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The vast majority of companies located in China are legitimately established, doing business, and seeking to develop their business operations in an honest way, compliant with domestic and international laws, regulations, and ethical standards. Unfortunately, there are always a few that are not.
In the event selected adjustments to the business license have been made, the adjustments have most often been made to make the company of the third party appear more “business competent” compared to its original status. In this unit the characteristics of two different types of impostors are discussed. Possible scams related to the business license are introduced, followed by the measures that can be taken to identify fraudulent activities and how to protect your organization against these.
1 Types of Impostors
When performing a background check on a potential customer or supplier located in China, the single most important document to request is a scanned color copy of the business license, with an imprint of the company seal affixed to it. The business license forms the starting point for the verification of companies in China, determining whether these are legit companies or fraudsters. Fraudsters can be classified into two types: so-called “paper tigers” and “impostors”.
2 Common Scams
Paper tigers adjust existing business licenses with the intention to appear more appealing to (foreign) companies to do business with. Commonly the following adjustments are made.
In short, these paper tiger companies pretend to be something they are not. Doing business with them impose several risks as most often they cannot deliver what has been promised in time, in quantity and/or in quality. This leads to reputational, financial, operational damages for the contract partner.
Second type of risk comes from so-called “impostors”, which pretend to represent a company with the intention to commit fraud. Impostors are purely focused on receiving payments for goods or services which they will never deliver. After the payment has been received the impostor will disappear, leaving their contract partner with financial damages.