It is officially 2021, but don’t fool yourself that some things change just because the calendar does. At China Law Blog we often post about fraud or attempted fraud that takes place in China; companies doing business there, or with Chinese counterparties, should consider due diligence an evergreen topic, the importance of which cannot be emphasized enough.
In June 2020, China Judgments Online published an order entered by Shenzhen Nanshan District Court, which – upon petition by Tencent – would freeze about 16 million yuan (US$2.3 million) worth of assets of Lao Gan Ma, the maker of a popular Chinese chili sauce. The underlying case is a contract dispute between Tencent and Lao Gan Ma, where Tencent accused Lao Gan Ma of breaching a “joint marketing cooperation agreement” with Tencent by failing to pay for the advertising services Tencent had provided.
This story took a sharp turn the next day when Lao Gan Ma announced that it never signed such agreement with Tencent and had reported this to the police earlier in June when they first received this order. A day later, the police said that it arrested three people, who posed as marketing managers for Lao Gan Ma and forged Lao Gan Ma’s company chop and signed the agreement with Tencent. According to the police, the trio’s purpose was to obtain Tencent online game gift codes which they then re-sell for economic gain. Apparently, Tencent had been conned.
In what appears to be the end, Tencent took it with good humor. In addition to referring itself as “a silly penguin who ate fake chili sauce,” Tencent also encouraged netizens to provide any leads for similar fraud, with the bounty being 1000 jars of Lao Gan Ma chili sauce. On July 10, Tencent and Lao Gan Ma made a joint announcement, stating that Tencent has withdrawn the asset seizure request and apologized to Lao Gan Ma.
The joint statement drew a stop to the series of events around this scam. One may wonder how Tencent would fall for such scam. But even big companies with sophisticated back office functions can be duped and this type of scam is nothing new as we have discussed before.
A few things we can learn from this.
First, company chops are still important in China. Tencent would not have believed they had signed an agreement with Lao Gan Ma without the latter’s chop, despite that they later found out it was fake. As we wrote before, a contract bearing a company’s chop are presumably authorized by the company. The company cannot later claim that the contract was not binding because whoever signed it was not authorized to do so.
On the other hand, it is often difficult to tell whether a chop is real or fake. That said, there are some ways to at least spot the most obvious errors:
- Is the font, shape or other stylish element commonly used for Chinese company chops? Most Chinese companies use a round red chop with simplified Chinese characters. Some also has the company’s registration/uniform social credit number or an English name.
- Does the print on paper look like a print by a rubber stamp with ink or a print from a computer file?
- Check the company’s chops filed with the local public safety bureau. Company chops are normally recorded with the government when a company is formed.
Still, you cannot be 100% sure as chops are very easily forged. Even if the chop is authentic, it is still important to do due diligence on the company with whom you are doing business before signing anything. When conducting business due diligence, you should bear in mind the following:
- Ask for the company’s Chinese name and conduct an online search. You can find basic information about a Chinese company for free from online databases hosted by the government (such as National Enterprise Credit Information Publicity System ) or by private companies. If you can’t even find it on these databases, you can stop right there.
- Check the history of the company. Most fake companies don’t bother to create a business history. If a company does not have a history that you can verify, walk away.
- When possible, visit their office or factory. Does it look like a factory that matches what ever manufacturing capacity they claim to have? How many employees do they have? What are the employees doing? If possible, visit multiple times. A good fraudster can put on a show, but they are unlikely to be able to do it the same way each time.
The list could go on. Unfortunately, no due diligence can protect you against bad people who are determined to do bad things to you. That said, the bottom line is before you commit to a deal, you should learn as much as you can and as much as makes economic sense about your China business partners.