Many European SMEs continue to be interested in sourcing goods from China. But finding the right partner is not an easy task; it requires careful analysis and due diligence. In fact, the EU SME Centre continues to receive, on a weekly basis, emails from EU SMEs that encounter significant issues with purchases from China.
Although each case is unique and a commercial dispute might arise from genuine circumstances, cases of scams from Chinese suppliers remain very frequent. They generally result in either one of two outcomes. In the first scenario, the buyer in Europe receives the goods purchased from a seller in China but the goods are of lower quality or defective. In the second, the goods purchased from China are never shipped or never received.
A few recent cases
For instance, a Croatian company ordered UV/LED lamps from a Guangdong-based manufacturer and made a payment of around 20 000 EUR. After receiving the goods, the company realised that all the lamps had serious defects. The lamps became non-functional after a few days of use from the company’s own clients in Europe, a problem resulting in complaints and returns. In another case, a Bulgarian company purchased around 70 000 EUR worth of granite and stones from a manufacturer based in Xiamen. Upon arrival of the goods, the company realised that the thickness of the plates was not the same as per the contract. It called a laboratory to issue a testing report, which was not recognised by the Chinese seller.
In both cases, the European companies requested either a new batch of products or a refund. Their requests were ignored. In another recent case, an Estonian company made an advance payment of around 30 000 EUR for a batch of alloy steel produced by a local manufacturer in Wuxi, Jiangsu province. After receiving the advance payment, the Chinese manufacturer first delayed the shipment. It later stopped responding to the company’s emails, without shipping the goods at all.
Other scenarios can occur. A Polish SME purchased three containers of steel and metal profiles from a manufacturer based in Wuxi, Jiangsu. The SME agreed to a partial advance payment. It was to transfer the remaining amount to the Chinese supplier when the goods arrived at the port of entry in the EU, in line with the sales contract signed. After transferring the goods from the port to its premises, the company realised that 7 tonnes of steel were missing from each container. This represented a difference of around 25 000 EUR. The Chinese supplier offered to provide the missing steel if the Polish company made a second order for new containers. However, it demanded the same sales terms: advance payment and settlement upon arrival of the goods at the EU port.
Minimising risks early on
The cases above caused significant challenges to the SMEs. Many of them needed the goods purchased from China to deliver other products to their own clients in Europe. The companies not only lost the amount they paid to the scammer; they also incurred fines from their clients. In some cases, it led to a termination of their business relationships. Even worse, after falling victims to a scam, SMEs can do very little. Legal action in China requires a significant amount of money and time. SMEs often do not know where to start. Some opt to swallow the bitter pill instead of enforcing their rights. Scammers know this very well and indeed rely on this aspect to perpetrate their frauds.
Companies can reduce the risk of scams and quality issues when purchasing from Chinese suppliers. Many risks can be avoided by taking simple steps to conduct background checks and preliminary due diligence on Chinese companies. The purpose of this short report is to help and guide European SMEs to do so.
Note: These are only basic indications and practical tips from real cases that the EU SME Centre came across. SMEs shall not rely on the following information as a substitute for legal advice, which should always be sought, as much as possible, for in-depth due diligence. This is especially important for bigger transactions for which detailed financial information is needed.
Common red flags for potential scams
Although each case is unique, scams may present one or more commonalities. The following is a list of red flags from many cases that the EU SME Centre has collected from SMEs. The presence of one or more red flags from this list does not necessarily indicate a scam. Conversely, their absence does not necessarily indicate the reliability of a seller.
- The Chinese seller does not have an official website. Or there is no Chinese version of the website, or there are inconsistencies between the Chinese and English versions.
- The company stamp used by the Chinese seller does not contain the standard elements stipulated by Chinese laws and regulations.
- The seller demands a T/T advance payment.
- The bank account provided by the seller does not seem to belong to the same company.
- The registered capital of the company has not yet been paid.
- The Chinese counterpart asks for more money to pay notary fees or other administrative fees.
Sign in or create an account to read more about common red flags, in a dedicated section of our report.
Preventative measures and steps
- Ask for a copy of the business license of the Chinese company.
Every company legally incorporated in China possesses an official business licence, which acts as its ID card. The first step is to request a copy of the Chinese company’s business license with the official company stamp. This is a common business practice. If a company refuses to do so, then the advice is to immediately terminate any negotiation.
- Check the company’s situation on the official government enterprise credit system, and on other relevant platforms.
After receiving a copy of the company’s business license, verify that all the information provided is true.
- Verify that your contact person is authorised to negotiate on behalf of the company.
In some circumstances, the Chinese company itself is safe and reliable. However, the contact person with whom EU SMEs are negotiating is not.
- Check with the EU SME Centre and your national representations in China.
- Hire an auditor to conduct on-the-ground inspection in China of the goods.
Hiring professional auditors to inspect and test the goods is common practice in China. Checks may be conducted in the factory of the Chinese seller or at the port before shipment. This helps to ensure that the terms of the contract regarding the product quality are met. - Hire a Chinese lawyer for in-depth due diligence.
For larger transactions, or whenever necessary, SMEs should always consider hiring a Chinese lawyer for in-depth due diligence. Chinese lawyers will have access to business identity documents and other key materials filed with local market supervision authorities. They will also be able to verify a company’s financial status and health.
Report contents
1. Common red flags for potential scams
2. Preventative measures and steps
3. Too late: What to do?
To download the full report, please sign in or create an account. Do you have a question on how to minimise risks? The EU SME Centre can provide European SMEs with preliminary background check assistance. Simply ask us for information or book a consultation with the EU SME Centre Business Advisor via our Ask-the-Expert service.
