Getting the Inside Scoop on Chinese Cos.

Westerners have always found China to be an exotic, mysterious place. When it comes to investigating shady business proposals, elusive employees or outright con-artist schemes, however, those words take on a whole new meaning.

Consider the simple dinner scam. A Chinese company contacts a small U.S. or European manufacturer and places an order—a big order. To make it official, the Chinese company says, the foreign firm must send its top executive to China to sign the contract—this week.

Eager to do business, the Western company whisks a team to the other side of the world to deal with the formalities. A banquet is held to honor the visiting guests. At the end, the Western company is stuck with the bill, usually $5,000 to $15,000. Even if the deal does close (and it may well not), the Western company has just footed the bill for the locals’ bash of the year.

Kern

“I can’t tell you how hard it would be to spend that kind of money on a banquet of, say, 30 people in a small town in China,” says Louise Kern, managing director of Globis, a Chicago-based due diligence company specializing in China.

Such stunts are all too common in China. Given the lack of transparency, abundance of forged documents, pervasive corruption, a weak judiciary and a formidable language barrier, conning foreigners—and getting away with it—is relatively easy. Claims are difficult to verify, backgrounds hard to confirm. Should you expose a lie, legal recourse is slim.

Kern and other investigators who specialize in China say most of this never has to happen. Yes, information is not easy to come by in China. Public records, even basic corporate registries, are not always public. Even when they are, the quality and depth of what is released usually depends on who does the asking and how the request is made. But there are resources available to help companies out.

For a fee, firms like Globis or the U.S. Commercial Service will provide an International Company Profile: a document that provides basic but sometimes hard-to-find details about a Chinese company. Those details include the names of directors, registered address, income, profit and products made and exported. Globis’ ICP also rates the Chinese company’s credit and bank references.

With that information alone, Western companies can learn much about their Chinese counterparts and avoid various rip-offs. The dinner con, for example, could be prevented because companies that run such a swindle usually raise a few red flags: They aren’t in major cities, have short corporate histories, or have sparse banking records because they do little actual business.

Background Checks

Often, however, more is needed. When a company considers doing a joint venture in China or taking on a senior Chinese executive, it may need to check that person’s background. That will most likely require the use of private investigators.

One source of concern: where a Chinese company or person obtained its wealth in the first place. For many years, private enterprise was only semi-legal in China; those who have succeeded at it might have connections to the Communist Party, the government, criminal enterprises, or other parties a Western company would want to know about.

“It’s not whether fraud exists in your value chain. It’s how hard you want to look.”

— Frank Hawke,

Chairman,

Kroll (Chinese Division)

There’s also a tendency in China to boast of connections that don’t exist, or don’t exist at the level claimed. One Chinese private investigator tells of a recent case where he checked the background of a mining executive who claimed he was the chairman of a national mining association; in reality the man was only the legal representative of a local association.

“Most people I investigate are good people, with good reputations and good ability,” says Wendy Wong, manager of the international department of Beijing Orient Investigation. “But sometimes they want to get more money from foreigners, so they will tell something that is not the truth.”

Shareholders should also be carefully examined. Keeping stock owned by one person in the name of somebody else is a common practice in China, often to hide that the true owner is a government official—which can be a problem under both Chinese and U.S. law. It may also be done to hide the existence of parallel companies, run and owned secretly by the Chinese joint venture partner.

Fraud can occur anywhere along the supply chain, and companies need to be prepared to investigate both upstream and down. The potential tricks are legion: double invoicing, false invoicing, dummy companies, and slipping of inferior components into the manufacturing process. Kern warns that if you ask a Chinese company whether it can make a product, the answer will always be yes. Often, however, the company simply trades in that product or makes something similar but not the same (particularly when it comes to chemicals or similar basic materials). She says that even today, companies will put their name on someone else’s factory and claim it as their own when there are visitors in town.

Hawke

“It’s not whether fraud exists in your value chain,” says Frank Hawke, chairman of the Chinese business of Kroll, the international investigation company. “It’s how hard you want to look.”

Lawyers can be a great help; Chinese lawyers, for example, are trained to spot fake documents. But sometimes a Western company must prioritize and make choices: It can hire a strong, well-known firm like Kroll, which charges higher prices but has strong checks and balances to conduct investigations legally, thoroughly, and correctly.

A Chinese private investigator, however, can be much cheaper (often less than $100 an hour) and very effective since it knows the tricks of the trade so well. But a company hiring a Chinese investigator must research the investigator and draw up documentation that protects the company, should the investigator do anything unlawful.

“You have to have an agreement in place that provides protection if they do something they are not authorized to do,” warns George Martin, a partner at the law firm Faegre & Benson. “You have to do due diligence on your private investigator before you hire them.”