When a company extends credit to a customer, it is extended in good faith. When the customer defaults on the debt, it may be time to hire debt collectors. Companies typically go through a credit analysis before extending credit to a customer. When credit is extended, it is because the company has looked at the customer’s “character” and believes the customer will honor its debt commitments. When a customer doesn’t honor its commitments, and never intended to, this is fraud and is punishable by law. section will discuss different types of fraud.
Types of Fraud
The critical characteristic of fraud is that the customer intended to deceive. If the deceit is missing in any default situation, then this situation can not be called fraud even though the creditor may lose out in the end. Incompetence and negligence are not the same as fraudulent. To be considered fraud, the creditor must have been deceived by the customer on a material fact.
Every company is susceptible to fraud. However, companies that are eagerly seeking increased market share and are willing to take on more risk to gain the increased share are particularly at risk. When companies ease credit terms to attract new business, it becomes easier for con artists to take unfair advantage. Creditors in this scenario are eager to attract new business and they want to believe potential customers are above board. Con artists are well versed in how to pass the credit check and they know just what to say and do to fool all the systems in place designed to weed out unsavory potential customers. What is the best way to keep the con artists at bay? Learn how the fraud game is played, and out play the bad guys.
Below are some examples of different scams companies should look out for:
“Overbuys” – (also known as “Bustouts.”) Customers using this scam are attempting to buy large amounts of your company’s products and not pay for any of it. Typically, the customer gains credit from several companies and pays promptly for a few orders from each. These companies then become the scammer’s credit references for bigger and bigger credit lines. Once the relationship is underway, large orders are placed and the scammer soon becomes a slow pay customer and then a delinquent customer. The creditor is the big loser. This type of fraud is usually well thought out and executed requiring significant financial backing. The unpaid for product is then sold at below cost prices to other fraudulent businesses, at swap meets, door-to-door and in on-line market places.
Hit and Run – A scammer moves into an area and places merchandise orders COD. The payment is made with a fraudulent certified or cashier’s check. The scammer is long gone by the time the check bounces, and is scamming some other unsuspecting company in another location.
Repeat Offender – A scammer runs a variety of different types of companies over the years in the same location. It scams only companies in other towns or states so that people living in the community never suspect the company is fraudulent. These types of scammers can indefinitely avoid criminal prosecution because no one around them sees them for the swindlers they are.
Advance Fee Scams – Scammers collect fees upfront for services to be completed in the future. The scammers have no intention of ever providing the promised services, and typically skip town before the victim figures out the scam.
Fictitious Stock Transfers – A bogus company exchanges its worthless stock for the stock of a successful company. The bogus company then creates inflated financial statements incorporating the value added by the successful company’s stock. The inflated financial statements are then used to convince other successful companies to exchange stock for a stake in the bogus holding company. The legitimate stock from the successful companies is then sold off by the bogus company and the revenue is absorbed or used as collateral to acquire bank loans which are never repaid.
Bank Loans and Leases – Bogus trade and bank references are provided by the scammer to obtain loans that will never be repaid or to arrange financing to lease stolen or non-existent equipment.
Anytime a company or a person is scammed, it is an unfortunate event. Debt collectors can help a company go after a scamming customer. Professional collection agencies are well-suited to this type of debt collection because they are experts in tracking debtors down. There is a definite art to tracking down elusive debtors. Collection agencies do this kind of search all the time, and they have many state-of-the-art methods for finding people and companies when they do not want to be found. Debt collectors are also experts in determining if there are any assets there to make collection possible. Hiring a commercial collection agency can significantly increase a company’s likelihood of collecting because of the experience the agency draws from. Because collection agencies typically work on a contingency basis, the client does not pay until the debt collection has been made, making it a cost-effective option for many creditors.
Commonly Scammed Businesses and Fraud Red Flags
Unfortunately, instances of fraud can be found in almost every industry out there. Protecting your company against fraud is important, and debt collectors may be useful for those times when the fraud has been perpetrated and debt collection is necessary. This section will focus on types of companies which seem to be hardest hit by fraud and red flags of fraudulent potential customers.
