How to Spot, Stop & Prevent Sourcing Agent Deception
A U.S. home goods company recently discovered they had overpaid $2.4 million over three years—thanks to a sourcing agent posing as a factory.
They had thought they were working directly with a trusted overseas manufacturer.
They weren't.
Instead, they were paying their sourcing agent close to 40% more than the direct factory price, and dealing with sourcing agent fraud—a slick website, a false claim of factory ownership, and a carefully crafted image of legitimacy.
It wasn't until a major quality failure in their latest shipment that they reached out to us. As it turned out, the sourcing agent had quietly switched to a lower-tier manufacturer to preserve its own profit margins—at the client's expense.
This manufacturing agent scam isn't rare; my law firm's international manufacturing attorneys uncover at least 5-10 of these cases every year.
Sourcing agent fraud is one of the costliest and least understood threats in global manufacturing. This post outlines the financial, legal, and strategic risks of working with deceptive agents—and gives you the tools to detect, prevent, and recover from these high-impact scams.
This post targets fraudulent sourcing agents who misrepresent themselves as manufacturers and known sourcing agents who grossly lie about their commissions. It is not about legitimate, transparent sourcing agents who provide valuable services and honest pricing.
The Hidden Costs of Sourcing Agent Fraud
Sourcing agent fraud significantly erodes profit margins and undermines competitive advantage. Deceptive markups often range from 30% to 40%. When layered on top of existing tariffs—which frequently exceed 50% on the inflated invoice value—the result is a pricing structure that can more than double the actual cost of goods compared to direct factory sourcing.
For example, a $1 million order routed through a fraudulent sourcing agent with a 40% markup means the factory only receives $600,000. Yet tariffs are calculated on the full $1 million invoiced amount, not the true factory cost. With average China duties around 55%, this adds approximately $220,000 in tariffs—bringing the total loss to over $620,000. That's capital gone not to goods or value-added services, but to fraud and misrepresentation.
Our investigations consistently reveal agent markups of around 40%, with combined fraud and tariff effects driving total costs to nearly double legitimate pricing. This isn't just about diminished profits—it's about staying competitive in a global market where others may be sourcing cleanly and legally.
This financial drain has triggered a surge in clients seeking our help with tariff reduction strategies. As detailed in THE Guide for LEGALLY Avoiding Today's and Tomorrow's U.S. Tariffs, our tariff reduction work often requires that we dissect the manufacturer's cost structures to separate tariff-applicable expenses from those that are not. But that process depends on one critical step: confirming that the "seller" is in fact a bona fide Chinese manufacturer. Too often, they are not. And too often, that discovery changes everything.
How Fraudulent Sourcing Agents Fake Factory Ownership
Dishonest sourcing agents have perfected the art of deceptive factory verification. They refer to "our factory," "our production lines," and "our quality control team" when they're actually just brokers operating from home with no assets beyond a $10 folding chair, a $20 desk, and a three-year old computer.
The sophisticated sourcing agents will:
- Show you factory photos from Google Street View
- Escort you on carefully choreographed "factory tours"
- Provide fake business licenses with matching addresses
- Use professional email signatures with factory titles
- Create elaborate backstories about their "manufacturing heritage"
Five Real-World Examples of Sourcing Agent Deception
The following examples are all real cases in which our international manufacturing lawyers have been involved. The facts have been changed just enough to make it impossible to identify the parties involved.
They illustrate just how sophisticated—and damaging—sourcing agent deception can be, and the range of costly consequences companies face when due diligence is skipped or delayed.
Case 1: The Vanishing Vietnamese Toy Manufacturer
An American toy company paid $2 million to a Vietnamese "manufacturer" with impressive credentials and a polished website. The American company never received a single product. Our investigation revealed a single consultant operating from a Hong Kong co-working space. With collection on any judgment uncertain, our client chose not to pursue any claims.
Case 2: The Christmas Lights Catastrophe
A U.S. retailer ran into serious trouble when a multi-million-dollar order of Christmas lights, scheduled for delivery in May, didn't arrive until November—missing most of the holiday sales season.
Our investigation quickly pinpointed the core issue: a sourcing agent who owed the actual manufacturer a significant sum. Because the factory hadn't been paid, it withheld the shipment.
To get the products released in time, the retailer had to pay the manufacturer directly. While the factory's prices turned out to be nearly 50% lower than what the agent had charged, the client still ended up having to pay for the same order twice.
Case 3: The Shoe Quality Nightmare
A European company learned a costly lesson after rejecting a shipment of defective shoes and withholding payment. They were quickly sued—not by the factory that had produced the faulty goods, but by the sourcing agent they had contracted with. The agent's agreement included a clause guaranteeing payment regardless of product quality.
Because the company had no direct contractual relationship with the manufacturer and no clear legal avenue to hold the factory accountable, they found themselves with limited options. Meanwhile, the sourcing agent was contractually protected. In the end, the company was forced to settle, paying approximately 80% of the original invoice amount for shoes they couldn't sell.
