The Ultimate Guide to Stealing Money in China...

If you are an a communist party official, the list is much longer! But here it is for the usual business person....

Fraud No1 typically involves a Hong Kong company that buys machinery with a loan from a local finance company. The machinery itself is pledged as collateral for the loan.

The company then moves the machinery to a mainland firm, ostensibly as a way of injecting capital into a wholly owned foreign enterprise.

This second company then uses the same machinery as collateral for a loan from a mainland bank.

``So one asset results in two loans,'' says Lai. Everything is fine with the arrangement until the mainland company's business turns sour and it defaults on its loans.

The mainland bank freezes the assets and auctions them off, leaving creditors of the Hong Kong company without any recourse but to sue.

However, such Hong Kong companies ``are literally shells without their main assets - the machinery. They're meaningless,'' Lai says.

Fraud No2 involves a mainland enterprise that owes money to banks and, despite having a lot of cash, simply refuses to pay its debts. The banks subsequently freeze the assets of the company and arranges for them to be auctioned.

By colluding with the auctioneers, the company can ensure that the public announcement of the sale is so small as to pass virtually unnoticed. And because such auctions are frequent in China, banks are accustomed to accepting far less than the fair value of the assets.

So who is it that swoops in to buy the cheap assets? Often, Lai says, it is the company itself, which then proceeds to set up shop elsewhere under a different name.

Once stripped of its assets, the original company offers little that its creditors can seize to help recover their loans. Again, Lai says, ``the owners simply leave creditors an empty shell and start another business elsewhere.''

Fraud No3 produces a result similar to Fraud No2.

A company that has borrowed heavily to get started but sees its business go south simply starts another company a few blocks away, transferring its client list and its contracts to the new entity, whose name is remarkably similar to that of its predecessor.

The new company will have different shareholders and directors, usually friends and family of the management.

Such ``familial fraud'' is a perennial favorite in China, and new variations are constantly being invented, says Sam Porteous, regional managing director for China at Kroll, a multinational risk consultancy and private investigation firm. ``One of the innovations we have seen lately is that some fraudsters are beginning to have family members legally change their names before participating in these frauds, all the better to further obscure the chain of beneficial interest linking corrupt employees with competing companies or channel partners,'' he says.

Changing names is easy and common in China; some people even do it because they think their names are bad luck. Porteous knows of instances where names have been changed three times or more.

``You've got to be very careful with names in China because people often think they're dealing with big companies with all the assets,'' he says. ``When it comes to signing the contract, they're actually signing with a company whose name is very similar to the big company's, maybe legally associated with it. But if even one Chinese character is different, they're basically dealing with a shell company with no assets.''

Lai says fast name changes are most common among trading companies, whose most valuable assets are their contracts, and restaurants and information technology companies.

``They will usually tell customers their company is not doing well. Then they verbally recommend these customers to the other company.''

Alternatively, they will tell customers that the original company is undergoing a restructuring and the new company is the result of a streamlining of its operations.

Once again, the original company, minus its contracts, will provide very thin pickings for creditors.

Fraud No4 occurs when a mainland company obtains a stock exchange listing in Hong Kong. It then injects the money raised in its initial public offering into a mainland subsidiary, ostensibly for purposes of expansion.

The fraudsters then have two choices on how to proceed. The company may enter into a joint venture with a party that appears to be independent but in fact is related. The joint venture agreement will stipulate that any breach of the contract will result in the payment of huge damages.

The company will then proceed to breach the contract and pay a vast sum of money to the other party in the joint venture, says Lai. Or the other party may take out a writ freezing the company's assets and putting them up for sale at auction.

Another variation on this scam is a joint venture wherein one of the parties injects the capital and the other assumes the task of management - at an obscenely high fee.

Fraud No5 involves inventing fictitious debtors. This requires little creativity, which may be why it is so common. A company in Hong Kong or China offers a customer unusually long credit terms, sometimes more than a year.

``The company's justification for giving such favorable terms is that without them, it would not get much business from the customer,'' says Lai.

The company claims that its debtor, which owes large sums, is unable to pay. This, of course, affects the liquidity of the company and gives it an excuse for being unable to pay its own creditors. In most of these cases the debtor either does not exist or is a related company whose only real asset is its letterhead.

Don't do business in China since the cards are severely stacked against you, particularly if you are honest. There is no justice in China and the only "justice" is available to officials or those that PAY the communist party officials for justice.

None of these scams would be available if the officials in China were not profiting handsomely from them.