Mitigating Risks Associated with Seals

Aug 30 2019
SBA Stone Forest

Management of seals is a unique and significant challenge for companies in China.

Seals have been used in China for centuries to represent the authority of the emperor in official documents. That tradition has survived and the company seal — also more commonly known as a company stamp — is essentially an instrument that carries the authority of the company in various transactions.

There are also complexities due to the use of several types of seals in China. In addition, the significant power entrusted to the seal presents unique risks that companies looking to invest or start up in China must take note of.

Types of seals

Due to the multitude of actions that a company may be able to take, many different seals exist, each of which applies in a specific situation or for a particular action. A list of some important seals in China is shown below.

1. Company seal
A company seal shows the registered full name of the company in Chinese and functions almost like the “company’s signature”. This is perhaps the most important seal because it can be used to authorise almost any action taken by the company. Generally, the presence of the company seal on a document also means that the company has accepted what is contained within that document and is therefore legally bound by that document. Due to the wide powers granted by this seal, it is potentially at the greatest risk of abuse.

2. Financial seal
A financial seal is used for basic company actions such as opening a bank account or issuing cheques. Due to the nature of the authority it carries, the financial seal is often held in the custody of the company’s officer in charge of finance, such as the Finance Director.

3. Legal representative seal
A legal representative seal is a personal seal representing the legal representative of the company. The seal symbolises company behaviour instead of individual conduct. It is commonly used together with the financial seal for opening bank accounts and regarded by the bank as evidence of authorisation by the company for bank-related activities.

4. Contract seal
A contract seal is used exclusively for all contracts that the company enters into. Technically speaking, this seal is not necessary and companies can choose to rely on the company seal instead. However, having a contract seal may make more practical sense where the company has many contracts to affirm, and relying constantly on the holder of the company seal can create difficulties.

5. Invoice seal
An invoice seal is used specifically to authorise invoices issued by the company.

Apart from these common seals, some others include the customs seal and HR seal.

Risks associated with seals

Seals are widely used by companies in a myriad of situations and each carries certain specific powers. However, it can be a double-edged sword and is also a source of significant risk that is often underestimated by companies unfamiliar with China’s business and legal environment.

Risks associated with seals that arise from sources outside the company usually relate to fraud and forgery. Due to the significance placed on seals, attempts to forge various company seals are not uncommon. In many ways, this is very similar to forgery of a director’s signature. The risk is in relying on such seals in correspondence with other companies and thinking that the counterparty is legitimate. For example, one may receive a signed and sealed offer from a counterparty stating that goods will be delivered upon payment. Yet, the counterparty whose name is on the offer may in fact never have authorised such an offer as the seal was simply a forgery.

There are also risks that come from internal sources — namely, a company’s agents or employees. Such problems often stem from a failure to develop a proper internal control system to supervise the usage and possession of seals.

Seals may be lost or stolen by an employee of the company. In such a situation, the company will likely encounter several consequences. The most immediate effect is that operations will be disrupted as the company is unable to act without the seal. For example, the company may be consequently unable to pay wages, enter into new supply contracts or withdraw money from its bank accounts. Further problems may arise if the seals were in fact stolen by an employee. The employee may have been using the seal fraudulently, without the company’s authority, to conduct transactions, such as selling off company assets in return for payment to his or her personal bank account. These transactions are generally legally binding since they carry the relevant seal and can therefore be extremely detrimental to the company. Alternatively, the employee may seek to use the seals as leverage in an attempt to coerce the company into providing a generous severance pay.

Management of seals

Given the multitude of risks that can potentially arise from the use of seals, it would be prudent to take measures to mitigate such risks.

In relation to risks arising from external sources, the key solution is greater due diligence and more thorough investigation. Some steps that can be taken to reduce this risk are as follows: visit the local authority to inspect the business documents to determine if the seal used is the same as the real one, or visit the company to determine if the offer indeed originated from it, and whether the person who sealed the document did it with the authority of the company. This kind of due diligence, inconvenient as it may seem, may actually go a long way towards mitigating the risks of falling victim to fraud and forgery of the company seal.

Regarding risks that stem from internal sources, the most important policy is that not all the seals should be held by one person. If it is absolutely necessary for one person to hold multiple seals, a company may still consider placing limits on those powers. A good practice is to keep a copy of all documents for which a seal is used, and to keep a record of all these copies in running serial numbers. This has the benefit of ensuring that all documents that have ever been sealed are known and recorded, which allows any forgery or unauthorised sealed documents to be easily identified. Further security layers can be added as desired, such as requiring application for seals to be made and approved by another officer in the company, or requiring seals to be signed out every time they are removed from the safekeeping area.

Cloud-based corporate compliance solution

Online tools can further mitigate risks arising from the use of seals and other corporate compliance issues, and reduce the cost of rectification should incidents occur. Such solutions may be especially useful for companies operating in China where administrative lapses could present unique risks.

For example, C3 is a comprehensive cloud-based solution developed by SBA Stone Forest to help businesses build a robust system of internal control, mitigate business risk and ensure corporate compliance with ease in China.