discrepancies.
In the event of more technical deficiencies, if the goods do not meet the quality requirements, the importer must consult an independent inspector, or a body responsible for legal quality assurance.
If the seller does not remedy the problem, then consider litigation, or arbitration, based on breach of contract.
It is often too expensive for small buyers to take legal action abroad. Are there any “easier” methods to get a refund from a supplier in the event of a commercial dispute?
Small importers involved in a commercial dispute where defeat cannot justify the cost of a major legal action can still call on a local lawyer to take the preliminary action of a letter of protest to the seller, threatening the seller with legal action in local courts or arbitration. unless he pays or remedies within a set period.
However, if a protest letter is not answered, it is difficult to take further action without initiating legal proceedings.
At the end of the day, there can be no further action possible, if you do not write a detailed review of the fraudulent seller and do not share the information on forums, to allow importers to offer useful feedback to the rest of the market.
Now, suppose I make a wire transfer and the provider suddenly disappears. This is a real fraud, rather than a commercial dispute. Can I do anything to get my money back?
Yes, the importer can get the money back from criminals, involving the police, rather than initiating commercial disputes.
Although the easiest way for the importer to recover the money is through negotiation with the fraudulent seller, no negotiation is possible in conjunction with a criminal proceeding.
Only with the pressure of a police investigation breathing down his neck will the fraudulent seller negotiate for real, because his intention has always been to get away with it.
How can an importer file a police report in China and how do you convince the police to accept your complaint and file?
Act fast. Obtain the documents according to the order of the list below. The importer should not be slowed down by a request made by the fraudulent seller, with the aim of negotiating an amicable agreement.
A false proposal, which is only useful to buy time or to make the fraud committed, probably serves to dissuade the police from intervening, since the management of commercial disputes is not their responsibility.
The importer should file the report with the county (rural), or district (urban) police, present in the jurisdiction of mainland China where the company is registered.
The efficiency of the police is not always the same in China, as is evident from the difference between the large developed urban metropolises and the still backward hinterlands.
The local police have the discretion to accept the report made by the importer and officially open an investigation, or they may refuse to take further action on the basis of the importer’s complaint.
The cooperation between the police and the local lawyer, who represents the importer, is essential for the police to decide to investigate further or refuse to act.
It is difficult to find a suitable local lawyer who has experience interacting with the local police department.
Ideally, the importer will first need to go to a law firm based in a large city, that is experienced in cross-border matters and is able to communicate in English to accompany them through the process and to find the right local lawyer to move the case forward.
Once the police are on the case, the situation could evolve quickly, as fraudulent sellers are often unorganized individuals, who take impunity for granted, given the presence of international borders.
Once led into the interrogation room, a fraudulent salesperson may be readily willing to negotiate the return of the money based on his available resources, including the money remaining from the fraud, as well as the contribution of money and goods from relatives.
These negotiations could drag on for months, that is, until the fraudulent seller finds those sources of support useful for the return of the money.
Do you have a useful list for preparing the police report?
Each case is unique, but this is the starting point.
- Appointment documents (for the appointment of the lawyer)
- Power of attorney (which authorizes the lawyer to act as your legal representative);
- Memorandum of Association or Business License of your company.
- Proof (if applicable)
- Email (email exchange and communication log between you and the suspect)
- Purchase Order
- Sales Agreement
- Proforma invoice
- Commercial invoice
- Insurance policy
- Certificate of origin
- Bill of lading
- List of packages
- Container weight declaration and packaging declaration
- Report of third-party tests
- Other tests needed
The ideal situation is to avoid, from the beginning, being scammed. Do you have any tips on how importers can avoid scams?
The first step is the article containing advice on doing due diligence, including reviewing certifications, researching specialization indications and industry knowledge, as well as reviewing the company profile, including the address of the share capital and foreign currency holdings.
I would like to add a note, following the tips in your article related to due diligence.
An importer should also consider using the National Enterprise Credit Information Publicity System (全国企业信用信息公示系统), an official government website, written in Chinese, that allows searches of essential public information about all registered domestic businesses.
The information disclosed by searches on the website includes the registered office, shareholders, share capital, credit status, filing status of annual reports, etc.
However, do not be overly impressed by the figures communicated for the share capital, which does not necessarily represent the actual amount of paid-up capital, as the Company Law, amended in 2014, removed the time limit and minimum threshold for the payment of actual capital.
However, local practice may require a new company to invest sufficient capital.
For large purchases, it pays to take additional due diligence measures in economic terms.
For example, an importer may appoint a professional investigator to do a site inspection (factory or office) to better understand the scope and status of the company.
An importer may also engage a law firm to conduct research on the company’s previous involvement in arbitration proceedings and/or litigation, as well as on the results of the proceedings, the ongoing measures applied against the company by regulatory agencies, and any listing of the company and its legal representative, which assesses it as a discredited enterprise.
If we talk more broadly about minimizing the risk of litigation, rather than avoiding fraud, an importer should draft a sales agreement that specifies the essential terms of the purchase.
A detailed written agreement will ensure that the parties agree and put the importer in a position to proceed against the Chinese seller in Chinese courts, or through arbitration.
As for the choice between courts or arbitration, given the heavy workload of Chinese judges and the expensive two-instance adjudication scheme, arbitration is a more effective and accepted means of achieving a speedy resolution of the case.
To do so, the parties must include an arbitration clause in their written sales agreement, or they must enter into an independent arbitration agreement from the outset.
There are a few things to highlight in order to expedite arbitration proceedings, and while these aspects are not mandatory, we recommend that the following clauses be included:
(1) choice of Chinese jurisprudence as the law governing the sale agreement;
(2) drafting of the agreement in Chinese or bilingual language, with the predominant function of the Chinese version
(3) Choice of Chinese as the language of arbitration.
For a broader overview of preparing a sales agreement with the original equipment manufacturer or broker, refer to this knowledgeable article by Dan Harris, of China Law Blog, which provides guidance on preparing the sales agreement.
Finally, how can you and the DeHeng Law Offices help importers?
We can help importers to involve the police against a fraudulent seller and negotiate a deal or, if all else fails, to have the bad guys brought to justice.
If you encounter a business dispute, we can also support you in negotiations or represent you in the dispute.
Finally, if you need to apply an arbitral award, granted by an arbitration body that is outside China, we can help you in the last stage, which is the recognition and enforcement of the arbitral award in China.
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