Chop it! The usage of chops in the Chinese business environment

印章 [yìnzhāng] Chop; Seal
Executives unfamiliar with managing businesses in China will need to become familiar with the use chops or seals instead of signatures. Chops, an old custom from imperial times, may be a little confusing in the beginning and can be perceived as unsafe. However, used properly, chops can be an important tool for financial and management control. In order to reduce risk it is important to understand their use and properly manage them.

What Chops Do You Need?

The most significant chop is the official company official chop and is required on most documents that require legal validity. The other main chop is the legal representative chop (法人代表章) which is the equivalent of the signature of the person appointed as legally responsible for all company transactions. Depending on a company’s needs, there may also be other chops, with restricted validity, such as a finance chop (财务章 ), a contract chop (合同章), and chops used by human resources departments and for import/export documentation at customs.

With chops being substitute for personal signatures in China, Westerners may feel uneasy and worry about fraud. There is a risk with using chops but similar risks also exist with signatures. With established internal controls and enforced management of the chops, their use should be as safe or safer than the use of signatures. In fact, in most cases two chops will be required for documents to be deemed valid. For example a bank cheque will need both the finance and legal representative chops, which adds an additional level of security.

Types of Chops

The Company Chop

All legally registered companies in China are required to have at least a company official chop. The company chop is required on all official documents such as contracts, memos, bank account applications and labour contracts. Technically, anyone who is in possession of the company chop can legally bind the company and therefore the management of this chop is extra important.

The local Public Security Bureau (PSB) will issue the company official chop upon successful company registration with the Administration of Industry and Commerce. The PSB will then keep a specimen of your company’s chop for verification in case of dispute or suspected fraud.

The Legal Representative Chop

The legal representative chop is required for many legal documents and applications for business licences, tax certificates and banking documents. The chop is square-shaped (while the company official chop is round and others may be elliptical) and has the name of the company’s legal representative carved into its face.  In most cases this legal representative is either the owner, the chief executive or a board member of the company. The chop is filed with the local Administration of Industry and Commerce (工商行政管理总局) (SAIC).

The Finance Chop

The finance chop is used for the company’s financial transactions such as cash withdrawals, bank cheques, wire transfers or account information changes. The control of the chop is normally delegated to the company’s financial officer and the chop, along with the authority to use it, should be kept separate from the other chops . The company’s designated bank will keep specimens of this chop (and of the legal representative chop) for verification.

Contract Chops

Contract chops can be issued as a substitute for the company chop in sales transactions and can enhance management flexibility and the efficiency of sales operations in China.  A contract chop can be established with authority to certify sales agreements and then the use of this chop can be delegated to a sales manager.  Multiple contract chops can be established and delegated to managers in various locations or in different positions.

More Chops You Should Know

The human resource chop can be used for your company’s HR activities such as employment contracts, authentication of employment verification letters, internal memos issued by the HR department and employee registration with your local governing bodies. Companies can also establish invoice chops for authorising sales invoices.

Using Chops Effectively and Safely

A person controlling the company official chop and legal representative chop can theoretically sell all the company’s assets and run off with the cash. Therefore the company’s board should ensure there are sufficient internal controls as to who has control and access to each chop, as well as how their use is to be recorded.

A newly appointed general manager should perform a complete review of all of the company’s chops and map out who keeps them, where and how they are kept and file a copy of their imprint.

Once this review has been completed, authority guidelines should be established for each chop with a responsible custodian assigned. These guidelines should also outline for what purpose the chops can be used and who the delegated authority is in case the custodian is absent from work. Finally, check with the PSB and other relevant authorities that the chops have been properly registered with them.

In the case that a company needs to safeguard itself against any potential conflict with a legal representative who is an employee of the company or someone other than a sole proprietor, business owners or board members the company should consider having the representative sign and chop termination of authority documentation before they take control of the chops, so that this authority can later be removed without incident or legal dispute.

Occasionally, the local government may require the mother-company of a China-based subsidiary to chop a legal document. As chops are not widely used in the West, in order to be prepared for this eventuality, foreign companies setting up subsidiaries in China should consider creating a special China chop to be used for such purposes.

As regulations on the use of chops may vary across regions of China and even within a particular city, managers should carefully consult local regulations on chop use before setting up business in China.

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