What happens when you’re defrauded by your manufacturer? How do you handle it? How do you prevent it from happening? What are the best practices? Here’s a true story I wanted to share with you. It happened to us the other week.
So we’ve got this manufacturer we’ve been dealing with for 5 or 6 years now. They manufacture ceiling fans for us. Normally, our payment terms with them are: we pay a deposit and then we pay the balance after the goods are inspected and before they ship.
Bank Account Change
We recently placed another big order with them. Like normal, we paid the deposit and as manufacturing is going on we start getting these communications from the factory. Not our office, but one of our clients – their office got the communications. They pay the supplier directly.
The supplier started emailing them to say, “please note our payment details had been updated, our bank details have changed, and need to remit the money to our new bank account.
So, of course, they exchanged emails back and forth. Finally, the client said, “OK, update the proforma invoice with the new bank details, send that through, and we’ll remit the payment.” This is a good idea in theory.
Now, they didn’t suspect anything was wrong because all the communication came from the normal person they’ve liaised with for a long time. So it just didn’t seem odd, although some alarm bells did go off. “How come, all of a sudden, they’re changing the bank account details?” Interestingly, the original account was a Hong Kong bank and the new one was in the U.K.
They remitted $30,000 US dollars to the UK bank account.
Following Up After Payment
From there we followed up with shipment documents – “what’s happening with the release of the container?” – and it just started getting awfully suspicious. That’s when our staff called the sales lady at the factory and asked what’s going on.
The lady at the factory had zero idea we had paid or about this change of bank account. She was waiting for payment and had absolutely no clue what’s going on. She asked “when are you going to pay so we can ship the goods out?”
You can imagine our surprise.
So, of course, stirred up a whole lot of emails, conversations, communication, us going up and down to the factory talking to the sales lady, the boss. They absolutely, 100% denied this payment was made. We showed them all the correspondence up and down. And she just looked at it and said, “This isn’t us, this isn’t our bank account. We never sent these emails” And so on.
We’ve Been Defrauded!
This is a bit of a catch 22. What do we do? Our initial reaction was that they were defrauding us. But it actually got to a point where they even went to the police station to report the issue, to prove to us that this is not them and that there was some kind of fraud going on.
So, long investigation. Discussions up and down and trying to resolve the matter. And of course, while we try to resolve it the goods aren’t shipping. So we’ve got this whole delay because they refused to ship the goods. And we weren’t willing to pay the money until we can recover what we had already paid. We also launched investigations at the bank to find out what’s going on and they weren’t being very helpful.
This is just really an absolute disaster. 30,000 US dollars down the drain plus stock that we just can’t get out.
Sophisticated Internal Fraud At The Manufacturer
So what happened was, and this kind of came out after about a week or 2 of investigating this matter, the factory had some internal fraud. They had found that one of their people from the IT department logged into their email server, set some forwarding rules on the emails, searching for keywords.
So what happened was every time a customer replied to their emails, these people were getting them forwarded automatically, and sent replies back spoofing the email address. The sales lady wasn’t getting any of these emails because the mail forwarding was based on keywords. And our client was communicating with the person doing the fraud.
This issue is actually still going on. It hasn’t been resolved yet. But these are the sorts of issues we deal with on a regular basis for our clients.
And I am going to give you a conclusion at the end of this, of what I think should have been done, what should always be done, and how easy I think this could have been to avoid.
Resolution Of The Issue
Where we stand right now is we’re trying to settle this 50-50 with the factory but they’re saying it’s not their fault, it’s fraud, they don’t have money for the goods and they can’t ship out. Which we kind of understand. But at the same time we’re saying, “Well, you had fraud in your company. You need to be responsible for what goes on in your company. We paid the money and it’s not reasonable to just not ship the goods. The client needs it quite desperately.”
We offered a compromise. We said, look, we’ll pay 50%. You bear 50%. Let’s write this off as a bad experience. Unfortunately – I don’t know whether this is Chinese culture or it’s just the business ethics of this manufacturer – they just don’t see that they should be suffering any loss at all if it’s not their fault and they don’t see how somebody committing fraud, whether in their organization or not, is their responsibility. That’s another whole issue I should go into at some point, but I don’t know what the answer is.
As of now, the goods haven’t shipped. We are trying to appeal to them and reason with them. We haven’t gone the legal route because we think this is kind of a commercial issue and legal is going to be expensive and take too long. The reality is we need those goods to ship. I think truth be told, what’s going to happen is we’re going to end up paying again, get those goods released, and be a lot smarter going forward. And hopefully, the factory will compensate us on future orders over time.
Some of the takeaways from this experience I want to share with you
Ultimately as the buyer, and you’ll feel the same in different scenarios, you always feel like the loser. You pay for goods, you order goods, you try to do everything on time. And no matter what the problems and obstacles are that get thrown up, you always end up paying, or you don’t get your goods. There’s always this leverage on you, “we’re just not going to ship the goods.”
