How to Spot a Fraudulent Business

Fraud is alive and well in the world of commerce. But is it rising or falling?

“We’re seeing less of it here at our firm and hearing less of it from our clients,” says Mark A. Amendola, a litigation attorney with the firm of Martyn & Associates in Cleveland, OH. “So I have to conclude that fraud is on the decline, perhaps attributable to better monitoring and prevention systems in place. I think overall better awareness and better monitoring have prevented or caught some of the fraud that used to be rampant before.”

Not everyone agrees. “As more and more business is conducted over the internet and not through traditional brick-and-mortar businesses, fraudulent business practices are most definitely on the rise,” observes Richard Copelan, president and CEO of the Better Business Bureau serving Ventura, Santa Barbara, and San Luis Obispo counties in California. As a result, he adds, “people are more suspicious of businesses than ever before.”

The Many Flavors of Fraud

Fraud comes in many sizes, flavors, and colors. It can take place within a company. One form is payroll fraud, in which an employee overreports overtime hours and collects the extra money. Another is doublecheck fraud. Here an accountant writes out a check to a vendor and simultaneously writes a check to him or herself, giving it the same code. Then there’s overordering fraud: an employee orders too many office supplies, returns the extra amount, and keeps the refund.

Yet another is friendship fraud. In this case, an employer hires someone—a friend, a friend of a friend, or even a family member—and places too much trust in the individual. This person may, for example, siphon off payroll taxes instead of paying the government.

These problems can be managed in large part by accountability: measuring results, cross-checking, and ensuring everyone knows they’re being watched. There’s also a small matter of fairness: employees who believe they are being treated unfairly (particularly by being underpaid) are far more likely to use unorthodox and illegal means to get what they feel is their due.

Business to Business

The other main kind of fraud is business-to-business (B2B). The credit rating firm Experian estimates that some $50 billion a year is lost as a result of fraud, though some analysts believe that figure is too low. Citing a recent LinkedIn article, Amendola says, “About 20 percent of all online B2B inquiries are fraud attempts, and about 75 percent of all businesses have lost money due to fraud.”

Here are some of the more common types of B2B fraud. Commercial bust-outs: A company or an individual establishes many lines of credit and pays conscientiously to build up a good credit history. Consequently, credit limits are increased. At this point, all credit is maxed out with no intention to repay. Creditors have to write off the loss.

Account takeovers are like personal identity theft, except with a stolen business identity. The scammer intercepts and usurps the victim’s credit information to place unauthorized orders.

Shell companies are set up solely for the purpose of committing B2B fraud, including money laundering. One way of spotting this kind of fraud is seeing if the company has any receivables listed in the credit-check phase. If not, there’s a good chance it’s a shell company.

Another variant: a case recently came to Blue Book’s attention in which a buyer—ostensibly from a reputable company—placed a $100,000 order and didn’t pay. What should have tipped the seller off? The buyer had a Gmail email address rather than one from the company he was supposedly representing. Secondly, the buyer requested shipment to another address. In this version, the scammer works by pretending to be from a reputable firm.

Never paying (or no payment) is when a company opens an account (often through material misrepresentation) without the slightest intention of making a payment.

Spotting the Impostors

How do you spot a fraudulent business? Rick Fryman, president and COO of TC Marketing, Inc. in Napoleon, OH, is blunt: “Unfortunately, every new account that you have zero experience with is a suspect until a relationship is formed.”

Blue Book Services can provide a head start with its ratings system, indicating the length of time a company has been operating and the pay experiences of other suppliers.

One of the first things the Better Business Bureau looks at is transparency, according to Copelan. “While not always a sure-fire sign of illegitimacy,” he says, companies that don’t include an address and telephone number raise suspicion. If there’s nothing to hide, most companies will generally disclose their location.

Amendola offers these warning signs: “An application from an unusual or high-risk zip code; a shipping address that doesn’t match the company’s office location; a new customer’s first order is for high-risk or expensive products; the company doesn’t have a significant credit history; financial statements are either withheld or submitted with mistakes; company ownership has undergone suspicious changes; [and] the company asserts sizable revenue, but is unable or unwilling to prove it.”

“Conflicting information” is also a clue, according to Michelle Pancotto, credit and collection manager for Chicago-based Clipper Controlled Logistics, a subsidiary of Radiant Logistics, Inc. For example, a company might claim to have been in business for a certain number of years, but “all trade information indicates a newly formed company.”

