Business Fraud

Business credit is based on belief or faith. Faith that once you as a "lender" have analyzed and are satisfied with all the financial, character and ambient analysis of a customer, you will have a reasonable opportunity to be paid the full amount owed, on time. Credit is a word derived from credere (Latin) which means to believe or trust. Fraud is any business activity, which resorts to deceitful practices or devices with the intent to deprive another of property or other rights, or to cause economic injury.

The essential characteristic of fraud is the intent to deceive. If the intent to deceive is lacking in any act or series of acts or representations, it is wrong to call such acts fraudulent, although they have caused you a loss as a creditor. A principal may be incompetent or negligent in managing the business or may be even willfully wasteful of the firmís assets, by gambling for instance; but, unless creditors were at some point intentionally deceived on a material fact, the principal cannot properly be charged with fraud.

Investigation concerning scams, bust-outs, false financial statements, and counterfeit checks, is an important part of the work of the NACM Loss Prevention Department. Particularly, when fraud is suspected (but for one reason or another the case does not go to the bankruptcy courts or state courts) this resource is often the only practical recourse of a defrauded creditor. The Loss Prevention Department works closely with federal and state authorities, and their information, if warranted, is turned over to these authorities for possible prosecution. The NACM Loss Prevention Department can be reached at 410-740-5560.

Why are all businesses susceptible?
Always unscrupulous individuals want to make quick money by cheating your company. However, the more competitive your business environment is, the more risk you take to get that new or incremental business. This eagerness can make it easy for a con artist to take advantage of your company.

You want to trust the customer because you want the business. Con artists know their game well. They know just what will "hook" you, and they know innumerable ways to fool the systems you have devised to stop them. You need to make it as hard as possible for a con artist to succeed. The best way to keep the hand of a crook out of your business is to learn the game.

Some Typical Scams to Watch Out For:

"Bustouts" or "Overbuys"
These terms describe criminal activity that aim to obtain large amounts of merchandise without paying for it. The swindler orders merchandise from a few suppliers and pays promptly. These suppliers are then used as credit references for larger and larger orders. The bogus company soon becomes a slow-payer and then a non-payer. At some point in the future, creditors are stuck for "the last payment".

This type of fraud is often well planned, highly organized and involves substantial financial backing. Unpaid-for merchandise is sold below cost to other illegitimate businesses, at "flea-markets" or peddled door-to-door.

Hit and Run
A swindler moves into a location and orders merchandise COD, paying with phony certified or cashier's checks. By the time the counterfeit check bounces, the "skip artist" has moved on to a new location to repeat the fraud.

The Hometown Repeater
By using different trade styles, keeping their operations small, and limiting their victims to "out of towners," a "respectable citizen" swindler may indefinitely avoid criminal prosecution.

Advance Fee Scams
In this type of fraud an up front payment is obtained for services to be rendered later, supposedly to "cover costs". This advance fee is accepted with no intention of providing the service. Example: The swindler, acting as a broker, is paid to secure a loan for a business. After some time, the swindler skips town or tells the victim that a suitable lender could not be found and refuses to return the fee.

Fictitious Stock Transfers
A fictitious company exchanges its worthless stock for the stock of a sound company. The swindler then creates false financial statements with inflated assets. These statements are used to get other businesses to swap stock for a piece of a bogus holding company. The assets of a legitimate company acquired in this way are then sold off or used as collateral on bank loans that are never paid.

Bank Loans and Leases
Fake trade and bank references are used to obtain loans not intended to be repaid or to arrange financing for the leasing of stolen or non-existent equipment.

Businesses Preferred by Fraudulent Operators
While fraud can be found in almost any line of business, certain businesses have special appeal to dishonest business people. The following are the types of businesses and products chosen most frequently by fraud perpetrators:

What you can do:

Who Really Owns the Company?
Criminals in the business of fraud know that a careful businessperson will likely check on the ownership of a company and its principals before granting credit and shipping goods. Therefore, they make it very hard for you to find out who you're doing business with. Here are some situations to watch out for:

What you can do:

Take Another Look at the Credit References

What you can do:

What's in a Financial Statement?
When a company provides a copy of its financial statement to obtain credit, do not judge it favorably after a quick perusal of the bottom line or the cash figure. Instead, look for indications that the financial statement may be questionable.

What you can do:

The Unsolicited New Customer
If most of your orders are obtained through your sales people, pay special attention to the unsolicited order. Here are some "red flags" to watch for:

What you can do:

Because you may not visit your customer at its place of business, you must check to see that the address provided does not carry the earmarks of a fraudulent business.

What you can do:

Mystery Affiliates
A fraudulent company often wants to convince you that it is a large, expanding business with many resources backing it up. It may claim to have parent companies or related businesses, branches and/or subsidiaries that do not exist. Here are some other things to look out for:

What you can do:

What's In a Name?
Do not be too quick to think that you have heard of a company, and therefore it is legitimate. Fraudulent companies will sometimes try to convince you that they have been around for a long time by carefully crafting a company name to mislead you.

What you can do:

Identifying Bankruptcy Fraud
The bankruptcy system is designed to give an individual or a company a chance to reorganize their affairs, or if reorganization is not possible, to equitably distribute the non-exempt assets of the debtor among the creditors. This is often referred to as "a fresh start." The amount of money a creditor will receive in a case will range from nothing in many cases to 100 percent in a few cases. In every case there will be significant delays from the time a bankruptcy petition is filed until the case is closed and all creditors receive final payment.

The bankruptcy system is based on the theory that a debtor will make full disclosure of all assets and liabilities so that the final disposition is in accordance with the requirements of the law. Unfortunately, at times both debtors and creditors try to obtain more than they are entitled to under the Bankruptcy Code. There are a number of criminal statutes that prohibit this type conduct.

Although concealing assets or making false statements in a bankruptcy proceeding make up the majority of bankruptcy frauds, there are a number of fraud schemes that are more complicated or are primarily designed for reasons other than maximizing the retention of assets in bankruptcy. Such schemes often use the automatic stay provided by the Bankruptcy Code to conceal an earlier crime, maximize profit from an ongoing fraud scheme or buy time while the perpetrator finds a way to avoid victims or leave town.

Bankruptcy Fraud Warning Signs

Copyright 1999 Credit Research Foundation
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