Certain types of businesses seem to have a particular appeal to scammers. Below is a list of businesses and product types which seem to attract more fraud than the average:
- General wholesale merchandise such as home products, health and beauty products, electronics including computers, televisions, stereos, radios, etc.
- Smaller products that can be easily transported from one location to another, are difficult to trace and are easy to sell.
- Apparel falling into the low to medium price range.
If your company is selling a product line that falls into the categories preferred by fraudulent businesses, it is imperative to set up and follow strict credit policies at all times. These credit policies must include independent verification of all information gathered from potential new customers, no exceptions, ever. In addition, it is advisable to become a member of a trade group consisting of businesses similar to yours so that comparing and sharing of credit information is possible. Networking about potential customers with other like-minded companies can go a long way toward thwarting fraudulent businesses.
Companies in the business of fraud know that potential creditors will do their homework to be certain of the character of a new customer. Because of this, fraudulent companies make it very difficult for the potential creditor to really know who the owners of the business are. Below are some red flags for creditors to be aware of:
- A very young owner. Often a fraudulent business will use a front man to conceal the true identity of the owners. A favorite front is the young person because invention of a long detailed business background will not be necessary.
- An older retired owner. This is another favorite front because the con artist typically finds a retiree with a clear business background who is willing to be the responsible shield for a dishonest enterprise.
- Employment records which cannot be verified. It should always be easy and straightforward to check the employment records of the company’s principals. Be very wary of principals who list long periods of employment in an obscure foreign company or as a consultant. Be even more cautious if the principal is unwilling to provide references or specific business address information from that past employment.
- The possible secret sale of your customer with the former owner staying on as if nothing has changed. The new principals may be committing fraudulent acts while the former owner keeps you from noticing anything unusual. The scammer in this case wants the failure of the company to look like it happened due to normal business causes because the chances of a conviction for intent to commit fraud are less.
- An organizational structure that is complex and confusing, particularly in a new enterprise. Scammers may hide behind this confusion making the credit check process difficult for potential creditors.
If any of these red flags come up during the credit check process, work even harder to find out everything you can about the principals of the business applying for the credit. Take extra care to check the employment history of the principals so that you can confirm their business backgrounds.
When a customer has fraudulently conducted business with your company and owes you money, debt collectors can help you collect the debt. Scammers are very good at hiding their true identities and locations. Professional collection agencies are experts in searching for and discovering these true identities and locations. Commercial collection agencies have vast experience in locating debtors and identifying if assets are available and debt collection possible. State of the art techniques are employed by collection agencies and they know how to negotiate with elusive debtors. They have proven methods of silencing every excuse the debtor makes, and their debt collection success rates are very good because of these methods. Dealing with fraud is always unfortunate, but collection agencies can take some of the sting out when they collect the debt that is owed.
How to Identify A Fraudulent Company
When a company is considering extending credit to a potential new customer, careful credit and financial statement analyses are paramount. Even with careful examination, however, sometimes a customer will become delinquent and debt collectors might be called in to collect. This section will focus on how to identify a fraudulent company by its credit references and financial statements.
Part of any credit application is a list of credit references supplied by the potential new customer. When determining the credit worthiness of a customer, calling and talking to each reference is important.
Below are some ways that scammers can fake credit references:
- When placing calls to references, be suspicious if the person contacted immediately launches into a glowing reference without a moment’s hesitation to even locate a file.
- Bank references can be falsified. If the bank reference is a phone number with an extension and a person’s name to ask for, this can easily be a friend of the scammer who is told what to say and what accounts to reference.
- Ordinary answering services can be used to provide false references.
- Be wary if the only way to request references is by sending a letter via fax machine. The fax number may be at a central location where many reference requests are sent and the responses can be sent out on a variety of different letterheads.
When credit references seem suspicious, below are some actions that can be taken to verify the legitimacy of the reference:
- Confirm the reference company truly exists by finding a yellow pages listing or other reliable outside source for the company.
- Attempt to obtain the phone number given for the company by calling directory assistance. If the phone number seems legitimate, make sure that the person you speak to actually works for the company and is in a position of authority.
- Check that the company reference is a business that is an industry that would logically do business with the potential new customer’s business.
