A popular way of buying wholesale from China is through Alibaba, the leading e-commerce sales portal. As with any sales transaction there is the risk of fraud, but in cross border transactions an added problem is the cost of pursuing justice for a defrauded buyer in a foreign jurisdiction.

In a typical case a defrauded Alibaba buyer makes a purchase but after sending payment, the buyer receives either junk or nothing and can no longer reach the seller. At first appearance the defrauded buyer has little to go on to trace back the bad guy. In most of these kinds of fraud cases, the Chinese seller is a newly registered entity with little registered capital that uses a fake office address. However, a defrauded buyer can pursue justice and restitution. This short overview is a pointer on how.

Initiating the police report

At the stage of initial contact with the police, there is an important distinction to be considered between fraud and breach of contract. A breach of contract is a commercial dispute. The buyer believes the seller has failed to deliver the goods according to the contractual terms (e.g. the seller ships goods that do not satisfy the stated requirements of the buyer). In contrast, fraud is when the seller intended in the transaction to misrepresent facts to the buyer and the buyer in believing the misrepresentation loses money (e.g. the seller vanishes after payment is made or ships junk).

In commercial disputes, remedy is obtained through civil action (e.g. demand letter, arbitration, and lawsuit) or possibly collection through a debt agency. But in fraud cases, the effective remedy is reporting the crime to the police to catch the fraudulent sellers and secure return of monetary losses.

When confronted fraudulent sellers will reflexively claim that the matter is a commercial dispute to avoid involving the criminal justice system. For this reason, in cases of clear fraud it is advisable to proceed quickly to report to police and ignore last minute entreaties by the suspect to amicably settle. These apparent attempts by the fraudulent seller to settle not only may be an insincere attempt to delay for time but are also designed to create the appearance of a commercial dispute to dissuade police from pursuing an investigation.

Making a report to the local police

When you find yourself defrauded, a preliminary step is gathering enough information to make a police report. Gathering information starts with identification of the location of the suspect’s registered company. If the fraudulent seller is registered in Hong Kong, but operates in mainland China, make the first report with the more effective Hong Kong police. If the fraudulent sellers’ company is registered in mainland China, then the report should be directed to the level of the county (rural) or district (urban) police in the local mainland China jurisdiction where the company is registered.

You should prepare all the documents and quickly report to the police within a matter of a few days. The police may be able to quickly detain fraudulent sellers and therefore maximize recovery by minimizing opportunity for the fraudulent sellers to spend their ill-gotten windfall.

It is difficult for foreign individuals to prepare and file reports and communicate with police. Encountering a new legal system is confusing and local police will only be able to dispense guidance in Chinese. Therefore it is necessary to engage experienced Chinese counsel to work with police in apprehending fraudulent sellers and negotiating restitution.

Checklist for preparing to file a police report

Generally, when you engage a Chinese lawyer to act on your behalf to report the criminal case before the local police you need to prepare the following documents:

Engagement documents

  • Power of Attorney (authorizing the attorney to act as your legal representative);
  • Certificate of Incorporation or Business License of your company.

Evidence (if applicable)

  • E-mails (exchanges and communication log between you and the suspect)
  • Purchase Order
  • Sales Contract
  • Pro forma Invoice
  • Commercial Invoice
  • Insurance Policy
  • Certificate of Origin
  • Bill of Lading
  • Packaging List
  • Container Weight Declaration and Packaging Declaration
  • Third Party Test Report
  • Other Required Evidence

However, each particular case requires the input of legal professional advice to help prepare evidence to accompany a police report.

Overview of criminal procedure process

After you prepare the engagement documents and evidence, your attorney will prepare a written report and engage the services of a local lawyer who has previously worked with the particular police department to meet face to face with the police and urge filing of a criminal case against the fraudulent seller.

After the police review all the documents submitted and meet face to face with your attorney, the police can accept the submitted materials as sufficient. This acceptance of the materials however does not kickoff the investigation. It is merely a prerequisite before the police make the decision of whether to file the criminal report.

Before making this decision the local police will go over the submitted materials and may also conduct a preliminary investigation. The police will file the criminal case on finding jurisdiction over the case and sufficient evidence to investigate a criminal offense. The importance of a local lawyer in persuading police to take further action is critical at this stage.

After the filing of the case, the police will investigate and may ask for the assistance of foreign police departments.

During the course of the investigation the police analyze evidence and may question, detain or arrest the fraudulent sellers. The police can conclude the investigation by taking no further action or referring the case to the People's Procuratorate (prosecutor) of the same jurisdiction for a decision as to seek an indictment against the fraudulent seller. The procuratorate will deliver an indictment against the fraudulent seller if evidence is concrete and able to fulfill the burden of proof to obtain a conviction. In virtually all cases, an indictment will lead to conviction before a court.

Alternative Track – Negotiating a settlement with the suspect

As an alternative to seeking a conviction against the fraudulent seller or in parallel step with the criminal process, negotiation for restitution can be made with the fraudulent seller.

Once put in detention and questioned by police, the realization of serving prison time acts as a strong impetus on the fraudulent seller to settle claims with the buyer. In exchange the buyer can agree to make best efforts to end the police investigation or ask for leniency for the fraudulent seller before the court if the case has advances to an indictment.

According to Chinese law, if an accused person returns some or all of the defrauded money and obtains a written pardon from the victim, her/his criminal responsibility may be mitigated. It’s on this basis that a fraudulent seller looks for a reduced sentence or release from detention by striking a deal with the buyer.

Although a fraudulent seller that has been detained by police is in a poor bargaining position, maximizing the settlement amount is still a challenge for the buyer. The fraudulent seller may have spent some of the stolen money and will claim to not have enough for full restitution. During these negotiations an experienced local attorney can assess the financial situation of the fraudulent seller and determine whether the full extent of available resources (e.g. property, real estate, and help of family members) is being offered for restitution.

One strong indication that the fraudulent seller has exhausted available resources is the extent that the fraudulent seller’s immediate and extended family make contributions. If a family member of the fraudulent seller provides a mortgage over real property or liquidates real estate assets to pay for restitution, then it’s likely that the fraudulent seller has cobbled together the maximum possible restitution payment.

Typically the buyer will in exchange grant a release for the fraudulent seller from criminal responsibility by signing an agreement to stop cooperating with the police investigation.

It’s up to the police whether to stop an investigation and if a case is already referred to the procuratorate that office also has the discretion to either indict or close the case. However, there is no obligation by the judicial system to follow the wishes of a settlement agreement between the buyer and fraudulent seller, and the police and procuratorate may well continue the case despite a private deal between the parties. Nonetheless if the case does proceed to sentencing before a court despite the settlement, the court will consider payment of restitution as a mitigating factor in sentencing.