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Scam Alert: Employee Fraud

Employee fraud is one that small business owners are usually too busy to notice; yet, it is one that risk management experts estimate costs every business an average of 8% in revenue. Thankfully, most of the frauds are not part of organized scam rings in China as they are in the West just yet, but things are changing and employers need to be on guard.

In China, there is little regard for quality control when hiring employees through recruiters and agents. They simply want to fill the job as quickly as possible and claim their fee. They focus on sending you an attractive and bilingual university graduate, which in their judgment is what you need. They do no criminal background checks and seldom, if ever, contact previous employers.

When you hire directly, your time constraints limit your interview time and most companies in China have no reliable or legal means to obtain criminal background checks on local Chinese citizens, since such information is not in any public records.  Trying to call former employers is almost futile as Chinese are very big on “face” and usually will only confirm that a person had worked for them, and will not say anything negative.

But statistics compiled by various Chambers of Commerce and China Scam Patrol indicate that 40% of small to mid-size business owners experience substantial theft of inventory and what can best be described as kick-back frauds.

This is a growing scam where local Chinese employees will use their company influence to give anything from cleaning services, to office supplies, to company insurance, and training contracts to either personal contacts or Chinese companies which offer them a 10% “personal rebate” – also known as a bribe. Outsourcing local contracts in China accounts for about 30% of a company’s operating expenses in China.  The fraud rates in restaurants are even higher.

One local Canadian company specializing in production of television commercials for overseas markets, recently caught an office manager making over 5,000 yuan every month in such bribes from suppliers – almost 50% of her already generous salary by Chinese standards.  She had only worked for the company for two years and management considered her to be very helpful, because “she always knew where and how to get everything.” But when China Scam Patrol was called in to investigate 8,000 rmb of missing copy machine toner (traced to another employee) a random “integrity check” of all the employees was conducted and an investigator stumbled across the kick-back scheme of the office manager.

When caught and questioned “Ying” (not her real name) was only a bit embarrassed but not at all ashamed. Her explanation was shocking… “Foreigners have cheated China for hundreds of years so it is no big deal for us to do a little cheating to foreigners.  Besides, inflation is making everything cost more these days and everyone does what I do in China. This is just part of business in China.”

Luckily for Ying, the company’s president liked her personally and did not call the police.  She was quietly allowed to resign for “personal reasons”.  But wherever she lands her next job will probably suffer the same fate. Less than 15% of these employee frauds are detected.  

An audit of Ying’s activities revealed that in just 2011, she had skimmed over 100,000 rmb and acquired another 120,000 rmb of VIP gift cards that were meant for the company president that she had intercepted.  This internal employee fraud is endemic and systemic in China. No company is immune.

Even State-Owned Enterprises are victimized, but small international companies take the biggest hits with this scam. Ying was just one of 3 employees found cheating this production company of over 300,000 yuan per year.  The company only has 21 employees and 13 of them are local Chinese. One of the thieves discovered was a foreigner.

Lastly another secondary big employee fraud takes place after a person like “Ying” moves on in her career to a new employer.  During their stay they will accumulate account numbers with suppliers, banks, as well as company credit cards and if they have access, even HR personnel files.

Perhaps three months after they move on to a new job, they will make a large purchase (like a $20,000 copy machine or maybe 5 laptops) under the former employer’s name and have it delivered to a “new office location” where a ready buyer will gladly pay her $5,000 cash. The HR files can be sold to identity theft rings based in Fujian for 1,000 yuan each.

The good news is that 80% of your employees in China are honest, decent, and loyal employees according to statistics kept by Compass Asia and Global Crossroads two of Asia’s largest HR consulting firms.  Expect 10% of your employees to have integrity issues – this is the norm.

