How to verify a business entity in China?

Bez kategorii | 6 June 2024

We advise on how to verify a Chinese company before entering into cooperation with it. There are scammers in China, just like there are scammers in Poland, Czechia, Slovakia, and Hungary. It has always been this way and will probably always be. The entrepreneurs finds themselves in a decidedly uncomfortable moment when they have to make significant transactions in a place where they feel unsure. To some extent, it should be expected that this moment is the best time for potential fraud. How not to be deceived in this case? All it takes is a bit of common sense and knowledge about how some institutions operate in the People’s Republic of China.

Verifying a Chinese company — step by step

Verifying a business partner from China may seem like a daunting task. We establish contact. We agree to the terms. We receive a contract indicating a party we don’t know in English, sent by a Chinese citizen with a grotesquely sounding American name. What to do with this information?

  1. What to ask?

Before signing a contract, we must ask about the license – the so-called business license (营业执照) and for a scan of the identity card of the authorized representative. This will significantly facilitate identification. Neglecting this obligation will condemn us to organize an investigation solely based on the name of the entity. Not knowing Chinese can make this time-consuming and burdensome.

  1. NECIPS

The National Enterprise Credit Information Publicity System is a website that can be found at: www.gsxt.gov.cn. It serves a function similar to company register. How to check a company from China? By entering the company’s name (or even more convenient – the registration number) in the search engine, we can obtain information about its capital, representatives, structure, registration date, licenses, or issues. The website is, of course, in Chinese, but using automatic translation of the page can at least provide us with basic information.

  1. Real names

It is good to know the name of the entity with which you are entering into a contract. Not only to know its name in the Western market but also to note down the name in Chinese – under which the company will most likely be registered. The same applies to representatives. They will usually use an Anglo-Saxon name, but it is good to be aware of how this name should look in Chinese. It is essential to ensure the use of real names in the contract we intend to sign. The Chinese translation alone may not be sufficient to identify the entity, and therefore, verifying a supplier from China may not be possible.

  1. Legal representative

It is obvious that not every employee of a company has the right to act as its representative, sign documents on its behalf, and incur obligations. Unfortunately, a classic problem is the situation where the contract with a Chinese entity is signed by an incorrect person. In NECIPS, the legal representative’s name is explicitly stated, so it is worth taking a moment to compare whether the person signing on behalf of the Chinese company in our contract is the same as the person indicated by the system. If not, it is essential to draw our counterparty’s attention to this and not be persuaded to accept the signature of another person. At the same time, it is possible to designate a suitable contact Person for each party, i.e., a person to contact during the execution of the contract – without the need to contact only the person whose signature is on the contract.

  1. Seal

The Chinese seal culture is a separate topic for discussion. From our perspective, it is confusing, but in the eyes of citizens of the Middle Kingdom, the seal often has greater significance than a handwritten signature. The designs of seals that companies can use are strictly regulated. If they contain English words, they are most likely not the authentic seals required for the validity of the document. It is also worth visually analyzing whether the text written in a circle is identical to the name of the Chinese company.

  1. Ordering a report

On the Central and Eastern European market, there are at least a few companies dealing almost exclusively with assessing a specified entity in China. Their actions are, of course, much broader than what one can do on their own, but they should not be treated as answers to every existing problem. There are cases where clients have conducted such an analysis, yet legal complications have arisen along the way. In practice, it is standard office procedure to first check information on ongoing legal or administrative proceedings against the entity, which may not always be found in the mentioned report. However, it is worth considering this option depending on our need for security.

  1. Export documents

Companies engaged in exports in China must have two documents: the China Customs Registration Certificate (中华人民共和国海关报关单位注册登记证书) issued by Chinese customs authorities and the Foreign Trade Operator Record (对外贸易经营者备案登记表) issued by MOFCOM (Ministry of Commerce). Based on this, they can apply for the so-called export license, which should be noted in NECIPS. Otherwise, it is worth asking the other party for these documents.

For larger orders, for example, it may be reasonable to ask for a product sample first. Not only will we have the opportunity to check the quality, but we will also see how the money transfer works for smaller amounts and how quickly the producer operates. If they refuse to send one, the question arises about their attitude towards the entire undertaking.

Summary

In our practice, we have encountered each of the cases described above, and they are by no means unusual. Verifying an entity is an absolutely necessary start to any matter, which is usually severely neglected. It is worth spending an additional day analyzing the level of trust we can place in our potential business partner, instead of getting entangled in suspicious contracts and trying to recover lost money six months later. If the issues discussed in the post have interested you, check out other articles published by our blog about China. We cover important economic and legal issues of this country, such as trademark registration in China, company registration in China, or digital yuan.

Karol Czekałowski

He specializes in Chinese civil law and private international law. He is a graduate of the Faculty of Law and Administration of the Jagiellonian University, where he defended his thesis on the New Silk Road. In 2017, he graduated from the CLTE programme at the China University of Political Science and Law 中国政法大学, he has repeatedly presented at conferences in Beijing, and is a scholarship holder of postgraduate LL.M studies in Chinese law in the People’s Republic of China. He has been a board member of the Chinese Law Association since 2018 and president of the association’s board since 2022.

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