Everyone who has ever been involved in a business activity in China has certainly come into contact with the peculiar red mark on every document: the chop. The chop is the Chinese equivalent of a signature in the Western Hemisphere and it is the ultimate tool used to authorise all kinds of documents.
Everyone who has ever been involved in a business activity in China has certainly come into contact with the peculiar red mark on every document: the chop. The chop is the Chinese equivalent of a signature in the Western Hemisphere and it is the ultimate tool used to authorize all kinds of documents. Just as various as the situations requiring authorization and approval are the chops and the implications that have to be considered when conducting business in China. This article is an attempt to shed light onto this very important business device.
In China, the chop is an almost 3000-year old tradition. But whereas the chop has evolved from a drip-wax seal to a stamp pad and chop, its importance has remained the same. The chop is used to authorize documents in all aspects of life. While a signature is solely an acknowledgement of intent to build a business relationship, it is not legally binding until a chop has been applied to the document.
Below, we will explain the most important types of chops:
The company chop is the essential part of any enterprise in China and as soon as an enterprise has been registered with the Administration of Industry and Commerce (AIC), the company chop has to be registered at the Public Security Bureau (PSB) and then carved by an authorized chop-maker.
This chop usually comes in a round shape, bears the registered Chinese company name and is a one-off piece. It is necessary for any legal execution by the company, since the company chop is sufficient proof that the holder is legally entitled to represent the company.
Legal Representative Chop
On many documents in China, the legal representative chop is required as a signature used for authorization. So, just like the company chop, it has the power to legally bind the company.
The Invoice Chop, also called Fapiao chop, is used for all invoices issued by the company. It allows the recipients to verify business expenses with the tax authorities.
The application of the Financial Chop is the verification of all documents that are used to communicate with banks, such as checks etc.
When signing a contract, this chop has the same authority as a company chop and is therefore often used by sales representatives.
Human Resource Chop
The advantage of the chop system is that it adds security in certain aspects, for example when a contract is stamped, one stamp (fan chop) has to be placed across all pages so that it is easily verifiable if any of the pages has been substituted. Furthermore, it is easier to transfer legal authority to employees in case of an emergency, absence of the legal representative or utilisation of chop management services.
The Significance of Safeguarding the Chops
Not all chops have the same power and some require a stricter control than others. Especially the company, contract and legal representative chops need special attention, because they have legal binding power over the company regardless of the person using them. The financial chop has to be complemented by the bank signatory chop, or a personal signature, in order to be effective, but it should nonetheless be granted special attention solely because it is able to authorise bank transactions.
Even though the theft of chops can pose a risk to companies, the risks associated with chops are mostly internal risks.
The most common issue is the unauthorized usage of chops. This does not necessarily imply fraudulent intent, but can be the result of lacking internal control mechanisms and having blurry areas of responsibility. Therefore, it is crucial that the chops are kept in a safe and that there is a designated employee responsible for supervision in order to prevent loss or theft.
Also, there have been incidents where an employee held the company chops hostage after he has been asked for his resignation and was only persuadable to hand them over after “a great deal of negotiation”.
This should work as a strong reminder of just how much power the chops have in China.
These few precautions can greatly mitigate the risks:
– One person should not have power over all chops
– The chops should be locked in a safe
– Companies should implement application procedures: (E.g. The usage of the chops has to be approved by one or more officers in written form)
– Maintenance of a log to record all applications of chops and storage of copies of all stamped documents
– Need to submit written requests for usage
Chop management services by a third party
Another option to mitigate the risks is the use of chop management services by a third party. Those can be an ideal solution for SME’s in the following situations:
– The Senior officials/legal team are not based in China
– The Senior officials are based in China but have no time to take care of day-to-day maintenance of the chops
– The companies are newly established
– The company are in the midst of an M&A or a change of management
– The company is in a dormant status
In theses situations, the use of chop management services can guarantee the safeguarding of the chops, can provide oversight and enforcement of internal control policies and help to keep a record of the usage of chops and the documents stamped.
To sum up, chops are an essential and powerful tool in the Chinese business environment and the variety of different chops might seem confusing at first. Therefore, all business owners in China have to be cautious who has access and who is in control of the chops.
So after all, it is important, if business owners want to stay on the safe side, that they look for and care to maintain a trustful relationship to their employees as well as their business partners or if in doubt use third party chop management systems.
ECOVIS Beijing offers chop management services for foreign companies in China. If you have questions, please contact: firstname.lastname@example.org
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: email@example.com
|Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 (10) 6561 6609 or contact us directly via firstname.lastname@example.org|