China

The China Bank Switch Scam

Be careful out there. Your clients may lose a lot of money thanks to this scam.

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I have received four emails in just the last month from U.S. companies that lost more than a million dollars (total) from China bank-switching scams. I first will describe what this scam is not, and I then will describe what it is.

This is not the entirely fake bank set up to bilk depositors. That happened in Nanjing earlier this year. This is also not the scam where an entirely fake manufacturer takes money from a Western company and then never delivers any product because it has no product to deliver. That scam happens all the time, but mostly to unsophisticated Westerners who fail to conduct even the most basic due diligence on their supplier. No, this is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening.

This scam usually involves your regular Chinese manufacturer asking you to make your next payment to a new bank account, though it sometimes can involve your very first payment to a new Chinese manufacturer. Then even after you make the payment, your supplier insists that you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain that you did pay and show written proof of that, your China manufacturer points out that the bank account to which you sent funds does not belong to them and so you still owe them the money.

Here is the most recent email I received on this scam, with all identifiers changed so as to disguise identity:

We had about $250,000 worth of widgets arrive in the USA in late December. We paid the remaining balance of about $144,000 to the manufacturer a few weeks before arrival.

The container is still at port in the USA because the Chinese manufacturer is claiming that it never received the remaining $144,000 balance. They refuse to give us the B/L.

After months of trying to track down the wire, we learned that the manufacturer’s email was hacked and the wire information was changed and the money has been stolen by someone in Hong Kong. They claim that the fake person gave us the wrong bank account information.

They refuse to release the goods if we do not pay them $135,000 more (they are giving us a small discount off the balance). They are saying that if we do not pay this right away, they will have the container returned to China.

We can take legal action against them, but we have worked well with them for years and I do not want to see this continuing to drag on.

What do you recommend?

I explained that it would likely not make sense for them to take “legal action” against the Chinese manufacturer in either the United States or in China. It does not make sense to sue in the U.S. because China does not enforce U.S. judgments and a Chinese court is likely to fault the U.S. company for having sent money to a Hong Kong bank account without first confirming with its mainland China manufacturer that it should be doing so. I suggested this American company negotiate as good a deal as it could with its Chinese manufacturer and then try to get coverage from its insurance carrier for employee negligence.

I want to stress that my firm’s China lawyers are regularly seeing smart, worldly, sophisticated companies get caught up in this scam. How can you prevent it from happening to you? Do the following (h/t to the Quality Inspection Blog for these):

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  • Get to know the employees at your manufacturer/supplier who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as they cannot be hacked. Call if you have any concerns.
  • Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time. This will make it less likely that one of your employees will just send the money to a new bank account listed.
  • Ask your suppliers to fax you their invoices and make sure the sending fax number belongs to your supplier’s company.
  • Do a small wire first to confirm the account.
  • Have a special procedure for confirming bank account changes that includes your calling several people in the company. Your Chinese supplier will understand your concerns — they are also a victim when it happens to their customers.

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Be careful out there.

Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at [email protected].

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