Avoiding this fraud is not easy but there are three preventative measures you can take in Beijing;  1) Check your employees against a blacklist database at ChinaCleverCheaters.com,  2) Always use an outside sub-contracted accountant who will not be close friends with your Chinese staff and offer that accountant a 500 yuan reward for any fiscal fraud he/she spots involving employees, and  3) Let China Scam Patrol conduct a discreet undercover “integrity check” of your employees which takes about 1-2 weeks depending on the number of employees you have.

To date, China Scam Patrol has found this type of employee fraud in 47% of the companies they have worked with.  For details about this scam and related services you can send an email to help@ChinaScamPatrol.org.



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smirk's picture


When this company goes public, I will sell my Disney shares and invest! I only wish I knew about this company two years ago when I got ripped for $65,000 of inventory (upscale lingerie from France & Italy). My trusted Chinese assistant manager (who was working with me for over 18 months and who I thought was a model employee) copy and sold keys to our warehouse to some scumbag on the street. I had no way to fill orders and without inventory to pledge I could not get a bank loan and had close up my business. Nobody ever thinks this can happen to them and that included me. Not any more. In China, most of the surprises in life are not pleasant ones.
new_and_improved's picture


I agree that all business owners expect their employees to steal office supplies from time to time, or maybe a can of coffee or even a laptop when they quit. But these guys caught my accountant skimming last year from our family business (we sell and install external firewalls) to the tune of $60,000 over the last five years! I think Chinese employee thieves are bolder and think bigger than back home. When Alex from China Scam Patrol confronted her in my office he acted so insulted! Then the next day I get a call in broken English that if take legal action against the scum and involve the police "he'd arrange to have my visa revoked!" Really these people have no shame and like someone else said, they think we foreigners were put on the Earth to become their personal ATM machine and fraud victims. I wonder if they cheat each other like they do to us?
78987's picture


Give me a break! This is China, and stealing to Chinese is like eating chocolate to the rest of us. Its something they cannot resist. And can you blame them? I mean they work 10-12 hours a day for crap wages. Employers in China probably expect a third of their employees to be thieves.
d_grabowski's picture


OMG! People aren't allowed to own a small business and have a PT job?!?!? I do part time SAT tutoring on weekends and sell western children's coloring books in China. What's your problem rainbowcat? Get a life!
rainbowcat's picture


@d_grabowski, who "owns a business" here was a teacher working for a Chinese company just a few weeks ago when the Scam Patrol did their article on foreign teachers. Hmm.
d_grabowski's picture


I also had a big problem with a former Chinese employee who I fired for constant absences and tardiness. Her idea of revenge was working for a competitor and ten weeks later I start getting calls from some of my clients that "Ms. Li" was calling them saying I was shutting down the business and they were sorry to hear about my "terminal cancer", and all my accounts were being transferred over to XYZ company where my never-on-time Ms. Li. was working as a sales manager! By the time I sent out emails to all my clients they had already stolen about 30% of them with a price that was 12% below mine. Ms. Li also took my price list along with my database before she left. Too late for me, but I hope people don't think "this can't happen to me" because that is what I used to think as well.
rainbowcat's picture


@dance_masters yeah right it's the most useful article you've read, right after all the other China Scam Patrol articles you commented on praising everything about the service. Shameless self promotion. You'd think the "Scam Patrol" could at least cover u
dance_masters's picture


This is the most useful information I found on your website in months. I have not paid much attention to pilferage but after I read this article yesterday, I just had my assistant conduct an inventory today and we discovered over $40,000 of costumes and video equipment missing and 12,320 yuan of unauthorized purchases! I think we are so busy running our business that we just take our employees for granted.
gloria_s's picture


I hope people pay attention to this article. I lost over $120,000 from a crooked employee and would have probably lost more if the China Scam Patrol did not alert me to an employee who was working with local Chinese art counterfeiters who were selling me great fakes. Because my employee said she worked previously at a famous museum in China I believed her. As it turned out she was only using the name of that curator and was only a tour guide there for 9 months before she came to work for me. If we didn't catch her, I might be out of business by now.
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