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Giving China Due Diligence Its Due, Part II. Don't Be A Sucker.

By Dan Harris and Steve Dickinson

I could tell you story after story that would cause your toes to curl. And I will. Some of these are composites, but all are true: 1. Sixty year old Illinois farmer contacts us to tell us that his 22 year old (absolutely unbelievably gorgeous "girlfriend" -- I saw the pictures) is being told by the Moscow airport authorities that she cannot leave the country without putting $10,000 into a bank in Russia to prove she has an intent to return. I tell Illinois farmer (all of this for free) that I have never heard of such a thing in Russia and that it sounds really fishy to me. Farmer gets mad at me and when I email him a few months later for an update, he never responds. We also every once in a while get contacted by someone who, for example, has absolutely no experience in the oil and gas business or with anything international, but for some completely unknown reason, is the only person in the world appropriate to help close this $230+ million deal (it's always some strange number) oil and gas deal. This person wants us to handle the legal work for a percentage of the deal and when I tell them no and that the whole thing sounds fishy to me, they fight me on it. Our new policy is to ignore these sorts of contacts and simply say we do not do this kind of work. We have learned that telling these people of our suspicions only makes them mad. They are living in a dream world and they just do not want us to pop their bubbles. This was/is also true of many of the people I discuss below. 2. Pretty much every single month someone contacts us to help them get their money back from a "lawyer" in China or Russia that has taken their money (usually between $3000 and $8000) to do something in China or Russia and then has fallen completely off the radar. At least half the time, these people mention that they have already written some arm of the Chinese or Russian or American government and/or some Chamber of Commerce somewhere and now they want to hire us to get their money back and to report this "lawyer." We tell them that our minimum fee on such matters is so high that it will not make economic sense for them to hire us, they oftentimes respond by saying they are surprised we are not willing to help out on these things in order to protect "the profession." At which point I tell them that we have never had an experience like what they are describing with any Chinese or Russian lawyer and that the odds are overwhelming that the "lawyer" to whom they sent their money was not a lawyer at all, but just someone posing as a lawyer to get their money. I then mention that if we were to take on for free every incident where an American had sent away money to Russia or China without having conducted even the most basic research beforehand, my firm would be doing nothing but that and we would be out of business. Their response (and I am not kidding here), is usually, well I just thought you would WANT to do something about this. They then sometimes ask us how they can go about reporting the offending "lawyer" to their country's bar association and would we help them with that. I very patiently tell them that I do not know how to do that and that we cannot help them without spending hours reviewing their matter because we are not just going to go off and report a lawyer to a bar association without having solid evidence on which to do so. I then tell them that I seriously doubt that the person who did this to them is really even a lawyer in the first place because, though it is possible, it is pretty much unheard of for a lawyer in China or Russia to devote so much of their lives to education and then to securing a license and then risk all that for such a relatively small amount and the odds are overwhelming that the person who did that to them is not a lawyer. About 25% of the time they then accuse me of protecting their own. 3. Pretty much twice a month, we get contacted by someone who has paid money to a Chinese manufacturer (usually between $10,000 and $40,000) and received either nothing in return or counterfeit product, not anything like what was promised. Again, they are coming to us after having written some arm of the Chinese and/or American government and/or some Chamber of Commerce somewhere and now they want to hire us to get their money back on a contingency fee basis. I tell them that there is no way my firm can make money taking these sorts of cases on a contingency fee basis as we would need to spend hours reviewing the documents to see if their is a case and then hours hunting down the right lawyer in China to pursue the case and then we would need to negotiate a fee split with the lawyer in China and, anyway, and then there are the filing costs, etc. About half the time they then mention how they had heard there are no laws in China anyway. I then tell them that our position on their case would be the same in the United States because it is difficult to sue people/companies anywhere in the world when those people/companies use fake names and are constantly shutting down and opening up anew. If I am in a particularly bad mood and if I have found their nemesis online, I will note something like how the money they sent went to one city in China (or in Malaysia or in some other country) while their website claims they are located somewhere else. 4. Every couple of months we get contacted by someone who has gone to China (sometimes Korea too, though far less often) on a job that was to pay x dollars a month with nice housing, only to find that they are either not getting paid, are getting paid less, are being required to work 40 hours a week, not the 20 promised, or that the nice apartment they were promised is a not so nice apartment they are required to share with two others. And what can they do about it. I very nicely tell them that probably the best thing they can do is try to find another job or just come home. 5. And then there is the fake lawyer for the ten Americans being held in Haiti for seeking to take a number of Haitian children out of Haiti. Not only did they hire as their attorney someone who is not a Haitian lawyer and, it now appears, not a lawyer anywhere, they hired someone who is wanted in a number of countries on human trafficking charges. Somewhere I read some relative of one of the ten saying they had retained this person because he had offered to represent the ten for free and they thought he was a good Samaritan. I don't know about you, but if my ass were sitting in a squalid Haitian jail, I would be a hell of a lot less concerned with the intentions of my "attorney" than with his competence. Did it not even occur to these people to try to get the best attorney possible? Seriously. Damjan DeNoble over at Asia Health Care Blog just did a post on someone he knows who appears to have been caught up in a China job scam. The post, entitled, "Wanna be doing health in China? Beware of red flags (of the minesweeper variety), expect lots of improvisation," talks about what drew this person in and then comments on the plethora of red flags. This person initially contacted Damjan and he told her not to do it:

A few weeks ago, a recently graduated college student wrote me an email saying that she was coming to China, and was looking for a job doing something healthcare related. She had some contacts in Chengdu and some vague promise of a work lead though that contact had gone cold in the weeks leading up to her flight. The lead had made some promises about giving her a large role in their organization. My immediate advice was to scrap the Chengdu idea and go to either Shanghai or Beijing because her work lead would very likely materialize in nothing. It is my experience that any company willing to give someone straight out of college, who had never been in China, an 'important role' is not worth working for. Either the company is staffed with crooks, or with people who don't have any idea what they are doing. In Beijing or Shanghai she would at least have the luxury of a large English speaking population to fall back on. In this case (unfortunately, since I was/am pulling for this person) my warnings came to pass.

