The “Paper Tiger” or the “Parasite” Company Scam

By | May 12, 2016

Today we will be discussing a type of scam that is hard to deal with, as it cannot be solved through simple verification because simple verification would prove the company to be legitimate. Sometimes scammers go through great lengths to gain the upper hand and swindle unsuspecting companies from their hard earned money. The key to these high-risk scams is the kind of connections the scammer has, and how she/he uses them.

From the Canadian Trade Commissioner Service:

“Dear Sir, we saw your product at a tradeshow last month and are very interested in distributing it in China. Our company is one of the largest in China and we have excellent relations with the local government officials as well as many potential clients.”

The Canadian TCS has been informed of cases where, in order to secure lucrative contracts, Chinese companies, often distributors, boast that they are industry leaders with great networks of potential clients or government contacts. In most cases, these companies actually exist and basic due diligence will confirm that they are legitimate. However, unless comprehensive investigation is conducted at the beginning of the relationship, Canadian companies will not find out until later that their new partner doesn’t much clout. While the scammers’ exaggerations may take different forms, the objective is simple: to persuade the Canadian entity to commit to an exclusive distribution agreement and as to secure better contract terms.

On the other hand, a “Parasite” company possesses excellent relationship with a governmental decision-maker, but relies exclusively on that relationship for its business activities. Having good a relationship is not a bad thing for business. But being overly dependent could be problematic and risky, especially when a company relies on a single influential figure for its success. The company may find itself operating in a legally grey area.

How to avoid partnering with a “Paper Tiger” or a “Parasite” company?

 You guessed it! Always conduct meticulous due diligence on prospective Chinese partners. Do not hesitate to ask the company for examples to substantiate their claims or for references from previous foreign partners. Consult informally with other companies in the industry to get a real sense of your potential Chinese business partner.

At CNBizCheck, we help our clients in many ways to conduct meticulous due diligence. We currently have two main products, our basic verification and essential verification reporting service. In the future, we will provide more and more different types of reports for serious in-depth data on companies.


What information is included in “Basic Check”?

Our Basic Check reports are perfect for those looking for basic background information on any Chinese company. This report generates primary information on your target company. This includes information on the validity of the company; including the official company name (in both Chinese and English) as well as the locations of its affiliate branch offices. The Basic Check also provides data from governmental registration materials; including its registration status, the company’s registered address (in both English and Chinese), its registration number, registration expiration date, organization code, and information on the issuing authority of governmental registration. Also included in the report is the target company’s scope of business; as well the Type of corporate ownership. (e.g. Limited Liability Corporation, Incorporated, etc.).

What information is included in “Essential Check”?

Our Essential Check (Basic+) Reports includes all information that our Basic Check reports while also generating in depth legal and director/shareholder information. Shareholders are listed in both their English and Chinese name, along with their holdings amount as well as the date and amount of their latest investment. Directors names (both English and Chinese) are listed along with their roles within the company. In terms of legal information, our product generates information on legal representatives, court notices, hearing announcements, court verdicts, and default public debt.

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