THE China Bank Fraud Scam. What To Do, What To Do….

Here’s how bad things have gotten: a year ago Interpol released a Purple Notice detailing the scammers’ M.O., but my firm’s China lawyers are receiving even more frantic phone calls now than last year….

The scam is typically employed against foreign companies buying product from Chinese suppliers, and it goes like this: a foreign company that has been wiring payments pursuant to purchase orders specifying the Chinese supplier’s bank account suddenly receives an email from the “Chinese supplier” (note the quotation marks here) requesting that payment for outstanding POs go to a new bank account. This new bank account may be in the name of a company with a slightly different name. The new bank account may be in a different city, or even a different country. The new bank account may be in Hong Kong, not mainland China. Often, there is not even a special request: the sender uses the same invoice as always, just with a new bank account.

The foreign company fails to notice (or to note the importance of) the inconsistencies and wires funds to the new bank account. A few weeks later, the Chinese company demands payment. The foreign company insists it has already paid the Chinese company, at which point the Chinese company responds that it has yet to be paid. Things virtually always go downhill from there.

In the old days, when this scam was much more unusual, the perpetrator was usually the Chinese supplier itself (seeking a double payment) or a rogue employee at the Chinese supplier (seeking his or her own payment). The Chinese company would invariably state that regardless of what had happened, it was still owed the money — if the foreign company had paid the wrong entity, it was the foreign company’s own fault.

The reason this scam has become far more prevalent and insidious is because many Chinese companies have insecure computer networks that are easily hacked, and this scam is no longer solely an inside job. Hackers with no connection to the Chinese company are now engaging in this fraud.

The most important thing you can do to avoid falling victim to this scam is to be aware that it happens — which, if you have gone this far in this post, you are. Beyond that, you should always review the bank account information you receive from your Chinese counterparty and if the bank account city is at all different from usual, do not pay unless and until you receive a good explanation for the change fromsomeone you know at the company. Then get a written and sealed confirmation of the account change before you initiate your next wire.

Be careful out there.