The prior post provided an overview of chops in China. This post focuses more specifically on how chops can be misused and how that risk can be mitigated.
We have seen numerous incidents where an unauthorized individual (e.g., local employee) uses the chop to further private interests (e.g., a side contract, engaging a vendor, engaging in unauthorized financial transactions, loaning out the chop) in a way that conflicts with the company’s interest. We have also seen situations where administrative personnel are pressured by their supervisors to misuse the chop.
We have similarly seen situations where local managers in a dispute (often employment-related) take the chop “hostage,” thereby making it difficult for the local entity to handle some of its daily business. Indeed, a special type of lawsuit exists to handle these situations that roughly translates as “a dispute for returning a company’s official licenses and documents” (公司证照返还纠纷).
In such disputes, the company may file a court claim to seek the return of company property, but shareholders cannot file a derivative action unless the company has suffered actual damage. Having a new chop engraved is normally possible only if the company can prove that the chop was stolen or damaged, which is difficult to prove in a “hostage” situation if the employee is in fact authorized on paper to use the chop.
In addition to misuse of legitimate chops, fake chops abound in China. Fake chops range from simple electronic copies to actual physical chops that mimic the real one. Indeed, ads for fake chops and fake fapiaos can be found stenciled or pasted on the walls of residential buildings, street signs, and littering the streets, despite the fact that making or knowingly using a fake chop is illegal. These fake chops are sometimes known as “radish chops” (萝卜章) in Chinese because they were historically carved from radishes rather than harder materials like stone or metal.
We have seen fake chops used for a variety of misconduct, including:
- fake contracts (to get credit for sales to earn a bonus)
- signing a yin-yang contract (阴阳合同): i.e., signing two versions of the same contract — one to file official, and one to express the true intent of the parties, such as different prices to minimize taxes
- approving fake/inflated expense reports
- issuing non-approved fapiaos (see above) fake identity-related documents (e.g., letters to prove employment, income, financial situation to secure bank loans, apply for credit cards or visas)
- fake authorization letter (such as authorization to represent a company in a negotiation or to participate in certain activities)
- issuing fake wealth management products that did not exist under the name of major Chinese financial institutions
- fake government documents (to suggest that the government approves of something that it actually does not, or that the government has closed an enforcement action when it in fact has not)
It should not be surprising that scanned documents and imaging-editing software (e.g., Photoshop) can facilitate documents with images that resemble real chops. We have seen fakes ranging from shoddy (simply clicking on the image shows that it was inserted later) to extremely sophisticated (essentially indistinguishable from the real chop).
Several Chinese companies have reported significant losses from failing to identify falsified chops in financial transactions, or through local employees misusing the chops to engage in unauthorized banking transactions.
Listed below are the most common indicia of a fake chop, based on guidance from the China Notary Association and which is consistent with our experience:
Font. Most chops use either the Chinese font SimSun or FangSong, so use of another font is a red flag.
Color. Almost all chops use a crimson oil inkpad, and a real image is actually not smooth but contains uneven dots in its color. (A few chops use dark blue oil inkpad, and those images should also contain uneven dots.) Many fake chops are smooth and do not contain such uneven dots.
Shape. Almost all chops are either round shape or oval, except for the chop of the legal representative of a company, which is normally square/rectangular. The Chinese characters should have sharp edges or cracks due to the density of oil inkpad and the uneven pressure placed on the documents. Except for true electronic chops (see above), a chop that looks “too good” to be stamped by hand probably is not.
Angle. Similarly, no hand-stamped chop image can be perfectly straight.
Location. Typically, a genuine chop image is placed on top of the name of a company, while a fake is often stamped in the blank area of the document. Some fake chop images are also placed on top of a company’s name, but it is much more difficult for a computer-generated fake chop to effectively cover some but not all of the company’s name, as the ink in a real chop does not completely conceal the underlying text.
Considerations for risk mitigation
1. If the company does not already have a formal policy for chop management, consider implementing one. Many companies keep a formal log of each time the chop is used to track usage, similar to a notary public’s book in most U.S. states. Some companies specify whether a specific chop must be used for certain situations to reduce the number of people with access to a specific chop (rather than having a broader group of people with access to the company chop). Note that because branch offices are not independent legal persons, a company is liable for how its branches use their chops.
2. Consider periodic training, spot checks, and/or audits of chop management. This could range from an informal request during a visit from headquarters to inspect the chop to a more formal review of the log evidencing which documents were chopped. Some companies include review of chop management as part of audits.
3. For suspicious or important transactions, consider trying to check a counterparty’s chop. Because every company chop contains unique patterns that are invisible to the naked eye and these patterns are extremely difficult, if not impossible, to be replicated in a fake chop, a company can work with the counterparty and the local police (PSB) to verify the chop if suspicion exists that a chop may not be genuine. A few jurisdictions (e.g., Shenzhen, Shaanxi) have web-based or WeChat inquiry platforms for verifying chops.
4. Never chop blank agreements. We have occasionally encountered situations where well-meaning employees try to save time and avoid hassle by chopping blank agreements or fapiaos. This amounts to signing a blank check and should be avoided.
Eric Carlson, a contributing editor of the FCPA Blog, is a Shanghai-based partner at Covington & Burling LLP specializing in anti-corruption compliance and investigations, with a particular focus on China and other regions in Asia. Eric Carlson speaks fluent Mandarin and Cantonese and can be contacted here.