This case underscores the importance of thoroughly reviewing sourcing agent contracts and ensuring direct recourse against manufacturers in the event of defects or non-performance.
Case 4: The China IP Theft Double-Cross
A U.S. sporting goods company worked with a "manufacturer" producing in China. That manufacturer turned out to be a sourcing agent who patented the sporting goods company's original design and began independent sales. This led to six different lawsuits in three different jurisdictions and losses of many millions of dollars.
Case 5: The Chinese Agent Commission" Lie
A European electronics company uncovered a significant fraud orchestrated by their Chinese sourcing agent. Although the agent had claimed to operate on a modest 5% commission, they were secretly inflating product prices by 35% and collecting an additional 10–15% kickback directly from the factories. The scheme came to light when an internal invoice was mistakenly forwarded to the client.
With our firm's support, the company has since filed suit against the sourcing agent. While the legal case is ongoing, they have already made a successful shift to purchasing directly from manufacturers at substantially lower prices—eliminating both the hidden markups and the kickbacks.
The Legal Risks of Sourcing Agent Fraud
At the heart of most sourcing agent fraud is a legal structure designed to leave you exposed. The following are their most common risks.
- Fake or Shell Contracts: Agreements are often with entities that don't actually manufacture anything, making enforcement meaningless.
- No IP Control: Trademarks, patents, and trade secrets are frequently registered under the agent's name—not yours, making it difficult or impossible for you to use or protect your own designs.
- No Legal Recourse: When the relationship fails, you have no path to recover losses from the actual factory doing the work.
- Jurisdictional Traps: Fraudulent agents manipulate venue and governing law to block enforcement or delay proceedings.
- Cross-Border Complexity: Litigating across jurisdictions becomes expensive, slow, and uncertain—especially when assets are hidden or dissipated.
When you sign contracts without verifying the true party on the other side, you aren't just wasting money—you're signing away your legal protection. Do your due diligence before you send anyone in China any money.
How to Verify Overseas Manufacturer: The Complete Due Diligence Protocol
Every case study above shares one fatal flaw: inadequate due diligence. The due diligence process typically requires four essential steps:
1. The Four Pillars of Protection:
- Verify Everything: Business licenses, ownership structures, and operational capabilities
- Visit Personally: No exceptions for physical facility inspections
- Contract Directly: Ensure agreements are with manufacturing entities, not intermediaries
- Monitor Continuously: Regular audits and relationship reviews
Don't let impressive websites or smooth-talking reps substitute for rigorous due diligence.
2. 12 Red Flags That Scream Sourcing Agent Fraud
Even the most polished sourcing agent scams tend to leave behind a trail of warning signs. If you know what to look for, you can spot deception early—before it drains your profits or traps you in a bad deal. The following red flags are patterns our international manufacturing lawyers have seen repeatedly in fraud cases and failed supplier relationships. If you notice even a few of these, it's time to start asking hard questions.
a. Major Red Flags:
- Refusal to allow unscheduled factory visits
- Mismatched business licenses and invoice entities
- Reluctance to provide direct factory contact information
- Generic factory photos or stock imagery on websites
- Payment requests to personal or offshore accounts
b. Communication Red Flags:
- Vague responses about production capabilities
- Inability to provide specific technical details
- Always "checking with the factory" for basic questions
- Delayed responses during claimed production hours
c. Pricing Red Flags:
- Significantly higher quotes than market benchmarks
- Inability to explain cost breakdowns
- Hidden fees emerging during production
How to Safely Exit From a Bad Sourcing Agent Situation
If you believe your sourcing agent is cheating on you, your immediate first steps should be to: meticulously document all communications and transactions, consult with experienced international legal counsel, discretely verify the manufacturer's legitimacy, and, then and only then, begin preparing a strategic exit plan.
Disentangling from a deceptive agent requires planning to avoid retaliation.
When someone comes to us with a sourcing agent fraud situation—or any situation where they want to disengage from their agent or supplier in China—we strongly advise that they get their entire legal and operational house in order before making the jump. That preparation ensures they are protected and positioned to succeed. See How to Move Your Manufacturing Out of China Safely.
Legal Protection Framework:
- Intellectual Property Safeguards: Secure patents, trademarks, trade secrets, and domain names under your name—not the agent's—in the relevant jurisdictions to block unauthorized use or control.
- Comprehensive Non-Circumvention Clauses: Prevent agents from contacting your suppliers, customers, or partners.
- Enforceable Non-Compete Agreements: Clearly define restricted activities, geographic scope, and time periods to deter agents from launching copycat operations or interfering with your supply chain.
- Robust Confidentiality Provisions: Protect proprietary information, pricing data, customer lists, and product designs from misuse or disclosure.
Don't Let Middlemen Control Your Manufacturing Future
With tariffs already inflating product costs, few companies can afford to overpay—let alone pay duties on those inflated prices.
Sourcing agent fraud isn't just costly—it can jeopardize your entire business. Every day without proper verification drains resources. Every contract signed without due diligence invites risk.
Sourcing Agent Deceptions: How To Spot, Stop And Prevent International Manufacturing Scams
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
