Know a Company and Trade Safely

Knowledge and insights on company search and due diligence in China

When seeing these red flags during a company background check, you should consider not partnering with that supplier

When seeing these red flags during a company background check, you should consider not partnering with that supplier

Due diligence | 2023-06-04

As a service provider in company search services in China, our clients frequently ask us the following questions

  • "I want to know whether the business of this company in China is legitimate?",
  • "Is this company listed in any blacklist?", and
  • "Just need to know if it is safe to do business with this company."

When answering the above questions, we always emphasize the importance of conducting a thorough company background check before engaging in business to determine whether it is safe to trade with that company.

An in-depth background check can reveal various red flags. Some risk signals are highly significant, and we should exercise caution once they appear.

We have summarized the following three risk signals. If you encounter these danger signals during the company background check of the target company, we recommend that you refrain from doing business with them.

#1 Using fake business licenses or certificates

Doing business with a supplier that employs fake licenses or certificates undermines the integrity of the business environment and poses significant risks to those involved. Suppliers using counterfeit licenses or certificates may deceive customers by falsely claiming compliance with industry standards or regulations. This can lead to severe consequences, including legal liabilities, financial losses, damage to reputation, and compromised product quality or safety.

Using fake business licenses or qualifications is sufficient evidence to indicate a lack of basic integrity within a company. Therefore, avoiding conducting business with such a company is highly advisable.

Our research cases identified companies using fake licenses to exaggerate their capability. Please read this article for this case:

Caution! This company might use a fake business license

#2 The company is listed in the current list of the dishonest judgment debtor

A "dishonest judgment debtor" refers to an individual or entity that, in economic activities, violates laws, regulations, or contractual obligations and is determined by the People's Court to have failed to fulfill its legal obligations. They are then listed in the court's list of dishonest debtors. Being listed as a dishonest debtor entails the following points:

  1. Damaged credit: The credit of a dishonest debtor is severely undermined. Their dishonest behavior is publicly recorded and may become known to other business partners, financial institutions, and the general public.
  2. Legal restrictions: Dishonest debtors may face legal restrictions and sanctions. This may include limitations on participating in bidding processes, applying for loans, obtaining government support or subsidies, and other activities.

In summary, being listed as a dishonest debtor results in a very high level of legal risk, which may lead to contract violation and significant adverse effects on goods and service delivery.

#3 Company registration status is abnormal

The company status is one of the most fundamental pieces of information in a company information search report. If a company operates normally, its registration status should be 'subsisting', 'active', or 'in operation.' However, the abnormal status may include 'revoked' or 'deregistered,' among others.

If a company's status is 'revoked,' it indicates that the company may have been involved in severe illegal activities or other circumstances that have rendered it unable to operate, resulting in the revocation of its business license by the regulatory authority. Revocation of a business license is typically a very severe punishment.

If a company's status is 'dissolved,' it indicates that it has ceased operations, canceled its company registration, and is no longer a functioning organization eligible to conduct business.

In our research cases, we saw certain companies with abnormal status but still conduct their business as exporters. The buyer should indeed pay close attention to whether the company's status is normal.

Know a company and trade safely!

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