Due diligence is essential. The only way to reduce risks is to spend time and resources to scrutinise every aspect of your potential partner’s business, to verify that the potential partner is legitimate and properly established, has a solid financial foundation, and is operationally capable of fulfilling your needs. Searching the company on web engines is not enough, although some potential red flags may already be triggered in this way, for instance if the company is not easy to find, or if there is no Chinese version of the website (indicating the legal Chinese name of the company). Other key steps include:
- Ask for a copy of the company’s business license.
- Verify the validity of the information included in it, especially the company’s social security number and whether the name and business scope showed on the business license perfectly matches that used in the business contracts.
- Verify whether your contact person is allowed to negotiate on behalf of their company.
- Verify the company stamp (chop): Chinese legal chops have a standardised shape, i.e. circled, red, with a star in the middle; other shapes of chops are not valid (for more details on this aspect, see the corresponding FAQ below).
- Avoid paying in advance, and instead use safer payment methods such as letters of credit which are commonly used in China.
- Visit in person the premises of your partner and conduct an on-site inspection of the goods before they actually leave the Chinese port. Alternatively, third-party professional agencies may be contracted for this purpose.
The EU SME Centre receives, on a weekly basis, emails from EU SMEs that have been scammed when purchasing goods from China. In the majority of cases, such scams could have been avoided with the above steps. The EU SME Centre can assist in conducting free-of-charge preliminary due diligence on potential partners. For major transactions and complex deals, it is always recommended to seek professional legal advice from law firms established in mainland China.
