Suspicious China Business Practices

An increasing number of Wisconsin companies have been contacted by dubious Chinese firms regarding extremely large purchases. Large metal vessel and tank fabricators appear to be especially targeted. While many excellent and legitimate business opportunities exist for Wisconsin exporters in China, firms should always use due diligence when reviewing purchase offers. Remember, if a deal looks too good to be true, it probably is.

A typical scheme involves a Chinese firm contacting a manufacturer via the internet and expressing the desire to purchase a large quantity of products. After several emails, the Chinese firm may inform the Wisconsin company that it has won the bid and it now time to arrange face-to-face meetings and a contract signing. At this stage the schemes can vary:

Advance Payment Scheme
The Chinese entity requests a "contract registration fee," "notary fee," or "customs expediting fee" required by Chinese government regulations based upon a percentage of the contract value. In actuality, the Chinese government does not impose fees to register contracts. The bogus buyer will pocket the fees and no binding contract will be singed.

Gift Lists and Banquets
The Chinese entity states that during contract signing ceremonies it is customary for the seller to host a banquet and give gifts such as gold, jewelry, or cash to representatives of the buyer. While a dinner may be held, the prices billed to a foreign seller are far in excess of the true cost of the event and the seller will be directed to buy appropriate gifts from businesses in on the scheme at highly inflated prices.

Travel Expenses
In addition to requesting a letter of invitation, the Chinese entity requests cash to cover travel expenses for executives to visit the U.S. facility. The invitation letter will be used to obtain a U.S. visa to enter the country. The traveler may never make a stop at the facility and could end up overstaying their visa. U.S. Consular officials may put future legitimate business travelers under additional scrutiny or deny visas to business people seeking to visit companies whose previous visitors have gone astray.

A basic rule of thumb is to never provide cash or other payments in advance, no matter what the scenario, in order to obtain a questionable contract. Negotiate your fees and responsibilities up front and seek legal and cultural advice upfront. Some simple background checks can help differentiate between questionable and reputable Chinese entities. Certain red flags to watch for include:

• Unusually large product volume or urgency to purchase on a lead that came out of the blue;
• Limited details or unwillingness to provide information on the project;
• Insistence on some type of cash payment to the Chinese entity;
• Insistence that the contract is only legitimate if signed in China;
• Incomplete information on the purpose of the ‘fees' or an inability to explain the regulations or name the government entities that are responsible;
• Requests for an invitation letter to visit the United States prior to any substantive communication about purchase terms or company background information;
• Business address in residential areas; and
• Use of pre-paid/rented cell phones

There are resources available to Wisconsin firms that want to check on the legitimacy of potential Chinese customers or business partners. You may contact Beng Yeap, Commerce's Asia Specialist, with questions on evaluating sales opportunities from China; phone: 608-225-8443; email: beng.yeap@wisconsin.gov.

-- Stanley Pfrang