• Supplier Scams in China: How to Get Your Money Back: By Kai Xue and Li Xianyun

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    Supplier scams

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    Small businesses importing from Asia get scammed everyday. You’ve heard the stories, so that probably doesn’t come as news. Most people would assume that there is no recourse, if you are scammed by a fake supplier.

    But, I know two Chinese lawyers that don’t agree.

    This week, we publish a practical ‘how to guide’ for reporting scams directly to the Chinese authorities and getting your money back – co-authored by Mr Kai Xue and Mr Li Xianun – both lawyers working for DeHeng Law Offices in Beijing.

    In this article, Kai and Li explains how you should deal with fraud situations, including how you should manage the scammers and how to file a police report (that will actually be accepted).

    Kai Xue and Li Xianyun, please tell us a bit about your backgrounds and roles at DeHeng Law Offices

    Kai Xue (Left photo) is a transactional lawyer advising mostly in cross-border finance and outbound mergers and
    acquisitions. Li Xianyun (Right photo) is a litigation lawyer representing clients in general commercial arbitration or litigation, including disputes stemming from foreign trade.

    Aside from our professional interest in being engaged in legal matters, we are enthusiastic about providing better public information on smoothly conducting business in China, and if necessary, catching bad guys.

    Let’s assume that I am an Importer. I wire money and my supplier does not deliver goods that comply with our quality requirements. What is the first thing I should do?

    In cases where you have a commercial dispute based on unsatisfactory quality rather than outright fraud by the seller, the Importer should first notify the supplier in writing of the discrepancies.

    For more technical deficiencies, the Importer should consult an independent surveyor or statutory quality assurance institution if the goods fall short of quality requirements.

    If the seller does not remedy the issue then consider commencing litigation or arbitration proceedings based on breach of contract.

    For small buyers, it is often too costly to engage in legal action abroad. Are there any ‘simpler’ methods to get your money back from a supplier in case of a commercial dispute?

    For small volume Importers in a commercial dispute, where the loss may not justify the cost of extensive legal action, Importers may still engage a local lawyer to take the preliminary action of a demand letter to the seller threatening legal action in local courts or arbitration unless the seller pays or provides a remedy within a set deadline.

    If a demand letter however is not responded to it’s difficult to take further action without instituting legal proceedings.

    At the end of the day there may be no further action possible then to write a detailed review of the fraudulent seller and share information on discussion boards for Importers to provide the rest of the marketplace with helpful feedback.

    Now, let’s assume that I wire money and the supplier suddenly disappears. This is an outright fraud, rather than a commercial dispute. Can anything be done to get my money back?

    Yes the Importer can get money back from the criminals through involving the police unlike in commercial disputes.

    Although the simplest way for the Importer to recover is through negotiation with the fraudulent seller, any negotiation is made possible in conjunction with the criminal process.

    Only with the pressure of a police investigation bearing down on them, will the fraudulent seller negotiate in earnest as their intention all along was to get away with a crime.

    How can an Importer initiate the police report in China, and how do you get the police to accept your report and officially file a case?

    Act quickly. Get your documents according to the checklist below in order.

    The Importer should not be slowed by a request by the fraudulent seller to discuss an amicable settlement.

    It’s probably an insincere overture to stall for time or to make the fraud committed by them look like a commercial dispute to dissuade police from becoming involved as handling commercial disputes is not the responsibility of the police.

    The Importer should initiate the police report at the level of the county (rural) or district (urban) police in the local mainland China jurisdiction where the company is registered.

    Police effectiveness is uneven in China as reflected in the gap between advanced major urban metropolises and hinterlands that lag behind.

    Local police have the discretion to either accept the report made by the Importer and officially commence an investigation or decline to take further action on the report by the Importer.

    The working relationship between the local police and the local lawyer representing the Importer is pivotal to the decision by the police to further investigate or decline to act.

    Finding the appropriate local lawyer experienced in interacting with the local police department is a challenge.

    Ideally the Importer will need to first engage a law firm based in a major city experienced in cross border matters and able to communicate in English to navigate the Importer through the process and find the appropriate local lawyer to push through the case.