- If the reference is an 800 number, request the local phone number from the potential new customer and call it to confirm the location and existence of the company reference.
When a potential new customer provides financial statements as part of its credit application, do not simply look at the bottom line or the cash amount. Below are some additional things to look at that may identify questions that need to be answered before credit is extended.
- Anytime the accountant’s statements are randomly dated, this is a red flag because usually these statements are prepared at month-, quarter-, or year-end.
- If the company’s assets are impossible to verify this may be a red flag. These would include marketable securities and real estate. In addition a very high accounts receivable number or a large amount due from principals should be verified.
- Verify that the accountant actually exists and is licensed. Also check if the accountant is from a different state than the state where the potential customer is located.
- For a new business, give careful consideration to the net worth and capital numbers to confirm that they make sense when taken together.
If the financial statements seem suspicious, below are some additional things to look at before making the decision to extend credit.
- Look at the assets and find a reliable outside source to confirm they exist. Be sure that the accounts receivable number seems consistent when compared to the annual sales number.
- Check the credentials of the accountant who prepared the financial statements.
- If the statements show large assets but little or no debt, this is a red flag.
- Call the primary bank of the customer and ask for the average balance. Compare this number to the cash number on the balance sheet. They should be comparable.
Once you have carefully evaluated the references and financial statements hopefully the decision to extend credit will be fairly easy. If something seems not quite right, then trust your instincts and keep digging.
Debt collectors don’t typically check credit references; however, they frequently evaluate financial statements prior to making a debt collection call. Once a customer has gone delinquent, it is quite common for a credit department to turn over accounts to collection agencies when in-house collectors have been unsuccessful in their debt collection efforts. When an account is turned over to a collection agency, the collection agency spends a fair amount of time understanding the customer and the debt collection situation. Often, if a customer is fraudulent a key to the debt collection is finding the customer. One of the problems with fraudulent companies is that they are very good at scamming and then disappearing. Collection agencies are used to finding debtors, and they have state of the art techniques for debtor location. This along with the fact that collection agencies hire only professional collectors gives collection agencies a significantly higher debt collection success rate than in-house collectors. When dealing with fraudulent customers, collection agencies may be a very cost-effective way to maximize debt collection success.
The Unsolicited Order Scam
In the complex business world of today, there are unsavory customers out there intending to defraud legitimate companies. If a company has been scammed, debt collectors can definitely be of help in tracking down the scammer and pursuing payment for the outstanding debt. This section will focus on the unsolicited order scam as well as identifying fraudulent businesses through suspicious locations.
If your business obtains new orders primarily through your sales staff, be on high alert if you suddenly receive an unsolicited order. Below are some danger signs to take note of:
- The potential new customer skates around your requests for verifiable information about the company.
- The customer requests delivery as soon as possible. The customer may give trade show or promotions as a reason for the urgency of the order. Whenever a new customer wants a rush delivery on credit, this is a high risk scenario.
- If the unsolicited order is very large, be extra careful in your credit analysis because this represents a greater risk for your company if payment is not received. In many cases, fraudulent companies will place small orders at the beginning of the relationship and pay on time to become a “good” customer with an excellent credit history. Once they have established this good reputation with you, they will then place a large order which they never intend to pay for. Beware of the change to a large order.
- If the potential new customer seems to already fully understand your credit policy, beware. A way to suspect this is if the initial order placed is just below the level which will cause a closer examination of the company during the credit analysis.
Below are some actions your company can take to lessen the chance of being scammed:
- When a new customer wants an ordered delivered immediately, do not extend instant credit to the customer. Do not let the customer talk you into it even if the reasons stated sound legitimate or they threaten to move their business elsewhere. These tactics are used successfully by scammers all the time.
- When checking the credit references provided by a new customer, be sure to actually check the references and be sure to ask what size orders the customer has placed with the reference. Compare the size of orders placed elsewhere with the size of the order placed with your company to see if there is consistency across suppliers.
- If your company suddenly starts to get credit reference calls on a new customer from other potential suppliers, be on high alert as this can signify that the customer is using your company to get credit set up with other suppliers it intends to defraud.
