Counterparty check | 6 things to pay attention to | Key risks

Before placing order with a new factory, undoubtedly it is worth checking the counterparty to avoid misunderstandings and further surprises.

Ways to check counterparties

It is critical to have a robust supplier evaluation plan for internal and external accountability and continuing the relationships and business. Measuring and evaluating supplier performance is paramount to reducing costs, and improving process efficiency and business performance. It helps preventing product issues and defects after payment and improves the supply chain management in general.

  1. Explore the supplier’s website

Pay attention to the fact that the site has up-to-date information. Real photos of employees, office, warehouse, transport. As well as the news feed of the company. Make sure the photos on the site are not stock. To do this, you can use the “search by photo” in your search engine by checking the availability of these photos on other sites.

  1. Check Factory MOQ

Usually, the MOQ of factories is higher than that of a trading company. For example, you are looking for a supplier to purchase 10,000 spoons. You can make a condition to the supplier that you buy 300 pieces to check the quality, and then if the quality suits you, place a large order. A large supplier will refuse to accept this order since the minimum order size will be at least 1000 pcs. But the trading company will accept your order to produce 300 pieces of spoons.

  1. Get organization details with business license verification services

A business license is a mandatory document that any company must have. The business license contains basic information about the organization, and by looking at it you can understand how reliable it is for the production of your products.

Ask your future partner to provide a copy of the business license, arm yourself with a translator and the Internet, and you will be able to understand the contents of the license yourself.

For example, in a Chinese business license, the scope of a factory must include words such as “production, processing” (加工制造) that will be missing from the trading company license.

Pay attention to the company registration number, which in China is called the Unified Social Credit number – it is not only a registration number but also an organization number and a tax registration number. It is also easy to check the authenticity of a business license, this can be done on the official website of the China National Enterprise Credit Information Publicity System (NECIPS) or at which also uses this source (for Chinese business license verifications) and brings you reliable and your language-friendly results.

Keep in mind that any company registered in China has a business license and will show up in verification. If you cannot find your potential supplier after running our verification, it is a red flag that the supplier is suspicious. Communicate further with this supplier and ask them if the business license number they sent is correct. 

  1. Check audit reports

If your supplier reports that they are working with large foreign companies such as Amazon, you can ask for a factory audit report. The manufacturer, unlike the trading company, will provide this report, in which you can see the name and scope of the supplier and compare it with the data specified in the license. can also assist you with on-site audits and inspections. We work with accredited quality control companies in Asia and can send the qualified auditor or inspector to the factory to physically conduct a comprehensive audit on site.

The Factory Audit will cover the following aspects:

  • Company profile (General information)
  • Organization structure
  • Production process
  • Production capacity
  • Facilities & machinery
  • Quality assurance system
  • R&D
  • Special Requirements from Client

The all-inclusive fee is 398 USD anywhere in Asia and already includes travelling and arrangements.

  1. Check for Certificates

One of the most common international certificates requested from a supplier is ISO 9001. This document is a confirmation of a certified quality management system that applies to almost any industry, not only manufacturing. In other words, a company holding this certificate has a Quality Control department in the company that monitors processes, checks and detects defective products, takes action to correct defects, and controls the efficiency and effectiveness of operations.

It is also worth highlighting the importance of the following certificates:

  • ISO 14000– environmental management
  • SA 8000– decent working conditions
  • ISO 45001(occupational health and safety)
  • CE EMAS(environment)
  • ILS(International Labor Standard)
  • BSCI(Business Social Compliance Initiative)

The certificate is usually issued in two languages and can be verified for authenticity by the certification authorities that issued it. also runs certificates verification – contact us to submit the certificate of your supplier and we will check it for you to make sure it is an authentic and up-to-date document.

  1. Check counterparty address

Check the address of the counterparty – is it not a general (shared) one. A general (shared) address is the address of the location of a large number of organizations that simply buy it on the Internet for registration. Hundreds of companies can be located at one address. This may mean that the counterparty is not located at the declared address. It will be difficult to find in case of conflict. The bulk address purchased for registration may not in itself indicate the unreliability of the counterparty, but in the overall picture of the check, it should alert.

Alert indicators

There are a lot of alarming factors when checking a counterparty, it all depends on the type of activity and the selection criteria. The main risk factors can be:

  • Shared registration address. Often this is a sign of a one-day firm, open exclusively for money laundering through fraudulent and illegal schemes. Transactions concluded with such an organization are fraught with not only financial, but also criminal risks.
  • Participation in litigation. When the counterparty acts as a defendant in court, there are risks of non-performance of obligations under the contract. Possible seizure of property, financial losses can cause a temporary suspension of activities or bankruptcy.
  • The presence of restrictions on the powers of the head. There are situations when the constituent documents stipulate the maximum amount of contracts that the head has the right to conclude without the approval of the Board of Directors or owners. In case of violation of this rule, the concluded transaction will be considered illegitimate.
  • A large number of transit operations on the current accountOne of the main signs of a one-day company. At best, such a counterparty will turn out to be a simple intermediary that does not have its own resources to fulfill obligations under the contract.
  • Zero financial result with large turnoversThis is an indirect factor, but it may indicate the risks of using fraudulent schemes. It is especially important to understand that such companies attract close attention of the tax authorities and arouse suspicion of tax evasion. Interaction with such counterparties is fraught with additional tax audits.
  • Existence of unpaid tax liabilities. Overdue tax debt does not always indicate the business dishonesty of the counterparty. The reason for its occurrence may be temporary financial difficulties. However, such a situation is fraught with the blocking of the current account and an increase in the risk of non-fulfillment of obligations under the contract.
  • Blocked checking accounts. Accounts are blocked for various reasons. The most common are tax debts, non-filed declarations on time and lack of response to appeals from the tax authorities. All these cases can be considered an indirect risk, but in a situation where an account is frozen before bankruptcy proceedings or when judicial restrictions are imposed on property, it is better to refuse such a counterparty.
  • Absence of tangible assets. The lack of fixed assets and other tangible assets is a worrying factor, especially when concluding a large contract. Evaluating it, you need to understand what kind of resources the counterparty needs to fulfill the terms of the contract. If the required equipment is not listed on the balance sheet or off-balance accounts, this is a reason to ask how the partner plans to meet its obligations.
  • Expired licenses or their absence. In cases where the activities of a potential counterparty are subject to licensing, it is important to check the existence of a license and its validity period. If there is no documentary evidence, the fulfillment of obligations under the contract will become problematic. This is especially true for services related to the safety of industrial facilities, health and life of people. Violations revealed during the inspection can lead to forced termination of the transaction and possible financial losses.

This is not a complete list of risk factors that may affect the assessment of the possibility of working with a counterparty. Each indicator has its weight, and many of them individually is not an obstacle to cooperation, but if there are several factors, then it is worth considering. Remember that the documentation review is only a basic company check. cooperates with Verificasia for business license and certificates verification and companies investigation.