It is the story of a U.S. company (the names have been deleted to protect the dignity of those involved) that thought they were about to save about 30 percent on some chemicals they needed.
An unsolicited offer via Alibaba (the infamous Chinese business to business website) from two Chinese companies offered a great deal. The U.S. company asked for and received samples from the Chinese companies that met specifications. The U.S. company then made a large order, with payment terms that were 100 percent irrevocable at sight, which the U.S. company agreed to.
The funds were paid when the containers were presented for shipping. A few months later, the containers arrived in the United States; 44 tons of unknown white powder and a number of plastic barrels full of water. After a few calls to the Chinese companies, communication ended.
The U.S. company contacts a specialist firm in China to help them. The U.S. company forwards all the correspondence and contracts, and it quickly becomes clear that they had been had.
- The seals/chops used by both companies were very similar and poorly made.
- The Chinese company's e-mails and correspondence had a changing cast of characters who used unusual foreign names.
- The companies' websites were registered to someone who had registered a number of other chemical company websites.
- The shipping documents were incomplete, and none of the barrels or bags had been properly marked with product descriptions, which indicated that there had been no outbound customs inspection, which would have been required for the types of materials involved.
- Initial efforts by the specialist in China to contact the companies ended after a few days, when the phone and fax numbers went dead.
- A visit to the Administration for Industry & Commerce (AIC) for the area where the companies are registered showed that these companies had been set up in 2009 and 2010 as trading companies, had listed small apartments as their headquarters and had no manufacturing facilities.
- A visit to the two apartments listed as headquarters shows they photo shopped their website pictures to make it seem they had big operations. No one could be found at any of the addresses.
- A visit to the Chemical and Mineral Department of the local the Commodities Inspection Bureau (CIB) shows that neither company had ever registered with the bureau as an exporter of the materials, no inspection certificates had been applied for and the price quoted was 30 percent lower than the lowest price offered by any local manufacturer.
- A visit to the Bank of China was not fruitful as they needed a court/police order to divulge information on private accounts.
- A visit to the police station in the district where Chinese company No. 1 was registered, yields an informative and helpful officer who has a number of outstanding cases involving the same chemicals. He provides a long list of what he needs to start making arrests and seeking funds.
- A visit to the police station in the district where Chinese company No. 2 was registered, results in a similar set of requests. The police officer who interviews them adds that he has just finished a similar case involving the same M.O. and materials in which an Indian company had been defrauded.
Against advice, rather than pursue the case, the U.S. company decides to file a claim for "theft in transport" with the Chinese shipping insurer. After six months, the claim is rightfully denied, the criminal trail is cold and the U.S. company swears it will never do business in China again.
The old adage applies here: "A fool and his money are soon parted." The irony is that this company could end up compounding their mistake. If China is, in fact, the lowest cost source and their competitors source there, the company will have a competitive disadvantage.
The best advice, as always, is not to be unwary. As can be seen, a few simple checks, which would have cost a few hundred dollars, would have saved hundreds of thousands of dollars and countless hours of wasted time and aggravation.
Please note the Chinese authorities were, by report, friendly, helpful and seemed to genuinely want to get their hands on these frauds. In most cases, the scammers are not from the community, and there is a genuine hostility towards these types of criminals because they target locals as well.
To keep protect yourself:
- Make sure you get a copy of the company's license and ID card.
- Get the name and a copy of the passport of the company's registered legal representative.
- Send people you trust to do a site investigation of the manufacturing and office sites.
- Do a site inspection on goods before payment.
- If the material requires legal testing or inspection, ask for the scanned report before the shipment and make authentication part of the LOC.
- Use formal and strict contract terms to protect your interest and include specific terms: product name; product specifications; price; packaging; quantity; payment; delivery terms; quality standards with specified testing methods; testing terms; arbitration organization or court if any dispute occurs; choice of law; penalty on quality discrepancy; and penalty on quantity discrepancy.
- Know the market price of the material you are seeking to purchase before you make the purchase. Do not trust a company that gives you unreasonably low price quotes. If it's too good to be true, it probably is.
But, if for some reason you find yourself battling for your money here are some tips:
- Prepare your evidence carefully, thoroughly and as quickly as possible. For a criminal case, the police need sufficient evidence to freeze the scammer's bank account. Any problems which could delay police action, decrease the chances of getting your money back. The same holds true should you decide to pursue a court remedy. Remember when they are in jail and their accounts have been frozen that is the best time to settle matters.
- Don't disclose your intent to report the case to Chinese police. If they become aware of the involvement of the Chinese police, they will take the money and run and even if caught will figure at least they have something waiting for them when they get out. Realize Chinese jails make U.S. jails seem like five star Hiltons. I have met a few people who have spent time in jail, but none who would talk about the experience.
- If the amount in question is large, it is best and quickest to send a high ranking company officer with the corporate seal. Feel free to notify the trade section of the Chinese Embassy in Washington, D.C., the American Chamber of Commerce in Beijing and the Chinese Commodities Inspection Bureau in the local area and request that they contact the appropriate Chinese police departments. They can do little directly, but it puts pressure on the local bodies, as they know others are watching.