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How to Fall for a Chinese Export Scam: A Step by Step Guide

February 4, 2015

Chinas Emerging Middle Class 2012 2020

Exporting to China is big business. Last year China imported around $1.9 trillion worth of widgets and gadgets and food and resources and everything else. Combine this with a surging middle class that increasingly demands top quality goods, and you’ve got an outstanding opportunity to export single origin Fairtrade coffee. Or so we thought. Read on to learn how we were nearly scammed and what you can do to avoid a similar fate.

Setting the Scene: Chinese Economic Stats

Despite recent whispers that China’s economy is slowing down, it’s undoubtedly a juggernaut with very few global peers. In 2014 alone, China imported $1.9T in myriad goods from various markets around the world.

These numbers are massive party because there are 1.35 billion people in China, but that doesn’t tell the whole story. Because China’s population growth is relatively flat (lower than the US in fact), one would expect to see large but unchanging import figures.

To explain the import growth, you need this chart, which shows that Chinese per capita income has increased an astonishing 13x since 1990.

Which gives you a large and growing middle class and upper middle class

Chinas Emerging Middle Class 2012 2020

All of which is to say that China represents a fantastic export market if you sell a premium product that lots of people use — like single origin Fairtrade coffee. Did we mention China’s urban elite love organic foods? Premium quality? Ethically sourced? Lots of demand? Check check check. So we were an obvious target.

The Scam: The approach

The first of 85 emails back and forth arrived innocuously enough

A bit odd someone reached out to us out of the blue like this, but great to get inquiries. I asked for more details around what sort of coffee they were looking for, and they came back with:

Not very encouraging. How did they get in touch if they don’t have our website? What’s the deal? I sent them a link to our one-pager and our website but was skeptical.

We then went back and forth for 8-10 emails, where I described our various products (over and over again, as she didn’t seem to really get it) and where we can sell them. One email from her (I say her, because a woman named Emily was emailing and translating for the main contact, Mr. Cheng) that should have raised a red flag in hindsight:

This wasn’t suspicious at the start, but as the conversation progressed, the story changed completely with no explanation.

They asked for photos of the coffee but never any samples, which I thought was odd. But then again, maybe they’re so excited about premium British goods that all they care about is that it looks nice. Another red flag in hindsight.

And then…progress!
screen_shot_2015-09-16_at_16-05-54-1

The Scam: Negotiations

Chuffed to hear they want our coffee, I told Emily the price would of course depend on volume. This didn’t really work.

Now remember how Emily told me they looked after Europe? Looks like now we’re focussing on the Chinese market. I’m embarrassed to say I didn’t even notice that at the time.

So we went back and forth three or four times where I unsuccessfully tried to explain a scaling price model (one price for 100kg, a lower price for 1,000kg), and then out of nowhere:

Now Honest Coffees is no longer a super small company, but ten tonnes of coffee would be a massive deal for us in lots of different ways. It would let us do lots of different things, including buy coffee from our farmers in bulk (better for them and us), buy coffee pouches in bulk (reduce our cost there by 90%) and some other things. So this immediately had my attention.

Some clarifying questions from me

screen_shot_2015-09-17_at_09-41-19

Emily doesn’t really answer the questions, but it all sounds legit enough.

screen_shot_2015-09-17_at_09-42-36

And Emily reinforces my notion that imported British goods carry a premium value, and she dangles the carrot of more business in the future. I call a friend at Barclays and check standard shipping terms on Alibaba, and the 30% / 70% ratio standard. 30% up front would cover most of our unrecoverable costs should things go wrong, and a letter of credit–as long as it’s from a reputable bank–is as good as cash as long as we deliver on our side. So while this all feels a bit off, it seems like there’s no way for them to rip us off given the terms Emily has proposed.

Emily reassures me this is a safe transaction

screen_shot_2015-09-17_at_09-49-08

Because this is a bespoke deal with lots of moving parts, I give Emily a price range for the ten tonnes of coffee to make sure we’re all in the same ballpark. A very confusing exchange of 3-4 emails takes place where I try to communicate how much the coffee will cost, and I finally propose a figure for the 10,000kg: £8.88 per kg, which is rock bottom for us even at those volumes, but I’m keen to start the relationship. Emily seems pleased:

screen_shot_2015-09-17_at_09-50-58

The volume has inexplicably (but pleasantly!) doubled with no discussion. I assume the price I gave was lower than they expected, and so their clients wanted more coffee. Either way, this is a great deal for us, and champagne is popping in the back room.

Now obviously the thought that this is a scam had crossed my mind, but given the guarantees they’d provide, I couldn’t figure out how they might swindle me….

The Scam: Alarm bells

I’ve left out the most confusing bits of this email exchange for clarity and (some degree of) brevity’s sake, but now that there’s a deal on the table, I need to get some specifics

Emily’s response doesn’t do much to clear things up

Lots of info there is missing, but most conspicuous are the bank details. I decide not to press, assuming it’s just a communication issue, and certain we’ll get those details sorted before moving too much further along. Emily places a formal order

Click the doc above to view the order. Looks legit enough, right?

