Sourcing from China: Supplier Due Diligence, Factory Audit & Anti-Fraud Guide
Successful sourcing from China starts with rigorous legal due diligence before you release any prepayments. Every year, overseas buyers lose substantial funds to shell companies and payment scams simply by failing to verify their Chinese supplier’s official legal identity.
This page is part of our Legal Services for Foreigners in China.
Supplier Due Diligence
Supplier due diligence starts by checking the official business license and confirming whether the entity you sign the contract with matches the factory bank account holder. Shell companies and middlemen often hide behind factory websites.
Start with the Chinese name. English names on websites, marketplace profiles and invoices are not legal identities; your contract, invoices and the receiving bank account should all show the same registered Chinese entity. Most of the basic checks can then be done from public Chinese-language sources:
Business Licence and Status
Check the Chinese name, unified social credit code, legal representative, registered capital, business scope and operating status on the National Enterprise Credit Information Publicity System.
Litigation Records
Search published court judgments for disputes with other buyers, quality claims or unpaid debts.
Judgment Debtor Lists
Check whether the company or its legal representative is listed as a judgment debtor or a dishonest judgment debtor.
Penalties and Credit
Look for administrative penalties, abnormal-operation listings and credit records on official credit platforms.
Bank Account Match
Payments should go to a corporate account in the name of the contracting entity, not a personal or unrelated third-party account.
IP and Certifications
Verify claimed patents, trademarks and product certifications on the issuing authorities’ databases.
For larger orders, a check of the registered address and of the shareholders and related companies can add further assurance.
Factory Audits and Site Visits
Factory audits verify production capacity, quality control and compliance status. An audit can reveal whether the supplier truly owns the manufacturing facility or subcontracts all production.
An audit or site visit can be carried out by your own staff, a third-party inspection company or a local representative. Useful points to confirm include:
- The premises are owned or leased by the company you are contracting with
- Headcount, production lines and equipment are consistent with the stated capacity
- Moulds and tooling for your products exist and are identified as yours where you paid for them
- Quality control records, test reports and certifications are genuine and current
- Which processes are done in-house and which are subcontracted
Also check how the goods will be exported. Some factories rely on export agents, which can change who issues export documents and who is legally responsible to you.
An audit is a snapshot. It does not guarantee future quality, so keep inspection and rejection rights in the contract.
Anti-Fraud: Common Scam Patterns
Critical risks include IP theft, quality non-conformity, delayed delivery, fake chop fraud and unauthorized subcontracting. Payment fraud in particular tends to follow a few familiar patterns:
Changed Bank Details
An email, apparently from your supplier, announces a new bank account. Hacked or lookalike email accounts are a common cause of lost payments, so confirm any change by phone using known contact details.
Lookalike Domains
Scammers register domains and email addresses that differ from the real supplier’s by a single character.
Trading Companies Posing as Factories
Trading companies may use factory photos and websites. Compare the business licence scope and address with what you are told.
Fake Chops and Documents
Forged chops, licences and certificates can look convincing. Verify the information independently against the issuing authority’s records.
Other red flags include prices far below the market, pressure to pay urgently, refusal of video calls or visits, and requests to pay a personal or offshore account.
Procurement Contracts, Quality and Inspection
Your procurement contract must set clear inspection rules, rejection rights, IP ownership and dispute resolution clauses. A typical order flow that keeps you in control looks like this:
- NNN agreement. Sign a non-disclosure, non-use and non-circumvention agreement before sharing designs.
- Sample approval. Approve a golden sample, signed or sealed by both sides, as the quality reference.
- Contract signing. Sign the contract with the supplier’s company chop, using its registered Chinese name.
- Deposit. Pay a proportionate deposit to the contracting entity’s corporate account.
- Pre-shipment inspection. Inspect against agreed standards, for example using an AQL sampling plan.
- Balance and shipment. Release the balance only after inspection results are accepted.
Inspections can be scheduled before production, during production or before shipment. The contract should say who appoints the inspector, who pays, and what happens if goods fail.
For drafting, governing law and dispute clauses, see China Commercial Contracts.
Customs Recordation and Trade Disputes
If your product designs or brand are at risk of counterfeiting, securing IP protection in China and recording your registered rights with the General Administration of Customs (GACC) can help stop infringing goods at the border before export. When a dispute arises over defective goods, late delivery or a lost deposit, act quickly: preserve chat records, contracts and payment evidence, send a formal demand, and consider whether arbitration or a court action in China, with asset preservation, is realistic.
A judgment or award is only useful if the supplier has assets that can be reached, which is another reason to check the supplier before you pay. Many Chinese suppliers have no assets abroad, so a foreign court judgment may be of little practical use; a forum in China, or arbitration producing an award enforceable in China, is often more realistic.
How We Can Help
Our lawyers provide online legal guidance for overseas buyers on supplier due diligence in China, IP registration and NDA/procurement contract risk review. We help you structure agreements to reduce fraud risk when sourcing from China, without requiring you to establish a Chinese legal entity.
Frequently Asked Questions
Why should buyers perform supplier legal due-diligence before paying deposits?
Many fraud cases involve shell companies or middlemen posing as real factories. Verifying business-license identity helps avoid losses from fake suppliers.
What key points should a procurement contract for Chinese manufacturing cover?
It should cover product specifications, acceptance criteria, IP ownership, inspection rights, delivery terms, liquidated damages and agreed dispute-resolution mechanisms.
Do I need to set up a Chinese company to purchase goods from Chinese factories?
No. Overseas entities can source products directly from China without establishing a local legal entity.
My supplier asked me to pay into a new bank account. What should I do?
Do not pay until you have confirmed the change through a known phone number or another independent channel, and check that the account belongs to the contracting entity.
What can I do if the goods arrive defective?
Document the defects promptly, notify the supplier in writing within the contract’s inspection period, and rely on the rejection and remedy clauses in your contract.
Can you complete sourcing-risk assessment purely online?
Yes. Supplier document review, contract risk assessment and anti-fraud legal advice can all be delivered remotely to overseas buyers.
Talk to Us Before You Pay
Checking a new supplier, or dealing with a problem order? Speak with our legal team before you pay.
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