Payment Fraud in China – How to Avoid Going Bankrupt

A true story from Qingdao

Afraid of losing (all) your money when you’re importing from China? You should be, and you’re not alone. Paying frauds are one of the most common forms of scam, and they are targeting small to medium sized businesses sourcing products on Alibaba.com and other online B2B platforms. In the last few years I’ve seen small importers losing hundreds of thousands of dollars in this type of scam.

The first time I had to handle a payment fraud case was in late 2011. It was late on a Friday evening and I’d barely opened my first beer when I received a desperate phone call from a long term client. She had, without telling us, contacted a suppliers, in Qingdao, selling food supplements. They had previously imported the same product from this supplier and my client experienced no problems whatsoever. This time she wasn’t so lucky. The supplier stated that they did not receive a single dollar from her, something which made my client nervous considering she had transferred around US$ 40,000 two weeks before she called me.

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How I spotted the payment fraud

Before we hung up I told my client to send over every single (digital) document and email conversation they’ve had with the supplier. The next day I had a closer look on the proforma invoice and noticed that the bank account beneficiary name didn’t match the supplier name. Neither did the location – the supplier was supposed to be a Trading Company operating in Qingdao, but the beneficiary bank account was registered in Hong Kong.

I quickly realize that what the supplier said was right – they didn’t receive any money, the client paid somebody else. This somebody else is a professional scammer, possibly even part of an organized crime network.

Why this fraud still works

So how did they do it? Simple. All the scammers had to do was to hack the suppliers email account, check the sent box and then replace the beneficiary, the bank account number and the SWIFT code. The next thing they do is to resend the invoice, often together with a simple excuse for sending the same invoice twice. The client did what most small importers would have done in a situation like this – she paid the invoice. She lost every single dollar.

How can a fairly successful business owner fall for such a simple scam? How can it be so easy to cheat somebody out of tens of thousands of dollars? Because most small business owners simply assume that “this is the way things are done in China”.

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How to prevent this type of payment fraud

Let me ask you a question. Would you be suspicious if you were about to buy products from a supplier in a neighboring state or country and all the sudden you are requested to pay to a bank account registered in Barbados? I certainly would! You’ll get a long way by using some common sense, even in China.

Preventing payment frauds when importing from China is very easy if you follow these two rules:

1. NEVER pay to a bank account where the beneficiary name does not match the company name of the supplier you’re buying your products from

2. NEVER pay to a bank account that’s registered in a completely different city, province or country than the supplier you’re buying your from

So, what happened to the client?

As expected when somebody lose 40,000 dollars, she was devastated when I told her that she won’t see her money again.

She still wanted the products though, and I told her that there’s a slight chance that the Qingdao supplier could accept a price reduction. The following week I caught a flight from Shanghai to Qingdao and met the Legal Representative of the company. They refused to take any responsibility for the scam, considering they’re a small trading company I concluded that they simply don’t have the money to do so.

The products were stored in a port warehouse and everything was fine. In the end we managed to negotiate a price reduction of 25% for our client. The supplier protested, because we were basically asking them to lose money, even though it wasn’t their fault. In the end they had no choice, because they had no other buyer for the products and dumping them would have cost them even more money.

Every now and then I get emails from suppliers warning us for payment frauds. I assume this is because they were recently exposed to one. The first issue is that the importers are not using enough common sense when importing from China. The second issue is that most Chinese suppliers couldn’t care less about basic email security.

Watch out for the suppliers’ employees

There’s also another problem. Many Chinese suppliers request payments to bank accounts that are not operated by their company. It’s very common that suppliers in China’s southern Guangdong province have offshore companies in Hong Kong, often owned by the Legal Representative or a relative of this person. In some cases I’ve seen individual employees acting as middlemen by asking the client to pay to them first where after they pay their employer for the products. As expected, they pocket a handsome commission on top of their salary.

But I know of at least one case where an importer was not only paying more than they should have, they actually got scammed. The employee simply took their money and ran away without paying the actual supplier. So what did the supplier say when the client asked about their products?

“Sorry, we didn’t receive your money”.

You have been warned.