Bustout Fraud; Credit Fraud; Criminal Behavior

Credit fraud is an intentional misrepresentation of a material act made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act.  This action on which the other person relies results in financial injury or loss.  A bustout is a type of fraud sometimes linked with bankruptcy, insolvency, identity theft, or Assignments for the Benefit of Creditors.  A bustout is criminal activity since its perpetrator(s) want to acquire as much inventory as possible on open account terms and then disappear, file for bankruptcy protection, or file an Assignment for the Benefit of Creditors.

No company is immune to credit fraud, and no credit manager can promise to be able to prevent it. Criminal activity designed to separate creditors from their products has become more sophisticated, and unfortunately more commonplace. Credit losses can be reduced through awareness, constant vigilance, education, thorough credit checking, and tight credit granting policies. The only difference between fraud and losses caused by simple mismanagement involves the intent of the business owner or manager to commit fraud is to increase the amount ofgoods they can purchase on credit     credit, while planning to ignore the final payments due. The typical bustout starts with small orders being placed and paid promptly.

The goal of the criminal is to gain the trust of one or more trade creditors. They will spend time to convince a creditor to establish an open account, even if it has a relatively small credit limit. The perpetrators TheTheTheTheTheThewill use trade references from vendors that have been persuaded to offer open account terms to convince other creditors to also extend them open account credit.   

A typical bustout scam will last for only a few months. An elaborate bustout might last up to a year. The end game of the bustout scam is the most important. The scam artist begins to delay payments to creditors, often making and then breaking payment commitments.  All the while, the criminal will be pocketing the money received from the sale of products. Up to the end of the scam, the criminal will always be on the lookout for another supplier that will ship goods on open account terms.  When the supply of goods arriving on open account terms dries up and before creditors close in, the company typically either files for bankruptcy protection or skips town.

No company is immune to credit fraud and no credit manager can prevent it. Criminal activity designed to separate creditors from their products has become more sophisticated, and unfortunately more commonplace.Credit losses can be reduced through awareness, constant vigilance, education, thorough credit checking, and tight credit granting policies.

One final thought: Statistics on credit fraud are difficult to obtain for several reasons, including:

1. It is often difficult to differentiate between a legitimate business insolvency, and a loss caused by a deliberate fraud committed by the customer;
2. There is a natural reluctance to report credit fraud due to embarrassment about the fact that the fraud was allowed to take place;
3. There is also an issue that reporting suspected fraud to senior management might result in the credit manager losing their job.

© 2011 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."