- If your company sells out of a wholesale enterprise and your new customer wants to take possession of product immediately, do not allow the customer to use credit for the purchase. Insist that the customer pay at the time of purchase.
- When taking on a new customer, it is not unusual that your company would never have the reason or opportunity to visit the location of the customer. Because of this, fraudulent companies know how to appear to have a legitimate location, when in actuality, they do not.
Below are some things to look out for relating to location:
- Fraudulent companies frequently use short term, cheap rental locations. Fraudulent companies also change locations frequently.
- Fraudulent companies often utilize mail drops. Mail drops enable the fraudulent company to have a street number address which makes them look legitimate rather than a post office box number.
- Fraudulent companies often use a strip mall location which provides them with a way to sell the stolen merchandise to walk-in customers.
- Determine if the customer’s address is consistent with where a business would be located. For example, a residential address is not appropriate for a company involved in wholesale, retail or manufacturing.
- If the ship-to address is not the same as the business address, be on high alert. The ship-to address may be a temporary address which will disappear along with the business address, leaving you high and dry.
Below are some things to do to avoid location scams:
- Verify how long the customer has been at the current location by checking with an outside source or the building manager.
- Ask a supplier or other business associate in the customer’s area to drive or stop by the location to verify its legitimacy.
- When checking the credit references of the new customer, ask the reference how long they have been doing business with the customer. This will give you a sense of how long the company has been in business.
Debt collectors do not usually worry about unsolicited orders, but they frequently are searching for a debtor’s true location. It is not unusual for a collection agency to spend a lot of time tracking down debtors who have disappeared and do not want to be found. Because collection agencies utilize the most state-of-the-art search techniques, they are typically much more successful at locating dead beat debtors than in-house collectors. In addition, once the debtor is located, collection agencies are very good at finding out about the debtor’s assets and ability to pay. Using this information, the debt collector is able to have a debt collection strategy already in mind when the first phone contact is made. The debtor is usually caught off guard because the scammer does not expect to be found. If the debt collector can engage the debtor this usually indicates that there is a chance for debt collection. Collection agencies usually do not get paid unless they collect, so this can make using an agency very cost effective.
Companies committing fraud can be very sophisticated in their scams and in their disappearing acts. Professional debt collectors are trained to sniff out debtors even when they have quietly left the scene of the crime. This section will focus on companies claiming to be part of a bigger entity and companies pretending to be a well known company you have heard of.
The goal of a scammer is to convince your company that they are legitimate and credit worthy. They will go to great lengths to become your customer including telling you that they have a parent company or they own other related businesses, branches or subsidiaries, all of which are not true. It is up to you to determine the truth of a potential new customer’s claims. Below are some red flags to be aware of:
- If a potential customer claims to be a subsidiary of a well-known large company, do the work to confirm the relationship exists. Scammers frequently try to appear legitimate by claiming they are owned by a legitimate well-known company.
- If a potential customer claims to be owned by a foreign company, but the relationship is difficult to verify, be on high alert. These foreign parent companies are frequently used by securities and merchandise scammers.
If you are suspicious about a potential new customer because of claimed affiliations, below are some steps to take to verify the information:
- Insist that the customer provide you with specific affiliate information including addresses and telephone numbers. Take the time to call the affiliate and pursue verification until you are satisfied the relationship is legitimate.
- Check the information provided by the customer by calling the affiliate and talking to a source not provided by the customer. Use the affiliate’s main published phone number rather than the number provided by the customer. Verify the customer’s relationship with the affiliate named.
- Verify any relevant corporate charter information by contacting the Secretary of State.
Sometimes fraudulent companies will come up with their company name by taking a well known corporate name and tweaking it slightly. Just because you think you’ve heard of a potential new customer, still conduct a thorough credit check. Here are some tactics scammers use to trick you into thinking they are a legitimate company you think you know:
- The potential customer uses a name that is nearly identical to a legitimate well-known company. They also may locate their fraudulent company in the same town as the legitimate company making the scam even harder to pick up on.
- They name their fraudulent company using a word which signifies “big” such as International, American, U.S., European, Atlantic or Pacific. These words signify size and stature, giving the fake company a legitimate sound.
