How to Get Cheated Every Time: Ignore These Warnings

by Brendon Carr

(This was originally published at the Marmot’s Hole weblog December 5, 2005. But it’s timeless, and anyone considering trading with Korean residents ought to read and heed. Probably this is good advice for China too, but I don’t know the patterns of doing business with Chinese. What I describe below is absolutely typical for disaster-story credit losses based on my experience.)

I am constantly consulted by foreign businesses who got suckered by “the Koreans”. By that time it’s usually too late for these poor bastards.

My advice for people doing business for the first time in Korea: CASH ON THE BARRELHEAD. NO CREDIT, NO WAY, NO HOW. Not because Koreans can’t be trusted (if 99.9% of 50,000,000 Korean people are completely honest, that leaves 50,000 bastards you can’t trust — lots of ways to get cheated) but because the legal system leaves no remedies in the case you are cheated.

The story always goes thus:

Mr. Kim: “Here is Kim, CEO of Kimsco World Incorporation, CO., LTD. We big company in Korea, know many people in government. Now we have big project bid going and Kimsco will order 10,000 of your esteemed company’s prestigious widgets. Please must to give good price and quick delivery. Project gonna very urgent now.”

Suckercorp: “Thanks for your inquiry Mr. Kim. 10,000 units at unit cost $100 each will come to $1,000,000. Please make payment by telegraphic transfer or irrevocable letter of credit, or bank guarantee.”

Mr. Kim: “Your price very high. We are contacting your competitor now. Please to cut price unit cost until $70 each. We have big order later on; many more projects here in Korea. Kimsco World Incorporation CO., LTD. now business very good. Don’t worry — my friend Mr. Han will sign contract. I am using his name for company due to unfair government harassment. But don’t to worry about that.”

Suckercorp: “That will be a stretch, Mr. Kim, but we can do it. Please transfer US$700,000 to us.” (Geez, this sale is kind of a loss leader, but this will be my first inroad into Korea, and soon I’ll be selling to all the Korean companies! What a goldmine! I’m going to be a hero here at Suckercorp and the richest salesman in Springfield!)

Mr. Kim: “Bid very urgent now. Government says we must have product before bid can be approved. But my friend (very powerful in government) says we will win if we have your widgets. Now very urgent. Don’t worry about payment. All under control.”

Suckercorp: “Okay, Mr. Kim. Because this is so urgent and we value your goodwill, we have shipped 10,000 units to you. I’ve upgrade shipping to FedEx air freight; don’t worry — we’ll be responsible for that extra cost. We’re looking forward to working with you. Please advise on payment.” (The air freight touch is genius! I’m going to be rich off all those future commissions!)

Mr. Kim: “Thank you for quick shipment well received. Bank L/C or guarantee too expensive. We will pay by T/T much cheaper. But now economy not so good, all SMEs are difficult now. Please to must understand our situation. Can we reschedule first payment $100,000? But still need 10,000 more units of widgets for big contract. Once bid approved Kimsco will need second supply top urgent.”

Suckercorp: “Umm. Well, I guess so, but what’s the date of this first payment again?” (Should I do some due diligence on this guy?)

Mr. Kim: “Cannot schedule first payment now. Economy still bad. Please you must understand our Korean special situation.”

Suckercorp: “Hey, Mr. Kim, we are willing to work with you on payment. Can you make a first goodwill payment of US$50,000?” (Getting worried now. Maybe I should check this out and get legal advice. What, that greedy lawyer wants $300 an hour? Screw that.)

Mr. Kim: [no response]

Suckercorp: “Mr. Kim, we’re becoming concerned. You’ve not kept any of your promises to us, and we are considering legal actions against you.” (Hmm, but $300 an hour is too damn much to spend.)

Mr. Kim: [no response]

Suckercorp: “Mr. Kim, respond immediately or we will commence legal actions against you.” (Why isn’t this guy answering e-mails or the phone anymore?)

Mr. Kim: “So sorry, Mr. Kim is on important overseas business trip and cannot respond. He will be back in six months. What hotel he in? We don’t know. Please don’t to bother us anymore.”

Suckercorp: What the hell? Maybe we should talk to that lawyer and do some due diligence. What’s the headquarters address of Kimsco World Incorporation CO., LTD.? Oh here it is: Doosan Bears Craptown Officetel, Guro-gongdan, Guro-gu, Seoul.

Brendon: Dude, you’re cooked.

I want to make sure that this information gets recorded so others might find it later and avoid the disaster foretold by the typical pattern I describe.

That story I made up above based on my experiences here, has about a million screaming red flags in it:

HURRY, HURRY - Speed kills. Slow it down.

“FAKE NAME” PROBLEM - Mr. Kim says in passing that Mr. Han, his friend, has “lent his name” as Representative Director of the company but that Kim is the real principal. This is common, but anyone sensible would ask why Mr. Kim needs to obscure the ownership/management of his company. What is he hiding from? This is one of the first red flags one could catch if legal counsel is consulted early.

BUSINESS ADDRESS - Although this was discovered at the end of my fictional tale, if Kimsco were indeed a major business its address would probably not be over there in Guro. A quick call to a knowledgeable and frank foreign or Korean lawyer (call the foreign lawyer!) could give one this judgment.

IS IT A REAL COMPANY? - And of course, we would pull the commercial register of the supposed “Kimsco World Incorporation CO., LTD.” to check if it exists at all. It’s available on line and costs us $1.00 to pull (and then my usual hourly rate to analyze and counsel). It’s surprising how often we find the company doesn’t actually exist.

