Protect Your Business from China Supplier Scams and Fraud

Here are some common scams and frauds that small businesses may encounter when outsourcing production and engaging OEM in China:

Quality scams

In this scam, the Chinese supplier or manufacturer provides samples that meet your quality standards, but the actual products delivered are of substandard quality. 

 

To avoid this, ask for references and samples from previous customers, conduct quality checks before finalizing the order, and include specific quality requirements in the contract.

Production capacity scams

This is where the Chinese supplier or manufacturer exaggerates their production capacity, causing delays and quality issues.

 

To avoid this, ask for production reports and schedules and verify their production capacity before finalizing the order.

Payment scams

This is a common scam where the Chinese supplier or manufacturer takes the payment but never delivers the goods.

 

To avoid this, use secure payment methods, such as escrow services, and only pay a deposit before receiving a written contract.

Intellectual property theft

This is a growing concern, where the Chinese supplier or manufacturer copies or counterfeits your products or brand.

 

To avoid this, register your trademarks and patents in China as early as possible, include non-disclosure and non-compete clauses in the contract, and conduct regular IP audits.

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  • Advanced precaution: To mitigate the risks of scams and fraudulent activities when outsourcing production and engaging OEM in China, it is advisable to conduct due diligence on the prospective supplier or manufacturer before making any deals.
  • Remedial action: In the unfortunate event of falling prey to a fraudulent scheme orchestrated by a Chinese supplier or manufacturer, it is imperative to seek prompt legal assistance to safeguard your interests and enforce your legal rights.

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Legal Q&A

What legal steps can I take to protect my intellectual property when outsourcing production to China?

To protect your intellectual property (IP) when outsourcing production to China, you should consider taking the following legal steps:

  • Register your IP in China
  • Conduct due diligence on potential suppliers and partners
  • Include strong IP protection clauses in your contracts

How can I verify the qualifications of a Chinese supplier?

To verify the qualifications of a Chinese supplier, you should consider taking the following steps:

  • Request documentation of their licenses and certifications
  • Conduct on-site inspections
  • Check with industry associations and regulatory agencies

What should I do if I discover that a Chinese supplier has committed fraud?

If you discover that a Chinese supplier has committed fraud, you should consider taking the following steps:

  • Gather evidence, such as documentation of fraud, communication records, and financial records
  • Consult with a legal expert who is familiar with Chinese laws
  • Consider filing a lawsuit or demand letter to recover damages

Can I use my own contract template when outsourcing production to China?

Since Chinese contract law has unique requirements and provisions that may not be included in your template, we recommend that you have a local lawyer draft a tailor-made contract that takes into account the specific requirements and considerations of your production arrangement.

If you do decide to use a template contract, it’s important to have a legal expert review the contract and ensure that it complies with Chinese law and includes necessary protections.  Both contract drafting and contract review services are provided by vetted lawyers on Trustiics.  

What agreements should I sign when planning to outsource production to China?

There are two primary agreements that may be relevant when outsourcing production to China:

The China NNN Agreement: This agreement includes non-use, non-disclosure, and non-circumvention clauses, which prevent unauthorized use or disclosure of your intellectual property and confidential information.

 

Manufacturing Agreement: A contract that sets out the terms of the manufacturing arrangement, including the scope of work, quality standards, payment terms, and delivery schedule.

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