Supplier Payments: Dangers of sending money to a 3rd party or Hong Kong sister company.
Red Flag: Sending money to a Chinese supplier via their HK account
In my video tutorials on safe payments, and as explained in my book on China sourcing, it can be very dangerous to send funds to a 3rd party rather than direct to the supplier in China, unless you have specifically stated on your contract that funds sent to the 3rd party are considered payment to the Mainland supplier.
Many buyers don’t know the danger they are getting into when the seller casually says “we can give you a discount if you send the funds to our CFO’s private account so we can avoid tax” or even more common “please send the money to our parent company in HK for accounting purposes”. Sadly, buyers don’t realize that HK entities and their Chinese subsidiaries are very much at arm’s length! And sending money to a supplier’s personal WeChat account is downright stupid.
Here is an excerpt from my book that explains the dangers in detail:
I have seen situations where the buyer takes the seller to court because the product had bad quality or was delivered late, but the case was lost because (even though the buyer had clear signatures on the invoice, PO, and warranty terms) the mainland supplier claimed that the PO was never activated because no funds were received to their corporate account. They say “how can we be help liable for an order that was never paid for?”.
The buyer flips out because they have a signed PO and 100’s of emails that appear to link the HK account to the Chinese company. But when the Chinese judge asks to see proof of payment to the mainland company that is signature party to the contact, the buyer can only show a payment to a Hong Kong company. Even though that HK company account was given to the buyer by the Chinese seller (and even if the name of the HK company is the same name as the China company!) the judge will say there is no proof of payment to the Chinese company and you should go to HK to sue that HK company.
Guess what happens when you get to HK?
The HK entity claims they have no idea what you are taking about (of course they really do!) because they have no signed contact with the buyer nor any direct email communications. Good luck getting your money back.
Long story short, as I preach over and over again in my presentations and tutorials, make sure the address on the bank account matches the address of the supplier listed on the contract and ideally the address is also the actual site of production.
Related Content:
- The Essential Reference Guide to China Sourcing
- Contracts that actually protect the buyer while being fair to the seller
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).