To the cross-border investors of the world, the People’s Republic of China is no longer a mystery. Between January and August this year Chinese organisations invested in 4,067 enterprises in 150 countries, to the tune of $65.17bn. You are now much more likely to encounter a Chinese enterprise with which you might co-operate in the future.
But behind the big figures and the excited headlines, as experts in the areas of legal risk prevention and dispute settlement we have seen some unfortunate cases related to misleading activities, false pretences, and even fraud that have led to big losses in time, effort and money, and thus diminished confidence in co-operation.
Below is a cautionary true story including some practical advice on how to recognise an untrustworthy business partner at an early stage.
The Xin Feng scam
A Polish trading company (PC) got to know a Chinese company named Luancheng Xin Feng Chemical Co Ltd (XF) through an internet search and concluded an agreement with it via email. In the agreement it was stated that PC would buy chemical materials from XF and make full payment by letter of credit (L/C) in advance.
After arriving at the designated port the goods were found not to be those agreed and PC contacted XF to return the goods and be refunded. XF prevaricated and negotiated with PC using a variety of excuses, but after a while PC found it could no longer reach XF – even the landline became unavailable. So, at huge cost, PC had to destroy the unidentified chemicals in compliance with local laws while suffering serious loss of reputation as a vendor.
When the general manager of PC contacted King & Capital Law Firm he asked us to help them find XF for compensation, or to represent his company in suing XF in the Chinese courts.To identify whether a Chinese lawyer could provide legal services in such a case we took the following steps.
The first thing was to find out the Chinese name of XF. ‘Luancheng Xin Feng Chemical Co Ltd’ is, in fact,an English name – useless in China for identifying a company. A lawful Chinese company name can only be registered in Chinese characters.
We figured that Luancheng refers to a district in Shijiazhuang City, and Xin Feng could be a trading name. But the words ‘Xin’ and ‘Feng’ are just pronunciations of the corresponding Chinese characters and reflect more than a dozen frequently used Chinese characters. In short, the combination of pronunciations leads to 210 possible names!
So we could not identify the Chinese name of XF based on the information at our disposal.
Next, we checked if we could get information about the company through an internet search. The first thing we noted was that the website had no language bar and thus no Chinese version. As mentioned above, this made it impossible to confirm its registered name.
Then there were no images on the site showing the look of the company or the inside of its offices,neither was there a logo, face nor a clear contact name. The name of the contact was given as ‘Mr Sun’.In China there are 180 million people whose surname is Sun, and approximately half of them are Mr Suns.
Missed opportunity
Had PC sent us even a screenshot of the website before concluding the agreement we could have told them within minutes that it was not the site of a reliable or trustworthy business partner. and now,the site was useless to us in trying to track down any background information on XF.
So could we find out more by using PC’s payment information? No. Banks keep their customers’ information confidential unless access to it is applied for by way of court orders and instructions from the Public Security Department or the Public Prosecutor’s Office.
Maybe we could sue XF for compensation or the investigation order? Again, no. This rolls back to the first issue mentioned here – the accurate Chinese name in Chinese characters as well as the legal address and legal representative’s name are required to be listed in any complaint.
Beware of briefcase companies
Eventually, we reported the case to the police and the wrongdoing was exposed. It turns out that XF was a ‘briefcase company’ focused on defrauding foreigners.
The suspects contributed a very little registered capital and simply opened a bank account and hired a couple of staff to contact foreigners via the internet and conclude agreements. After receiving payments from customers XF would deliver them a consignment of chemical waste, which made the whole operation seem superficially to be a normal foreign trade business with some element of dispute involved.
The fact the company was duly established gave the suspects an excuse to explain away their fraudulent conduct as normal business behavior with a few small flaws, in an attempt to escape criminal liability.
