Reporting Franchise Fraud in China: Distinguishing Contract Disputes from Crime and Organising Evidence

When considering a franchise, you need to guard against scams without treating every business failure as fraud. For franchise investors in mainland China, the key questions are not whether the brand has made you money, but how it obtained your payments, what business resources it provided and whether it genuinely performed its contractual obligations after signing. These distinctions directly affect whether you should negotiate, bring a civil claim or report the matter to the police.

1. Distinguish breach of contract, civil fraud and criminal contract fraud

Mainland China has specific rules governing commercial franchising. The Regulations on the Administration of Commercial Franchises set out requirements for franchisors’ operating conditions, regulatory filing, information disclosure and contracts. Contract performance, termination and civil compensation are also governed by the Civil Code of the People’s Republic of China. Where criminal conduct is suspected, the matter must also be assessed under the Criminal Law of the People’s Republic of China.

The following three categories can overlap, but they should not be treated as interchangeable:

• Breach of contract: The franchisor genuinely has business resources but fails to provide agreed services or supplies. This will generally raise questions of contractual performance, termination and compensation in the first instance.
• Civil fraud: The franchisor deliberately conceals or fabricates material facts, inducing an investor to sign under a mistaken understanding. This may provide grounds to have the contract set aside, recover money or property transferred, and claim compensation based on fault.
• Criminal contract fraud: This requires an assessment of the statutory elements, including an intention to unlawfully appropriate property and obtaining it by deception during the signing or performance of a contract. Losses or a refusal to issue a refund alone do not establish the offence.

Illustrative commercial franchising cases published by the Supreme People’s Court include instances in which individuals were convicted of criminal contract fraud after inducing investors to sign agreements and obtaining franchise fees by deception, despite lacking the requisite qualifications and business resources to operate a franchise. However, this does not mean that a failure to complete regulatory filing, meet the ‘two outlets, one year’ requirement or perform adequately automatically amounts to a crime.

2. Check the payment arrangements before paying

One practical way to reduce risk is to ensure that every payment can be linked to a specific contractual obligation. Rather than simply asking, ‘Can I pay into this account?’, establish who is requesting payment, who will receive it, what it is buying and who is responsible for delivery.

Before paying, prepare a checklist recording the contracting party, the account holder’s name, the purpose of the payment, the corresponding services and responsibility for any refund. If Company A signs the contract but asks you to pay Company B or an individual, ask the contracting party for a written explanation bearing its company seal. This should clarify the authority to collect payment on its behalf, to whom the funds belong and who bears responsibility. Where necessary, have the relevant parties sign a joint confirmation.

Collection by a third party is not automatically unlawful, but a sales representative’s assurance that ‘we are all part of the same group’ is not enough reason to pay. Cross-check invoices, receipts, bank transaction records and the contract. State the true purpose in the payment reference and keep the full transaction documentation, not just a screenshot showing a successful transfer.

If the other party repeatedly changes accounts, refuses to confirm the collection arrangement or asks you to disguise a franchise fee as a personal loan, pause payment and investigate. Payment into a company account does not, by itself, establish that the project is genuine or reliable. You still need to check the promised resources and arrangements for fulfilling the contract.

3. Organise the facts chronologically when concerns arise

A police report should focus on verifiable facts, rather than repeated allegations of ‘scammers’ or ‘tricks’. Organise your material into the following four groups and preserve the original records and the devices or media on which they are stored:

1. Pre-contract statements: Who described which business resources, and when? What outlet details, authorisation documents, promotional videos and promises were provided?
2. Signing and payment: Keep the complete contract, attachments, orders, payment instructions and proof of payment, along with messages requesting changes to the receiving account.
3. Actual performance: Record whether equipment and supplies were delivered, training took place, systems were activated and the relevant services were genuinely usable. Accurately record any services you did receive as well.
4. Irregularities and subsequent discussions: Document how you discovered inaccurate information, the results of your checks, formal requests for performance and refund discussions, and the other party’s explanations and subsequent actions.

For example, ‘the franchisor never delivered any supplies’ and ‘the franchisor delivered supplies, but they did not meet the agreed specifications’ describe different facts. Do not delete communications that weaken your position in an attempt to strengthen an allegation.

For electronic evidence, retain complete conversations, account details, original files and exported records wherever possible, rather than keeping only cropped screenshots. Gather evidence lawfully: do not access other people’s accounts without permission, publish personal information or threaten online exposure to demand payment.

4. Choose the right route: a police report does not guarantee a refund

Where specific facts point to fraud, you can report the matter to the police. Submit a concise timeline, a payment breakdown and a numbered evidence index, explaining which facts have been verified and which remain concerns. Making a report does not mean the police will open a criminal case, and opening a case does not guarantee recovery of your money.

If the main issues are inadequate services, late delivery or a refund dispute, consider civil proceedings or arbitration under a valid arbitration agreement. Administrative breaches involving franchise filing, operating conditions or information disclosure can be reported to the commerce authority with jurisdiction. Other unlawful conduct falls to the relevant authorities. An administrative penalty does not itself replace a claim for a refund or compensation.

Where both civil and criminal issues arise, ask a lawyer to plan your claims in light of the facts, the contract’s dispute resolution provisions and the progress of any proceedings, avoiding repetitive or contradictory accounts. Do not assume that reporting the matter to the police automatically protects all civil deadlines. Time limits for exercising a right to set aside the contract, limitation periods for claims and any need for asset preservation measures must still be assessed separately.

Practical reminder: verify responsibility for receiving payments before you pay, retain records of contractual performance afterwards, and organise the facts before choosing a procedure if concerns arise. A complete, accurate and verifiable chain of evidence will do more to protect a franchisee’s rights than rushing to label the project a scam.