Common Fraudulent Tactics of Chinese Suppliers and Countermeasures

In international trade, some unscrupulous Chinese suppliers may resort to fraudulent means. Foreign buyers need to be vigilant.

Tianni Law Firm has handled hundreds of cases involving fraud by Chinese suppliers; this summary provides some legal advice.

A. Common Types of Fraud

1. Goods-Related Fraud

• Substandard Goods: Suppliers intentionally provide goods of lower quality than stipulated in the contract. For example, in electronics transactions, the contract may require high-quality chips, but the actual shipment may use inferior, cheaper substitutes; in clothing trade, inferior fabrics may be passed off as high-quality fabrics, affecting the overall quality and performance of the product.
• Quantity Shortage: The quantity of goods shipped is less than the quantity stipulated in the contract. Suppliers may commit fraud by falsifying shipping manifests or intercepting goods during transit. For example, in a large-volume commodity transaction, the contract may stipulate 1000 items, but only 900 items may arrive.
• False Packaging: Using packaging that does not match the sample or contract description, or excessively packaging goods to conceal quality problems. For example, packaging ordinary goods as high-end brand products to mislead buyers; or filling the packaging with inferior materials to reduce the actual weight of the goods and thus gain undue profits.
• Document Fraud

• Forged Documents: Suppliers forge important documents such as bills of lading, invoices, and quality inspection certificates. For example, they forge cargo information and shipper information on bills of lading to mislead buyers into believing the goods have been shipped; they forge quality inspection certificates to prove that inferior goods meet the quality standards required by the contract.
• Altered Documents: Genuine documents are altered, such as changing information on the quantity, specifications, and price of goods. For example, the unit price on the invoice is increased to defraud the buyer of more payment; or the shipping date on the bill of lading is modified to mislead the buyer’s judgment of the delivery time.

3. Contract Fraud

• Ambiguous Clauses: Contracts are deliberately ambiguous and prone to ambiguity. For example, key clauses such as quality standards, acceptance methods, and delivery time are not clearly stated to provide excuses for evading responsibility or seeking improper benefits during subsequent performance.
• Dual Contracts: Two different contracts are signed with the buyer: one is a public contract shown to the buyer, and the other is an internal contract for actual execution. The surface contract offers favorable terms to attract buyers; however, the internal contract contains clauses more favorable to the supplier, such as higher prices and lower quality standards.

4. Credit Fraud

• False Qualifications: Suppliers provide false corporate qualifications, performance records, bank credit information, etc., to deceive buyers. For example, they forge the company’s registered capital, production capacity, and past success stories, misleading buyers into believing it is a strong and reputable company.
• Impersonation: Suppliers impersonate other well-known companies to transact with buyers, leveraging the brand influence and reputation of established companies to secure orders. If problems arise, buyers find it difficult to identify the true responsible party.

5. Transportation Fraud

• Collusion with Freight Forwarders: Suppliers collude with freight forwarding companies to commit fraud during cargo transportation. For example, suppliers may conspire with freight forwarders to illegally divert or detain goods, then demand exorbitant ransoms from buyers; or they may deliberately delay cargo transportation, causing buyers to miss sales opportunities and suffer financial losses.
• False Shipping Information: Providing buyers with false shipping information, such as forged bills of lading numbers and shipping schedules, prevents buyers from accurately tracking the goods’ progress. When buyers discover the goods haven’t arrived on time, the supplier may use various excuses to evade responsibility.

6. Payment Fraud

• Setting Unusual Payment Conditions: Requiring buyers to use uncommon, high-risk payment methods, such as demanding large upfront payments to a private account designated by the supplier instead of a company account. Once payment is made, the supplier may refuse delivery for various reasons or simply disappear.

 

• Forged Payment Notifications:Sending buyers forged bank payment notifications to mislead them into believing payment has been made, thus lowering their guard. In reality, the supplier has not received payment and may subsequently refuse delivery or demand further payment on the grounds of non-receipt.

7. Intellectual Property Fraud:

• Unauthorized Use of Intellectual Property:Suppliers use the buyer’s trademarks, patents, designs, or other intellectual property without authorization to produce goods and then sell them to the buyer or other customers under their own name. This not only damages the buyer’s brand image and interests but may also lead to legal disputes.
• Intellectual Property Fraud: False Intellectual Property Declarations: Claiming to own intellectual property rights to coerce buyers into paying extra fees or accepting unreasonable transaction conditions. In reality, these so-called intellectual property rights may be false or invalid.

1. Prevention Recommendations
2. Preliminary Investigation

• Verify Supplier Information: Use various channels, such as the official website of the Ministry of Commerce of China, Tianyancha, and Qichacha, to check the supplier’s company registration information, business status, credit records, etc. You can also consult industry associations and chambers of commerce regarding the supplier’s reputation.
• Inspect Factory Strength: If possible, personally visit the supplier’s factory to understand its production equipment, technological level, management level, and employee quality. You can also commission a professional third-party agency to conduct a factory audit.
• Review Qualification Documents: Require suppliers to provide relevant qualification documents such as business licenses, tax registration certificates, import and export licenses, and quality management system certifications, and carefully verify the authenticity and validity of these documents.

2. Contract Signing

• Clearly Define Terms and Details: Specify in detail the specifications, quantity, quality standards, price, delivery time, delivery location, payment method, and liability for breach of contract in the contract, avoiding vague language. For key terms, it’s best to have them reviewed by a professional lawyer.
• Include Guarantee Clauses: Require suppliers to provide guarantees, such as bank guarantees or security deposits, to reduce transaction risks. If the supplier defaults, the buyer can use the guarantee to compensate for losses.

3. Transaction Process Monitoring

• Track Goods Transportation: Maintain close contact with freight forwarders to stay informed about the transportation status and location of goods. Request freight forwarders to provide cargo tracking information to ensure goods are transported according to the time and route stipulated in the contract.
• Phased Acceptance: For large-volume goods or goods with long production cycles, a phased acceptance approach can be adopted. After each production stage is completed, send a specialist to the factory to inspect and ensure the quality of the goods meets contract requirements. If any problems are found, promptly require the supplier to rectify them.
• Dispute Resolution

• Preserve Evidence: During the transaction process, carefully preserve various written evidence, such as contracts, invoices, bills of lading, inspection reports, emails, chat logs, etc. This evidence will play a crucial role in case of disputes.
• Seek Legal Recourse: If a dispute arises with the supplier, first try to resolve the issue through amicable negotiation. If negotiations fail, you can protect your legitimate rights and interests by following the dispute resolution methods stipulated in the contract, such as arbitration or litigation.