The person who was to go to Chengdu wrote the following:

A week before I was scheduled to leave for Chengdu, the night before New Year's Eve, I received an email from my contact there. The startup company I was to work for, XXXX, had encountered a series of issues. Their goal is to open 100 health clinics in rural areas of the Sichuan province - at international standards of care - in the next 5-10 years. .. The first was that the doctor responsible for overseeing and training the medical staff was forced to take a one to two year leave of absence due to a family emergency. The second was a delay in the opening of the first clinic. The executive team had sought to open this pilot clinic in September 2009. But, due to some bureaucratic issues and because they wanted to find the best possible location for this clinic, they had not yet been able to open it. ...There were a few other minor issues that combined with these two larger ones caused the Board to call an emergency meeting, culminating in a decision to cease operations, effective January 1st. This decision was quite unexpected and threw many lives, including mine, into disorder. After extensive conversations with members of the executive team, we decided that the role we had initially discussed for me was no longer plausible, and that it would be best for me to pursue an opportunity with another organization.

Damjan then writes of how there are countless red flags in this paragraph that are obvious to anyone has been to "China before, or worked with real world start ups in under regulated regions before:

Flag 1: Company XXXX has a very sloppy website with little information. Flag 2: 100 health clinics in 5-10 years? Really? International Standards of Care? So that means that they are going to be staffed with doctors and nurses? In rural China? Really? We can't even do that in the West.... Flag 3: The team was looking to open 100 clinics but did not anticipate bureaucratic issues? Sounds like they did not get a very good Chinese partner to me. Flag 4: 100 clinics and its a start up? really? Flag 5: There was a single doctor assigned to training medical staff? One doctor? Really? Flag 6: And this is the big one. Giving a role to someone straight out of college with no medical/hospital experience. You can't overlook that one. *It took me a lot of time to figure out that under the circumstances, my college education was not worth very much to anyone who would be worth very much to me. In general, I found that the people reluctant to give me a lot of responsibility were the ones who had the best grasp of what they were doing. So, for anyone fresh out of college, coming to grips with their own sense of worth in the world, remember the importance of working with people that are capable enough to give you less than what you think you can chew.

The best thing anyone can do to prevent these sorts of things from happening to them is to find out more about the people with whom you are dealing, analzye what you are doing and not ignore the red flags. And if you do not know enough to know what might be a red flag with respect to what you are doing then you should either bring in someone who does or seriously consider not doing it at all. This need for due diligence is definitely not confined to China, but it does increase when doing business internationally. It will always be easy to get away with things when there is a border and a foreign language to protect you. In contrast to the above, and just by way of example of the sort of thing that one can do to prevent the above sort of things from happening, is what I did the other day for a client who asked me to help his company go into Haiti soon. Because neither I nor my firm have any Haiti legal experience, I determined we would need a really good Haitian lawyer. I found a lawyer at a top national law firm who discussed having worked on a legal matter in Haiti. I contacted him and he gave me the name of a Haitian lawyer with whom he had worked and been very much impressed. I then contacted a number of lawyers I know in other countries in the Caribbean and got the names of more lawyers and then emailed back and forth until I now have the names of two lawyers in Haiti that are clearly highly regarded by those I know to be smart and trustworthy. All this took about an hour. Do you have any due diligence stories, good or bad? UPDATE: A reader sent me a link to a China Solved post that nicely sets out the following as some of the things you can/should do in performing due diligence on your China partner: -- Reference checks are not only possible - they are a MUST. Check every company on your future partner?s CV and any foreign client he claims to have worked with. Call each one of them and don?t be shy about asking for any type of information. If you are afraid of hurting your future partner?s feelings ? DON?T BE! Professionals with nothing to hide will not be offended. If he has something to hide and you don?t do a thorough background check, your feelings and pocket will be hurt badly! It is your business on the line, so don?t feel uncomfortable. -- Check the business license of your future partner to find out if he is on any black lists of the tax bureau, banks, customs, trade office etc. If you feel that you cannot do it yourself, use professional help to do it for you. It is a worthwhile expense that might save you a lot of money and trouble in the future. -- Make sure your partner has relevant experience in your industry or a related industry. Don?t be shy about asking technical questions to see if he really knows what he is talking about. -- Don?t rush into a relationship with any partner of any kind. China was here 5,000 years before you came and will still be around for another 5,000 years. Don?t make irresponsible decisions that you will later regret. Don?t sign - or promise to sign - any agreement or any document under pressure or in unsuitable environment such as: in a car on the way to the airport, in the KTV, in the Sauna, after 20 glasses of wine or other alcohol etc.

Full post as published by China Law Blog on February 16, 2010 (boomark / email).