Buyer beware

• Source: Global Times
• [09:51 February 25 2011]
• Comments

A man in an Alibaba exhibition booth in Shanghai. Photo: CFP

By Chen Yang

Jay Qi used to keep a low profile when he worked for Alibaba.com's anti-fraud system in Hangzhou, Zhejiang Province. But since he quit the job last April and co-founded InsideAlibaba.com, he has drawn attention from a lot of people, including John Spelich, Alibaba Group's vice president for International Corporate Affairs.

The website, launched in May last year, allows buyers to post their fraud experiences, updates a list of suspected fraudulent suppliers on Alibaba.com, and provides buyers with a service to check suppliers' credentials.

"Mr Spelich once asked me to be cautious with the site and not hurt Alibaba's image, but I think what I am doing is another way to help his company avoid becoming involved in scams," Qi said.

Alibaba.com, China's largest business-to-business e-commerce website, is facing a fraud crisis at the moment as nearly 100 sales staff were recently found to have been helping fake companies register as credible suppliers in order to cheat overseas buyers.

Frauds move in

Qi seems not to be surprised by the fraud scandal afflicting his former employer.

"I found the number of scams kept increasing since 2009, when Alibaba.com lowered its Gold Suppliers' annual membership fee from 49,800 yuan ($7,575) to 19,800 yuan ($3,012)," he said. Gold Supplier is a premium membership for suppliers on Alibaba.com, to show they have been authenticated and verified by a third-party security service provider appointed by the website.

The cheaper membership fee has brought a surge in the numbers of Alibaba's Gold Suppliers from 30,000 to 100,000 in a short time. It would seem that a number of fraudulent companies have also crept in, tempted perhaps by the lower entry barrier. Qi recalled that around 300 buyers would contact Alibaba's service team every month to complain that they had been cheated by a dishonest supplier.

Qi's job was to shut down the accounts of fraudulent suppliers at that time, but he felt the conflicts between his team and the sales team were getting worse.

"Our sales colleagues were very aggressive in attracting paid memberships, so the Gold Supplier became more of a revenue producer than a safety net for buyers," he said. "In fact I could only shut down the accounts of non-paying members who were suspected of fraud. I had nothing to do with suspicious Gold Suppliers as the sales people were always on their side."

Qi remembered there was a single mother from the US who got scammed out of about $25,000, after she tried to purchase products from Alibaba.com to resell on Ebay. "I felt sympathy for her and helped her in contacting a local attorney," he said. "Unfortunately the attorney was unable to assist her because she did not know the true name and address of the scammer."

Exposed

Qi finally decided to quit his job with Alibaba.com and do something to help overseas buyers protect themselves from online fraud.

His thoughts were echoed by Eric Watkinson, a former customer relations manager for Alibaba International in Santa Clara, California. "He felt the same with me and wrote a lot of letters to Alibaba's senior management about the fraud problem, as he and his colleagues working in the company's US branch often faced threats from angry customers who had been cheated by phony companies in China," Qi said.

They soon launched an independent website, InsideAlibaba.com. At first they wrote tips about how to verify suppliers, recognize scammers and avoid being cheated. With more buyers visiting their website, some asked them for help.

"At first I helped foreign buyers verify suppliers for free," Qi said. "But as requests continued to increase, I couldn't spare more time to satisfy all their needs and began to charge $20 for verifying a supplier from last November."

After accepting such a request, Qi usually conducts a search using the supplier's Chinese company name, before checking its business license. He then makes a phone call to the supplier to test their integrity. "Bogus companies will expose themselves if they don't want me to visit their installations or if they insist on using the Western Union for transactions," he said.

But Qi says he doesn't have plans to make the website into a profitable business. "I run a company helping exporters establish their own websites, and mainly use my leisure time to help overseas customers verify suppliers," he said. "I could only accept one to two requests per day, but I hope my efforts can benefit the online e-commerce community."

Alibaba and the 2,326 thieves

Something that did surprise Qi was when Alibaba.com chose to reveal its fraud problem to the public.

The company announced Tuesday the resignation of two top executives, Wei Zhe and Li Xuhui, who failed to detect or stop the fraud for several years.

The company's internal investigation has revealed that nearly 100 salespeople helped thousands of fake Gold Suppliers evade verification procedures. The fake suppliers offered popular consumer electronics at very low prices and didn't deliver the products after they received buyers' money. The average claim by buyers against fraudulent suppliers was around $1,200.

Alibaba said it had shut down a total of 2,326 Gold Suppliers found to have defrauded buyers in 2009 and 2010. The company pointed out that they represented only 1.1 percent and 0.8 percent of Gold Suppliers in the two years. The company has also paid $1.7 million in partial or full reimbursements to defrauded buyers.

"The percentage is small, but these dishonest suppliers have brought a huge negative impact," said Qi. "There are lots of complaints circulating on the Internet from people overseas who have been cheated, damaging not only the credibility of Alibaba's suppliers but also all Chinese manufacturers."

Alibaba's fraud problem has also shocked the market, and the business model of charging a membership fee is now in doubt.
"The fraud problem is well-known in the e-commerce industry, but we still felt very shocked when we heard Alibaba's news," said Yu Lihong, deputy general manager of DHgate.com, a B2B e-commerce website in China.

Yu says DHgate.com's business model is different from Alibaba's membership fees model. "We charge commissions from buyers only when the transactions are completed, so it partly avoids the risk of salespeople cashing in on fraudulent suppliers," she said.

But she admits that e-commerce websites, both B2B and B2C, should learn lessons from Alibaba's fraud scandal. "Hasty expansion will bring problems," she said. "We will focus on providing better services for our existing 900,000 China-based suppliers, rather than enlarging the number," she said.