    Once the police are on the case progress may be swift as fraudulent sellers are often unorganized individuals who assume impunity due to international borders.

    Once hauled into the interrogation room, a fraudulent seller may be readily willing to negotiate restitution based on available resources, including money remaining from the fraud and contributions of cash and assets from relatives.

    These negotiations, though may drag on for months as the fraudulent seller finds sources of support to pay restitution.

    Do you have a checklist for preparing the police report?

    Every case varies, but the following is a starting point.

    • Engagement documents (for engagement of attorney)
    • Power of Attorney (authorizing the attorney to act as your legal representative);
    • Certificate of Incorporation or Business License of your company.
    • Evidence (if applicable)
    • E-mails (exchanges and communication log between you and the suspect)
    • Purchase Order
    • Sales Contract
    • Pro forma Invoice
    • Commercial Invoice
    • Insurance Policy
    • Certificate of Origin
    • Bill of Lading
    • Packaging List
    • Container Weight Declaration and Packaging Declaration
    • Third Party Test Report
    • Other Required Evidence

    The ideal situation is to avoid being scammed from the start. Do you have any tips for how Importers can avoid scams?

    The first stop is your [Chinaimportal’s] excellent piece with tips on doing due diligence, including reviewing certifications, looking for indications of specialization and industry knowledge and reviewing the company’s profile for details including address registered capital, foreign currency holdings.

    I would add one note along those lines of your article’s suggestions for due diligence.

    An Importer should also consider making use of the National Enterprise Credit Information Publicity System (全国企业信用信息公示系统 ), an official government website in Chinese that enables searches of basic public information for all registered domestic enterprises.

    The information disclosed from searches on the website includes registered address, shareholders, registered capital, solvency status, filing status of annual reports, etc.

    However, don’t be too impressed by the figures disclosed for registered capital, which does not necessarily represent the actual amount of capital that has been paid-up, as the Company Law, amended in 2014, has removed the time limit and the minimum threshold for actual capital contribution.

    However, local practice may require that a newly enterprise invest sufficient capital.

    For large purchases, it’s economically worthwhile to take further due diligence steps.

    For example, an Importer may appoint a professional investigator to conduct an on-site visit to the company (factories or offices) to better understand the scale and status of the company.

    An Importer may also engage a law firm to conduct research on the company’s previous involvement in arbitration and/or litigation proceedings and outcomes of the proceedings, ongoing enforcement actions against the company by regulatory agencies, and any listing of the company and its legal representative as a discredited enterprise.

    If we are speaking more broadly of minimizing the risk of disputes rather than avoiding fraud, an Importer should prepare a contract that specifies the essential terms of the purchase.

    A detailed written agreement will better ensure parties are on the same page and enhance the ability of the Importer to take action against the Chinese seller in Chinese courts or through arbitration.

    As to choosing between courts or arbitration, given the heavy workload faced by Chinese judges and the time-consuming two-instance adjudication scheme, arbitration is a more effective and welcomed means for quick resolution.

    To this end, the parties need to include an arbitration clause into their written sales contract or have an independent arbitration agreement from the beginning.

    There are certain aspects to note in order to expedite arbitration proceedings although these aspects are not mandatory the following clauses are recommended:

    (1) selection of Chinese law as the governing law of the contract;

    (2) drafting the contract in Chinese or bilingual with the Chinese version as the prevailing one; and

    (3) selection Chinese as the arbitration language.

    For a more extensive overview on preparing a sales contract with an original equipment manufacturer or intermediary, please refer to this knowledgeable piece by Dan Harris from China Law Blog with pointers on preparing the sales contract.

    Finally, how can you and DeHeng Law Offices help Importers?

    We can assist Importers in involving the police against a fraudulent seller and negotiate a settlement or if all else fails see to it that the bad guys face justice.

    If you run into a commercial dispute we can also support you in negotiations or represent you in disputes.

    Lastly if you need to enforce an arbitration award granted by an arbitration body outside of China then we can assist you in the last step, which is recognition and enforcement of the arbitration award in China.

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