SIX COMMON CHINESE BUSINESS LICENSE SCAMS AND HOW PROTECT YOUR ORGANIZATION AGAINST THEM
Date: 2 April 2020 | Tags: Risk, Fraud, Business license scam | Written by Dr. Richard van Ostende | Reading time: 5 minutes
The vast majority of companies located in China are legitimately established, doing business and seeking to develop their business operations in an honest way, compliant with domestic and international laws, regulations and ethical standards. Unfortunately, there are always a few that aren’t.
In this article the characteristics of two different types of impostors are discussed. Possible scams related to the business license are introduced, followed by the measures that can be taken to identify fraudulent activities and how to protect your organization against these.
TYPES OF IMPOSTORS
When performing a background check on a potential customer or supplier located in China, the single most important document to request is a scanned color copy of the business license, with an imprint of the company seal affixed to it. More information on company seals you find here.
The business license forms the starting point for the verification of companies in China, determining whether these are legit companies or fraudsters. More information on the business license you find here. Fraudsters can be classified into two types: so-called “paper tigers” and “impostors”.
Paper tigers adjust existing business licenses with the intention to appear more appealing to (foreign) companies to do business with. Commonly the following adjustments are made.
Increase of subscribed capital. Fraudulent companies increase the amount of subscribed capital listed on the business license to appear to be heavier invested and herewith more financially stable and capable.
Expanded business scope. By expanding the business scope companies appear to be able to engage in more business activities than approved by the authorities.
Backdated registration date. By backdating the registration date, it would appear that the company has been actively in business for a longer period in time, thus implying the company has a proven sustainable business model and is successful in doing business.
Registered address. The registered address is altered to make it appear the company is located in a more attractive business attractive location, i.e. in a nearby bigger city instead of a small town or in a certain more favorable district.
In short, these paper tiger companies pretend to be something they are not. Doing business with them impose several risks as most often they cannot deliver what has been promised in time, in quantity and/or in quality. This leads to reputational, financial, operational damages for the contract partner.
Second type of risk comes from so-called “impostors”, which pretend to represent a company with the intention to commit fraud.
Assuming the identity of an existing company. In this case the fraudster pretends to be a representative of a respectable company and aims to do business with foreign companies, with the objection to have the foreign company make a prepayment for goods or services. The goods or services will never be delivered, and the representative disappears.
Using a company name that is not registered in China. The fraudster does not have a company and will falsify a business license in order to appear like a legitimate company, with the same focus on receiving prepayments from the foreign company.
Impostors are purely focused on receiving payments for goods or services which they will never deliver. After the payment has been received the impostor will disappear, leaving their contract partner with financial damages.
WHAT YOU CAN DO TO PROTECT YOURSELF
There are multiple ways to minimize third-party risk by verifying Mainland China companies.
Verify the scan of the business license that has been provided by your potential customer or supplier and assess the listed details against the official corporate information registered in the China National Enterprise Credit Information System (NECIS) database or at the bureau of the Administration of Industry and Commerce (AIC) which governs the company.
Assess consistency of all information available of the company, which includes but is not limited to the business license, correspondence and other documentation, references, business cards, phone and fax numbers and website.
Perform a site investigation to confirm whether the company is located at the indicated address.
Any inconsistencies that arise out of the assessment are to be clarified. If you have a feeling something might be incorrect, such as a slight deviation in beneficiary name, the way you have received the request, by whom you have received the request, if there is sudden urgency, do not doubt your doubts and clarify the matter first.
The information in this article is intended for general information on the subject matter. The content of this article is not intended to replace professional advice on the subject matter in relation to your specific circumstances.