JD.COM 'Brushing' Fake Orders to Inflate Sales
JD.com Fires Employee For Encouraging 'Brushing' Fake Orders To Inflate Sales
Recent controversy over “brushing” on Chinese e-commerce sites has come to a head as a merchant on JD.com (NASDAQ: JD) exposed a seemingly company sanctioned brushing campaign.
A Beijing based newspaper, Jinghua Times, reported two week ago that a merchant operating a storefront on JD’s marketplace had been approached by a JD.com employee to participate in a brushing arrangement that was “approved by company leadership and would not negatively affect the merchant’s storefront as it does on other sites.”

“Brushing,” as it is known in China, is a way for merchants operating online storefronts to fake orders. The typical process sees vendors paying brushers the cost of the product for sale plus a fee. Using that money, the “customer” then orders the product and the vendor will ship an empty box to them, thereby completing the transaction and allowing the “customer” to write a positive review for the vendor.  By inflating positive ratings and reviews, merchants are able to attract more customers.


A pervasive problem in China
Not only is brushing a problem for real paying customers, who rely on reviews and the perceived popularity and reliability of merchants, it is making it tricky to understand a company’s real Gross Merchandise Volume (GMV). Brushing falsely pads sales figures and makes the marketplace appear more prominent than it is. 

Brushing has grown to be an increasingly pervasive practice on China’s e-commerce sites. As competition on sites heats up, sellers employ brushing so that their listed products will not end up at the back of search results.
Until now, Alibaba’s dominant C2C marketplace - Taobao, which commands about 80% of market share - has been at the center of the brushing controversy. But now, the company’s closest competitor – JD.com – is being drawn into the brushing plot as JD.com tries to grow its marketplace business. It’s alarming because of JD.com’s claims of guaranteed quality.

Mr. Wang – a JD.com target
Whereas JD.com previously operated an Amazon like model, holding inventory and selling directly, its recent earnings showed a marked shift towards a marketplace model as they reported a 217% YoY growth in its online marketplace. 
As the recent brushing phenomenon shows, the marketplace model is not without risk. But JD.com’s brushing case is distinct because of the alleged organizational support of brushing JD.com thrown behind merchants.
Mr. Wang, a merchant operating on JD.com’s online marketplace, said the JD.com employee reached out with an offer to participate in a “distribution” model that was “in honest terms - brushing.”
The JD.com employee guiding Mr. Wang emphasized this was a form of sanctioned brushing approved by JD.com management. He gave Mr. Wang instructions to begin brushing with a JD.com designated account and password. In return, JD.com would reward him with resources to help increase visitor traffic.
How serious is JD’s brushing?
It is difficult to predict how much of JD.com’s GMV can be attributed to brushing, but it is safe to say this is not an isolated case and could be happening on a regular basis. 
Jinghua Times found a number of JD.com brushing chat communities that provide professional fee-based brushing services to merchants. Brushing “clients” even set up dedicated message boards to share brushing experiences.
During conversations with Mr. Wang, the JD.com employee also stated that “very capable” storefronts on JD.com brush several million RMB worth of orders and average storefronts will complete a half million RMB worth of brushing.
Companies and Chinese law try to stem the growth of brushing
Other companies like Alibaba has come out swinging against merchants they have discovered brushing. Alibaba’s COO, Daniel Zhang, stated that the company scrubs fake transactions from final GMV numbers. Sellers found faking transactions also face penalties – from having reviews deleted and no longer appearing in search results to fines up to 150,000 yuan and closure of their online stores. 
JD.com announced that the employee working with Mr. Wang was fired for violating company policy. However, an employee-initiated brushing campaign remains a worrying stain on JD.com’s growing marketplace business.
JD.com spokesperson, Josh 
  Gartner
 , has defended JD's efforts to protect stakeholders from fraudulent activity, saying “By design, JD.com’s business model of direct sales and a manageable number of marketplace vendors ensures close quality oversight for issues like authenticity and ‘brushing.’ We aggressively use advanced algorithms and other monitoring techniques to identify and harshly punish attempts to engage in fraud, as we did in this case, and will continue to strength our efforts until the practice is eliminated. The opinions that the former employee, who had only recently joined the company, reportedly expressed are in direct contradiction to our explicit policies against 'brushing' and he was quickly terminated following an investigation. ”
Legal regulation and enforcement in China is starting to play catch up. Under Chinese law, companies could be held liable if it knows of fake transactions on its platforms, but does not take adequate action. Provincial regulators are also stepping into the fold - fining a department store in Changsha city 50,000 RMB for faking 45,000 out of 58,000 RMB in reported online sales over nine days.
China is also set to release a draft e-commerce law by the end of 2015 for further deliberation in 2016. Yin Zhongqing, deputy director of the Financial and Economic Affairs Committee of the National People’s Congress, has been tasked with drafting the law. According to Yin, the law will cover provisions for an honest trade environment, quality of goods and services, protection of consumers’ interests and intellectual property rights.
Should shareholders be concerned?
As a practice, brushing is a kind of upgraded, more involved version of the fake review problem that plagued Amazon in the past or “Operation Clean Turf” that caught businesses paying for positive ratings on sites like Yelp. 
But in JD.com’s case, brushing is primarily concerning because it can artificially inflate GMV – an important metric for top-line growth, highlighting both a legal and business risk within the company.
Update: JD response added