NO CREDIT - If local banks and guarantee insurance institutions won’t extend credit to Mr. Kim, there’s probably a good reason. They know the limits of the local legal system better than you do — follow them. Any Korean counterparty who cannot pay in advance by T/T and cannot arrange intermediation by a trusted financial institution is not worth the risk. The banks are here in Korea and have much more staying power than a foreign company selling from offshore; if they won’t extend credit why should you?

BIG TALK - People who try to get over on you now with promises to make it up in the future are exploiters and cannot be trusted. It applies equally to sales of goods and services. Customers who ask for a concessionary rate now so that the vendor can get future work at full price are liars: Giving in to that game establishes one as an easy mark for exploitation.

MISSED FIRST PAYMENT - This is the big one. If there is no first payment, there will be no later payments either. You wouldn’t believe how many foreigners get burned by this one and reschedule again and again, all the while continuing to supply more goods or services to the Korean customer. (There’s another version of this one where the canny foreigner insists on partial advance payment: That first payment is made, because otherwise goods won’t be delivered. After that, no more money is released.)

ECONOMY NOT GOOD - We have been hearing versions of “economy not good” as an excuse for for eight years. You should translate it into English as “I’ve mismanaged my company into bankruptcy.”

PLEASE UNDERSTAND OUR SPECIAL SITUATION - Everyone is special. This means “I’m not taking responsibility.”

UNAVAILABILITY DUE TO BUSINESS TRIP - This one always cracks me up. We see it every time. In English, “extended business trip” means “he’s a fugitive from justice”.

So, what to do about it? Number one, although legal services may be expensive, getting ripped off is far more expensive. (Of course, it really burns when you choose the wrong law firm and your lawyers rip you off too. If there are six lawyers waiting for you in the conference room, run away — there are 10 more billing on the case in the back room.) Consult a lawyer at the beginning of your commercial transactions and 99% of disasters can be spotted in advance and avoided.

Credit reporting is becoming available. Use it. Get a credit report from the National Institute of Credit Evaluation, a joint venture with Dun & Bradstreet. Get reports on both the company itself and its Representative Director individually.

Never be an unsecured creditor. Unsecured creditors here have no recourse other than the criminal system. And the returns on that are not great: The police here put just about zero effort into looking for swindlers.

If assets are offered as security, have the security evaluated by a lawyer so you can be sure you’re getting what you think you’re getting. Last night we counselled someone on the advisability of accepting a fourth-priority keun mortgage on 500 sq. m. land and two-story commercial building in Mapo already encumbered to the tune of W730,000,000. Upon default and liquidation at auction, the other creditors would be paid out W730,000,000 before our client would see a dime of proceeds; they’re selling W1,100,000,000 worth of equipment — does that sound like a good idea?

Recently another foreign client who had gotten swindled out of millions of dollars came to our office with a “guarantee insurance” policy that their trusted agent had supposedly bought for them in Korea for a W6,000,000 premium. It turned out to be a “Silver Insurance” supplemental-health policy with a W1,000,000 benefit level and a W20,000 premium; the trusted agent had embezzled the rest of the money to buy a really swell computer for himself. It took me seconds to recognize the discrepancy but by that point they had been relying on the trusted agent as their only source of information about Korea for years.

Now, if you’re a knee-jerk defensive nationalist, these war stories might lead you to shriek “Brendon hates Korea, to criticize so much!” Far from it. My own experiences here, especially with the folks in [the firms I’ve worked in], have been really positive; our guys are 100% decent and 110% honest (too honest, if you ask me). But like I said earlier, even if 99.9% of Koreans are completely trustworthy that still leaves a lot of potential disasters out there.

Forewarned is forearmed.

[NOTE: The comments to this post at the Marmot’s Hole were great. Apart from too much insider griping about the American Chamber of Commerce in Korea (AMCHAM), I think there is a lot of value to the comments as well.]

August 6, 2007 | Filed Under Company and Commercial Law

Comments

5 Responses to This Entry

  1. China Law Blog on

    China?  Hell, I could have written the exact same post, just by changing “Korea” to “China,” “Korean” to “Chinese” and “Kim” to “Zhang.”

  2. Brendon Carr on

    Congratulations, by the way, on being named Best China Business Blog.

  3. China Law Blog on

    Thank you. I ended up “stealing” your post and basically just changing it to China.

  4. Nobody on

    Great comments Mr Carr, but can I suggest cleaning up “Mr Kim” Engrish. This is just the kind of thing a person will notice (not the message or the fact that people do talk like that) and make an accusation of some kind of racist twards you.
    .
    On a side note, the AMCHAM works for Korean not American interests. Like you said: forewarned is forearmed.

  5. Marc on

    I agree with everyone else, this process can be applied directly to China.

    I have had a Chinese client trying to get $20,000,000 US from foreign sources using me as an agent. The shpeel follows the same process and the wording was almost exactly the same.

    I would like to add that there is blatant discrimination against foreigners here in China and although on the surface the Chinese seem to respect foreigners and use pleasing words, deep down they are looking for an opportunity to cheat. Though not everyone can be tarred with the same brush, the culture here states that cheating is clever and if one is honest one must be stupid.

    In addition cheating happens on a much smaller scale too. There are even time cheats. The Chinese will try to cut corners and play games with you, if you don’t have a strong defined process for doing things on your terms and stick to it. When they realize they cannot use you, the deal will fall apart if it’s not real.

    ‘Proof renders faith unnecessary’.

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