As always, when you feel suspicious of a potential new customer, the key is to verify the information provided by the customer before any credit is extended. The time taken to verify a customer’s legitimacy is always time well spent. When a company is scammed, there is always regret if verification was skipped for whatever reason.
When a company is scammed by a customer, all the information collected during the credit application process will be helpful to the debt collector. Whether the debt collector is in-house or from a professional collection agency, all the contact and financial information collected during the credit analysis will be useful. The contact information will provide the debt collector with a way to hopefully track down the debtor. The financial information, if legitimate, will provide the debt collector with information about the debtor’s assets and ability to pay. When information provided by the debtor ends up being false, it may be time to hire a collection agency because they are very good at searching for and finding debtors. Collection agencies use many tried and true techniques to find debtors. Once debtors are located, collection agencies know all the techniques to motivate debtors to agree to payment plans. When your in-house debt collectors come up empty, a good next step is to send the claims to collection agencies.
Most companies filing for bankruptcy are legitimately attempting to reorganize and get a fresh start, or in the worst case scenario, equitably distribute non-exempt assets to the creditors who are owed money. Bankruptcy fraud occurs when a company utilizes the bankruptcy system to hide assets or otherwise conduct a scam where they end up debt free and Scott free. Debt collectors may be helpful if bankruptcy fraud occurs and the debtor disappears. Professional debt collectors know how to find debtors who do not want to be found, and how to motivate debtors to pay. This section will focus on bankruptcy fraud.
Below are some red flags to watch for which may represent a customer committing bankruptcy fraud.
- The fraudulent company attempts to hide some of its assets.
- The customer has a history of serial bankruptcy cases.
- A lack of normal business records.
- Business records that are missing or not complete.
- Their business conduct falls outside normal parameters within the industry and for businesses in general.
- Assets were mysteriously depleted just prior to the bankruptcy filing.
- An unusual level of recent departures of key management personnel from the company.
- The company fails to answer questions about their debt payment schedule or other aspects of their current financial status.
- Numerous amendments are made to debt payment schedules or monthly financial information provided to the creditor.
- Inconsistencies appear when comparing financial information and tax returns provided to the creditor.
- Be on high alert if you are consistently unable to contact key management personnel at the telephone number and location listed for the debtor.
- If the customer suddenly begins dealing in cash, this is a red flag.
- If the customer’s inventory is suddenly depleted just after the petition for bankruptcy was filed, be wary.
- Take note if key management suddenly is given unscheduled salary hikes or bonuses or if officers or other company insiders withdraw cash from the business.
- Be wary if property is suddenly transferred to insiders, owners or relatives shortly before the bankruptcy filing.
- Another red flag is if loans are paid off to owners, directors, shareholders, relatives or other insiders just prior to the bankruptcy filing.
- If you see unusual transactions occurring with non-debtor subsidiaries, parent companies or companies affiliated with the same owners or relatives of the owners, this is a red flag.
- If the customer has a history of breach of contract or other frauds, be on high alert.
- If the customer has very complicated company structures this can be a red flag.
- If there was a fire or loss of some kind, including theft prior to or following the bankruptcy filing this can indicated bankruptcy fraud.
Collection agencies often become involved in tracking down debtors who have disappeared. The state of the art search techniques employed by collection agencies enables them to successfully find dead beat debtors much more often than in-house debt collectors. They are experts in finding debtors and collecting the debt owed. Bankruptcy fraud is just one more scam used by a customer to buy product with no intention of paying. The biggest problem with bankruptcy fraud is that the debtor finds a way to hide or distribute assets illegally. While collection agencies are well versed in locating debtors, they do not have a lot of success with collecting from fraudulent customers. Collection agencies will go through the same debt collection process they do for any other collection file, however, their success rate will be less than their typical success rate for more collectible files. A professional debt collector will investigate to determine if assets exist to pay the debt, however, scammers can be much more sophisticated than the average debtor, so the chances of success are less. Since most collection agencies work on a contingency basis, they do not get paid unless the debt is collected. When dealing with scammers who are very sneaky and slick in their ability to avoid paying what they owe, using a collection agency can be very cost effective and can sometimes increase the chances of debt collection success.