Fraud of changing bank account in China

Philippe Deltombe, Partner China Desk. AGM Abogados

This fraud, which is already a classic in the field of trade relations between Chinese suppliers and Western companies, is not about making an order to a Chinese supplier, make a transfer and receive nothing in return. No, it’s difficult to identify and relatively frequent and not always obvious.

The fraud is basically that a Chinese manufacturer which is already has normal commercial activities, asks the foreign company to accomplish the payment with a transfer to a different bank except the account that they usually use. Later the Chinese supplier claims, saying that they have not received any transfer, and in the documentation shows that the foreign company itself has made the transfer, saying the bank beneficiary account of the transfer is not under the supplier´s name, therefore, the debt still exists.

This article will start from the hypothesis that the supplier acted in good commercial activity and their email account has really been hacked by a hacker outside of the company. We will leave aside the hypothesis that fraud has been internally organized by the same Chinese company or a result of a retaliation of some wayward employee.

This usually happens because the computer networks of many companies are not safe and can be relatively easily hacked. Hackers can run from the same Chinese supplier email, and send a request to change bank account to the foreign company, diverting the transference to their own account. For this reason e-mail communication with certain companies is not completely reliable for important issues, must be confirmed by other supports.

A changing bank account request by the Chinese supplier should arouse some suspicion to the foreign company, as it is quite rare that Chinese companies suddenly change their bank account. Moreover, usually in this fraud that the new figure bank account is on behalf of a company with a slightly different title from the vendor. And the new account is usually located outside mainland China, can be found in Hong Kong, Taiwan, Africa …; even the offender can also be found outside China. Often the request of change bank account is justified by fiscal or commercial reasons, need for foreign exchange outside China, etc.

Dan Harris, from Harris & Moure, suggests in his blog (www.chinalawblog.com) that generally the companies that maintain trade relations with China should adopt a mode of operation that contemplated measures of the types listed as following:

• Make sure you have coordinates of the contacts for the Chinese company that speaks your language. In case of doubt or suspicious situation, it is highly recommended to confirm the change by telephone.
• Prepare a document with information related to the bank account of the supplier and in future invoices make reference to that document instead of putting all bank details on each invoice. This possibility of sending transfer to a new account is reduced.
• Make first a small amount transfer to confirm the bank account.
• Make an agreement with your provider about a special procedure that regroups some of the measures mentioned above, to confirm account changes.

In case that fraud had already carried out and if the defrauded amount is not too significant, it is very possible that recovery costs may be greater than the lost amount.

The first possibility that comes to mind is to take legal action against the supplier, but on the one hand, China does not recognize judgments of foreign courts, and secondly, a Chinese court could blame the foreign company for lack of diligence to transfer funds to a new bank account without confirming before with your Chinese supplier.

It is imperative to act immediately denouncing the fraud to Chinese police (Public Security Bureau “公安局”) in order to launch a criminal investigation. If you act quickly you may achieve that police blocks the account before the money disappears. Later you can negotiate with your Chinese supplier to share costs related to the complaint.

Another possibility worth to explore is to share the loss with the Chinese supplier, with the argument that its computer system has been hacked because of its low level of security. The result of these negotiations will depend fundamentally on the relationship between the two sides and the future prospects of doing business together. Furthermore it can be argued that the application for the change of bank account through email usually used in communication between the parts. (and if and if this type of request had already been made in the past) is a normal commercial practice (art. 60 Contract Law and Interpretation of the Supreme Court of Peking). This way you can defend your company acted as the usual practice between the two parts and that there is no negligence on your part, since the cited legal references lead us to think that changing bank account through email usually used between the two parts could be considered as a formal instruction and in accordance with normal commercial practice.

In conclusion, it is necessary to emphasize that doing business in China is no more insecure than doing business in other countries, in China as well as in other places you just have to be aware and set a few simple rules to avoid possible fraud, absolutely, diminish the attraction of this large market.