China Scams: The Holiday Edition

One of our oldest and most cherished traditions is to write about China scams at the end of every year. We do this because history shows this is the biggest month for them.

Scammers increase their activities at the end of the year, hoping to be less noticed/less examined due to the usual end of the season rush.  I was reminded of this tradition after reading my emails this morning and getting hit with what look like a couple new fraud matters from companies scammed by China, and a number of people who got scammed, including one person — and I kid you not — who revealed that he had been scammed four times this year by Chinese companies. I do have to give the scammers credit in that the diversity and ingenuity and number of scams is way up as well.

This has been an impressive year for scams and I suspect that is due in large part to the worldwide economy hurting and especially to the COVID problems that have of late been decimating China’s economy.

1. This Year’s Most Common Scams

We are seeing the following old scams in quantity this year:

A.  The New Bank Account to Pay Us Scam  

‘This is the scam on which we so often focus and that is because far too many smart companies fall for it. This scam is usually employed against a foreign (i.e., a non-Chinese) company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often the new bank account is in Hong Kong.

What’s the scam here?  Well, it is always possible the Chinese company has changed its bank account, but you should be quite certain of this before you switch your payment.  In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company.  The Chinese company would get the money in Hong Kong and then claim you had never paid and you still owed them money because it was completely your fault for having made the payment to someone other than to them. Then if you don’t make the second payment they report you to Sinosure and that is never a good thing. See Navigating Sinosure Claims Just Got Tougher and How to Conduct Business with Chinese Companies That See a Dark Future.

In the last couple of years, this scam has became even more sophisticated when computer hackers from all over the world started hacking into Chinese company’s computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud?  Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies. Add to this the fact that the Chinese government sees many of your emails and it no doubt has employees who would like to make more money and you have a pretty toxic mix.
  • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

B.  The Fake Company Scam

This is an old scam that seems to morph into something slightly different every year. My personal favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website appears proclaiming really cheap trademark, copyright and patent registrations in China. The foreign company sends some money and nothing ever gets filed.  There are two variations on this one, one much more sophisticated and harmful than the other.

The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows it still needs to register its IP in China.

Under the more sophisticated version, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate. The foreign company is convinced its China IP registrations have been covered and it does not learn for many years that it is not. By that point, there are no traces that might lead to the scammers.

A more recent addition to the panoply of fake company scams is fake freight forwarders.  The most common version of this scam is similar to the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing:

Fraudulent forwarders pose as legitimate companies with spare capacity. They arrive on-time to collect loads and then disappear.

Another frequently seen scam involves organized gangs creating their own websites and advertising themselves as freight forwarders. These sites are characterized by very basic information, freemail accounts, and mobile phone or Skype contacts only, Mr Yarwood warned.

A third type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit.

Many years ago, a company came to us after its multi-million dollar cargo had disappeared. Our 15 minute check of the shipper’s (fake) business license told us the company was a complete fake.

Then there are of course the many websites that spring up that purport to sell products (this year bikes, lawn equipment, outdoor grills, and furniture seem to be the most common products) when in fact the entire enterprise is a scam. You pay the company hundreds or thousands of dollars for your product and you never get anything. The more sophisticated of these scammers will often come back and hit you up for a “customs clearance payment” as well.

C. The “Butchering the Pig” Scam

This one is huge and by far the fastest growing. So huge in fact that our law firm typically has 3-5 of these matters going at any given time, each of which involves millions of lost dollars. In The Butchering the Pig (Crypto – Forex) Scam: With Love from China, we wrote how this scam typically goes down as described below:

I met a person on a dating app. This person suggested we switch our chat conversation over to WhatsApp. Our relationship developed and deepened over sharing life experiences and emotional stories. After a period of time, this person casually mentioned the incredible gains they were earning on their investments, and then introduced me to this forex (foreign exchange)/cryptocurrency investment opportunity.

After researching and testing the investment opportunity out and making huge gains on my initial deposits, it seemed legitimate and I sent more money to the investment firm. I was told I could be a VIP member and even make higher gains if I sent more money, so I did.

Later, I tried to withdraw money from my investment account, but a customer service representative is telling me that I owe capital gains tax [or that my account has been frozen because authorities believe it is involved in money laundering]. The customer service representative told me that if I wired more money, I could then withdraw my money and profits. So I sent more money and cryptocurrency, but I still cannot withdraw any money. Now the customer service representative no longer replying to my messages and the person I initially met and introduced me to the investment is also not responding. I have now lost hundreds of thousands of dollars and I do not know what to do.

This scam is called “Butchering the Pig” because targets are engaged for several months before large amounts of money are sent to the scammers. In other words, it is like fattening up a pig before the slaughter. The scammers lead the target (the pig) through carefully scripted conversations. Once the target has sent an initial “investment” deposit, the account will show impressive gains. Sometimes the scammer will allow the target to withdraw a small amount of money to prove its legitimacy. The target is encouraged to send further funds to maximize this investment opportunity. Eventually, the scammers cut off all communication, leaving the target without their money or their “profits.” All or nearly all of the “butchering the pig scams we have seen have some sort of China connection.

What makes this scam so insidious and so successful is that while the amounts stolen usually range between USD$15,000 and $2,500,000+, the sheer number of scams occurring is overwhelming. Lawyers, accountants, CEOs and pretty much everybody else is falling for this scam and like I said, the dollars being lost are astounding.

To make matters worse — and is true of most scams — a cottage industry of scammers have sprung up to “help” the scam victims. These scammers are fly-by-night “investigators” and “fraud recovery experts” who charge thousands of dollars (sometimes I’ll call in ten of thousands of dollars) to help people recover their funds. Some of these follow-on scammers provide a basic (and not helpful report), but many of them provide nothing at all. Undoubtedly, some of these follow-on scammers are the original scammers just milking out even more money.

2. The Come to China to Celebrate our Deal Scam is on Hiatus

There is though a small and probably temporary glimmer of good news on the scam front. For obvious reasons, we didn’t see any “come to China to celebrate our deal scams”. In this scam an alleged Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service. The terms of the deal are quickly (too quickly!) resolved and the Chinese company suggests the foreign company come to China to sign the contract and celebrate the great cooperation and friendship the two parties have established. The foreigner(s) gets to China (usually some really out of the way city in China) and is “treated” to a super expensive meal at which the contract will be signed. After much food and drink the foreign company is then told that Chinese custom requires the foreigner pay for the dinner and buy the Chinese CEO an expensive gift and pay the notarization fee for the contract. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the dinner and another $3,000 to $8,000 for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go buy the CEO gift on the foreign company’s behalf.

Weeks later the foreigner learns there is no deal and (most of the time) there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend another $10,000 or so to seal the multi-million dollar deal.

Our China lawyers used to constantly get emails from people asking if “their” deal looks real, but I cannot remember getting such a request for years.

3. How to Avoid Being Scammed

Companies and people that do the following are rarely scammed:

a. Never send money to any company or preson you do not know.

b. If you are sending money to a company or a preson you do know, make sure you are really sending the money to them.

c. Do your due diligence before you send the money, not after.

It’s rough out there. So be careful.

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