Appearance counts too, adds Copelan. “A good, legitimate business is careful about how [its] website appears and functions. It’s kind of funny, really, how illegitimate companies will have their website, emails, and other forms of communications littered with misspellings and poor grammar. You’d think if someone is trying to fool you, they’d be more careful, but so many are trying to make a quick buck, then get out; they often don’t bother to look as professional as they could.

“With all of the resources available to people today, there should be a vast amount of information available on the internet about a company and its principals,” Copelan goes on to say.

Payment methods offer clues as well. “Any business that asks you to submit payment through an unsecure website is highly suspicious,” Copeland stresses, “as are requests for payment in the form of cashier’s checks, money orders, and so forth.”

Defending Yourself

What’s the best way to protect a business from fraud?  Advice from the credit professionals we interviewed include beginning with cash up front or limited credit terms, to get credit references and call those references.

Intuition often provides a clue. “You just have to get a feel for it,” Fryman stresses. “Sometimes, your gut just tells you not to work with certain companies/individuals.” Furthermore, there should be established protocols for vetting new business partners, and they should be followed without exception.

Certain steps “must be followed before any verbal or written agreement is made,” advises Copelan. “First, the business should ask the solicitor to forward as much information as possible in writing or email. All terms and conditions should be clearly defined. Any new vendor should be subjected to a background check. The background check should include thorough research of information on the company and its principals, as previously mentioned.

“At a minimum,” Copelan continues, “general research on Google and at least one other search engine is good and should include viewing links to Better Business Bureau reports, LinkedIn, Glassdoor, and the customer review websites.”

Jennifer Lobb, writing on the website of Nav, a business finance marketplace, agrees. “Perhaps the easiest and most important step in B2B fraud prevention is verifying the information provided by those seeking or requesting your services or products.

“If you’ll be extending terms to another business, or making a large sale without collecting full payment upfront, always make it a point to thoroughly review and vet information provided by the business. From the proper name of the business and the owner/representative to the physical location of the business, make sure everything on the application is accurate, and ask questions if it’s not,” advises Lobb.

Copelan offers this suggestion: when dealing with a company for the first time, pay with a credit card. “Credit cards are a great way to pay for purchases from a new vendor, because even though you run the risk of getting your credit card hacked, there are also some protections in making credit card purchases.

“We’ve seen many instances when a consumer or business has lost money to a scammer and there is simply no way to get the money back unless a credit card was used,” he says. “Illegitimate charges on a credit card can be reversed. A legitimate offer is just as good tomorrow as it is today, so a new business relationship should never be rushed into.”

Other methods include making use of fraud detection tools, such as Experian’s National Fraud Database. Banking and credit transactions should be carefully and regularly monitored, and accounts should never be entrusted to a single person without supervision.

Finally, Amendola recommends educating employees about the most common scams and types of fraud and how to recognize and prevent them.

Reporting Fraud

There’s no getting around it: being swindled is humiliating. But don’t let the humiliation stop you from reporting fraud.

“I’ve worked in the BBB system for over 30 years and can assure you that people of all types can be victimized,” Copelan says. “There are new scams being invented every day, and fraudsters constantly find new and innovative ways to relieve people of their hard-earned money.”

When fraudulent behavior does occur, Copelan points out, “communication is the key. We always recommend that people who have been victimized by an offer through the internet, particularly if the origin of the offer is unknown, contact the FBI’s Internet Crime Complaint Center.” Fraud should always be reported to the Better Business Bureau, and if applicable, local law enforcement agencies.

Of course, you can confidentially report credit concerns, including fraud, to Blue Book Services who is equipped to investigate these situations further on behalf of its Members.

You Can’t Cheat an Honest Man

Film buffs will remember You Can’t Cheat an Honest Man as a W.C. Fields movie from 1939, but it’s also a piece of proverbial wisdom. Many of the biggest scams trap people who want to beat the system. Another example from the film vaults is The Sting, a 1973 Oscar winner about an elaborate con on a compulsive gambler who wanted to cheat on the horses.

There are also smaller temptations to dishonesty—for example, offers to change negative online reviews of a product or service or boost scores on rating sites. The FTC warns, “posting fake reviews is illegal. FTC guidelines say endorsements—including reviews—must reflect the honest opinions and experiences of the endorser.”

All in all, honesty is not only the best policy, but the easiest one. Every business needs to do its part.