This is one of the reasons I really recommend LCs – Letters of Credit – because they help avoid these types of problems. But there is a reality – based on the value or your banking facilities – that LCs sometimes just aren’t possible and you’ve got to just deal with deposits and balance payments. So, it’s a case of mitigating risk. That’s really what it is.
And you know, on reflection, here’s a high-level checklist on how these things should be dealt with:
All Important Manufacturer Details Must Be Submitted Formally, In Writing, Signed And Stamped
Any bank account details, company details that you get should be formally sent to you in the form of a pro forma invoice or a form that the supplier fills out that they sign and they chop with their company chop.
Why do I say that? Because basically when you do your first deals with them, these guys do everything properly, everything legitimately. And it gives you a record of what the signatures on the legal documents are, what the signatures on the bank details are, what their official bank details are, their official company details and their company chops.
Those are kind of the key things that you want to have on record from when you start a business. So, the important thing, then, is to control the changes. Every time there’s a change in the company name or banking details on invoices or documentation – which happens a lot in China for reasons we’ll get into another time, but it really does happen a lot – you’ve always got a reference to go back to.
In fact, we use templates which we share with all our clients, for doing this. It is really an important step.
And any change that gets made needs to be verified. How do you verify this? There are two important things to do. Number one is you don’t verify information changes by email and you don’t always accept information changes by email. Treat an email as a notification. They’re just informing you. And you say,
“OK, noted. But what I need is and official company letter sent on official company letterhead, that’s chopped and signed by the owner or the legal representative and says, please note the following change to the company’s details.”
You want to get that document. So it’s formal, you have it on file and on record. One document. You don’t want to be scrolling through chains and chains of emails for these changes, to have a trace record or to prove your situation later.
You then take that document and compare the signatures, the company names, and company chops very carefully to all your previous documents or your initial onboarding documents with these suppliers and make sure it all matches 100 percent.
Get On The Phone With Your Point Of Contact When There Are Changes
The KEY INGREDIENT here for me is this. With any changes – I include changes of quantity process, banking details, company names etc- of any kind, I would always make a call as well.
So contact the supplier on another communication channel. Not Email. We’ve already seen from our scenario how email can be hacked. There are chat platforms like WeChat or Skype, that are helpful. You can check through there too.
But regardless of those communication channels, it’s very important to pick up the phone and call the supplier. Now, if you’re dealing with Susie at the factory, you always want Susie to be the one that says, “Yes, I’ve sent this.” / “No, I haven’t sent it.” Of course, if Susie is involved in the fraud, you’ll have a problem, but at least you’ll know with certainty that she verbally confirmed and that she’s actually involved. So, it’s much less likely for fraud to happen. So, get that verbal confirmation with people you know and that you know are familiar with the company.
Speak To The Boss
The other thing I would do is try to speak to the boss. Try to get the boss on the phone or even on a video call to verify. “Did you, in fact, sent this? Is your company document?” If he says yes, great. You can go ahead and accept it. It’s really important. This kind of thing happens all the time in China and it’s very hard to validate and verify things.
I think calling the boss, or calling your regular sales rep, will help a lot in avoiding these types of issues. That, and making sure that all the changes are done on a formal document that you can compare the details to the previous onboarding details.
Get As Much Official Documentation As You Can Upfront
The more you get upfront from the supplier, the more you can mitigate risks. So, for example, when we onboard a new supplier, we get their company registration certificate, we check that and verify it online. We ask them for their legal representative.
We ask to fill out our form and we asked him to stamp it and sign it so that we’ve actually got a record of the legal representative signature. We would have a record of the official company chop or stamp for that.
(For those of you who don’t know what a chop is, in China and in Hong Kong, they still use stamps. An official company stamp which makes something an “official” document.)
You can copy chops but it’s important to verify that regardless. It’s an accepted business practice.
I think it’s really important to be very careful, have a very clear onboarding, and get the right information upfront from the suppliers so you can keep it on record. And then any changes must come through an official format with the official documentation and signatories and verified with the phone call to the sales rep and ideally the boss.
So, that’s the story I want to share with you. I wish there was a better outcome where we recovered half our money, where they shipped our goods in good faith while we conducted the investigation. The simple bottom line is the goods won’t ship until we pay and we’re probably going to take a knock here on this issue and hopefully recover something good over time.
And you know, the sad thing is on reflection this could have easily, easily, been prevented. You know, no one actually thought of this particular case, of this type of email fraud or hacking. It just never occurred to anyone. It seemed so legitimate, so reasonable, after so many years with the supplier.
So, it just goes to show that discipline of process is critical and phone call verification is just essential in this day and age.
I hope you found this helpful. If you’ve got any questions or any stories you wanna share with us that are similar, please just email me support at globaltqm dot com. I’d love to hear your stories and offer advice where we can. That’s what we do.
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