Hundreds of manufacturers in China have reportedly been ensnared in a business scam in which manufacturers are asked to pay miscellaneous fees in advance of receiving a down payment for apparently lucrative export orders.

Letters of credit (L/Cs) might appear to provide protection against such scams, but it appears that traders have little confidence in their ability to ensure that trades are genuine.

How it works

A documentary investigation on China Central Television examined the scams and talked to several people who explained how the schemes typically work:

A manufacturer first notices an advertisement in the classified section of a reputable business newspaper. The Shenzen-based advertiser says it has a large contract with a foreign buyer for certain goods and is looking for a manufacturer of those goods.

Commitment

The manufacturer contacts the advertiser and is invited to Shenzhen for further negotiations. This would be the first of many trips to the city for the manufacturer who is asked to visit the trading firm in Shenzhen several times with prepared price quotes, samples and so on.

Travelling costs mount up for the manufacturer who thus feels compelled to stay in the deal to make sure these financial commitments ultimately yield rewards.

Contracts drawn up

The Shenzhen trading firm also sends people to confirm the manufacturer's capabilities, the costs of which can be in excess of US$3,000 by the time lavish gifts are paid for according to the television investigators.

Contracts are usually for between US$240,000 and US$360,000 and the trading firm promises a down payment of around 30 per cent of the order value.

Miscellaneous costs

Meanwhile the manufacturer might be asked to pay several more miscellaneous costs, which in the context of an order of these values do not appear excessive - around US$2,400 for currency conversion or around US$6,000 for merchandise insurance for example.

A contract is drawn up, but the money never shows up in the manufacturer's bank account.

Suspicions

When manufacturers start to become suspicious of the trading firm, checks on their status with credit agencies reveal that the firm is properly registered, with a comfortable amount of fixed assets, usually in the form of a bank account.

When the manufacturer finally decides to get tough and sort the matter out with a visit to the trading firm's and visits its Shenzen offices, either the trading firm has already disappeared or a down payment is promised in the near future. In the latter case, the next time the manufacturer visits Shenzen, the trading firm will probably have disappeared.

L/C fraud prevention?

One daily news journal talked to half a dozen manufacturers and trading firm executives and found that export-related scams - some of them much more sophisticated than the one described here - are regularly perpetrated and the newspaper asked business people how such scams could be prevented.

Neither existing financial and regulatory mechanisms nor conventional financial instruments would easily deter the fraudsters apparently.

"We all know that L/Cs can be fabricated. Even if you get a real one, it does not mean you'll get the money specified by your contract," one Zhejiang merchant told the China Daily.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.