So we move forward with the process of actually fulfilling the order. Getting quotes for labels and pouches, making sure we can access enough beans, etc. I ask a routine but slightly technical question, which Emily doesn’t seem prepared to answer…and she casually drops a bomb in the end of her note.

It felt a bit odd that they wanted to meet face to face, since that’s never happened before, but I put it down to a cultural issue. It was a lot of money after all, I’ve read that big deals in China tend to happen in person. However, this was 20 July, and at this point our son was five days overdue (he was due 15 July), so I was operating on borrowed time. Not really ideal, so I asked if we could push the trip back a month or two. Not happy with this, Emily sends this cipher through

I push back, saying I can’t leave my 41-week pregnant wife, and they have a relatively reasonable response

Oh look, they’re looking out for us so we don’t produce any coffee before the contract is signed. They must be legit! Eager to get going, I ask if I can sign the contract in London and post it back, happy to go out for a visit once the coast is clear.

Nope

Emily very helpfully sends through a reasonable looking document. Works for us!

Again, click the contract to have a look.

They finally send through details of their bank account and help me fill out some forms that the Chinese government requires importers to take care of. Things are starting to firm up, so I undertake some more rigorous due diligence, which is when it all starts to unravel.

The Scam: Due diligence

Our first port of call is the very helpful CBBC. They smell a rat immediately.

They ask for more details, so I send through the company name, account numbers, contracts, and so forth. They very helpfully do some background work for us, and it doesn’t look good.

So that’s not encouraging. Undaunted, I do some checks of my own.

There are a few sites that let you plug in a url to see if it’s listed as a scam or not. So I did that

http://www.scamadviser.com/check-website/xamohai.com

http://www.scamvoid.com/check/xamohai.com

Inconclusive!

Then I watched this video, and my heart sank

That sure sounds familiar!

And then I googled the whole thing. Not good.

Then I started to wonder about the cold email approach. If this is a scam, would I maybe have other cold emails from Chinese companies in my spam folder? Sure enough, there were three other emails that all sounded nearly identical to the initial approach email.


How does the scam work?

A brief interlude if you’d rather not watch the video and click the links!

The scammer gets you to fly out to China for a visit, whereby you spend a few days dining out, going on tours, and generally having a great time with the young female translator and the CEO. As negotiations conclude, the deal maker on their side asks for two things:

  1. A notary fee equivalent to 2-4% of the total deal amount (explains why they upped the order volume when our price was lower than expected). This would have been perhaps £5,000 for us.
  2. A gift for the CEO to seal the deal. This is usually a £5,000 to £20,000 piece of art from a local gallery they’ve got an in with.

Once you sign the bogus contract and give them the money, everyone shakes hands and smiles while the translator takes you back to the airport. You arrive safely back home and never hear from them again.

So you’re never really at risk of losing the money agreed in the contract, and as scams go, it’s relatively small at £10k to £30k. But this amount of money could cripple a small business. They know this, and they know you won’t have the resources to go after them. It’s really insidious.


The Scam: Negotiations Part 2

95% convinced it’s a scam but still clinging to hope, I try to ask questions and make some proposals that would eliminate the risk and give them a chance to legitimise themselves.

Strike 1

Not helpful.

So I propose a few reasonable alternatives to what they’re asking for, hoping to reduce or eliminate the risk while still being fair.

Strike 2

They’re still not happy, so I try one last time.

Strike 3

Not sure what happened to Emily!

That’s where I left it, and we’ve not heard from them since.

Lessons learned

So I’m left feeling incredibly stupid and naive and honestly, a bit sad. These scams prey on greed and hope, and by dangling a massive carrot in front of small businesses trying to scrape by, the temptation is huge.

It’s all so obvious in hindsight, but you get to a point where you just want to believe it’s real.

Beyond doing your due diligence, the best advice is to just trust your gut. Mine screamed scam, and I should have listened to it sooner.

As a final bit of help, here are some red flags to watch out for courtesy of the US government:

  • Unfamiliarity with your product’s application
  • Limited details or unwillingness to provide information on the project in which the materials will be applied or the end user
  • Discrepancies on business cards that cannot be clarified
  • Incomplete information on the purpose of the ‘fees’ outlined in the contract
  • Inability to specifically explain the regulations or government entities that are allegedly imposing certain fees
  • Offers to sell certain internal government information or sensitive commercial information
  • Rented cell phones
  • Location of office space in residential areas
  • Less than one year of operation history with very young leadership
  • Insistence on paying for a banquet in cash to the Chinese entity prior to concluding contract
  • Cash requested for cost of hosting a banquet is far in excess of typical costs.  [While banquets are a traditional business activity, the U.S. entity can arrange for a banquet through their hotel.  While costs vary, a nice event for $10 at a local restaurant (non-western hotel) might run $200]
  • Unusually large product volume or urgency to purchase
  • Insistence that the contract is only legitimate if signed in China
  • Requests for an invitation letter to visit the U.S. facility prior to any substantive communication about purchase terms or exchange of company background information
  • Insistence upon attending a banquet prior to concluding a contract later in the evening, referring to getting the foreigner intoxicated in an effort to finalize contract terms more favorable to the Chinese buyer.

I hope our stupidity can help save someone else from falling for what we nearly went for!