Avoiding Credit Fraud

Credit fraud involves the intentional misrepresentation of material facts made by an applicant or a customer with full knowledge of its falsity for the purpose of inducing the creditor to extend credit when otherwise credit would be denied.  Credit fraud typically involves the extension of credit on open account terms which results in damage in the form of late payment or payment default.  Credit fraud may also involve an omission or purposeful failure to state material facts resulting in the creditor being misled by the customer or applicant. 

Credit professionals should know that export transactions pose a high risk of fraud.  In certain countries, criminals intent on committing credit fraud may be all but immune to prosecution based on their political contacts or their ability to bribe officials to look away.  The Internet has made the job of committing credit fraud even easier.  Often, the salesperson and the buyer never meet.  Entire transactions can be conducted electronically making tracing the whereabouts of the people involved and learning their real names difficult if not impossible.

There are various types of fraud, including these:

1. The planned overbuy.  The fraud involves the buyer's intent to sell the goods but not to pay the creditor for them.  Hint:  Beware of medium to large orders received immediately after a trade show by a new customer.  Beware of customers that offer to pay COD for their first order.   Set low limits on shipments, even on accounts with COD terms, until you have established a track record and done a thorough credit check. 
2. Unsolicited orders.  These are a red flag.  A con artist might simply pick up the yellow pages and try to order product from every company listed in any quantity and any payment terms other than payment in advance with either no intention to pay or the intention to pay with an NSF check. 
3. If you have been victimized by credit fraud in the past, chances are good that your company's name is being shared with other criminals.  If you have been a victim of some form of fraud, close the loophole(s) that caused the loss or you risk being the victim a second time.
4. Do not ship multiple carton COD orders with one COD tag. Frequently the customer will accept the cartons without COD labels, and refuse the lead carton with the COD charge. The safest procedure is to require payment in advance by wire transfer. Another way to avoid problems is to divide the COD amount by the number of cartons and use a COD label on each carton.
   
   Name of Account:
5. Is the name of the business confusingly similar to another successful local or national business? If so, this could be an attempt to lull you into a sense of security and cause you to ship the order without completing a routine credit investigation. 
6. Is the name of the business prestigious-sounding, i.e., Worldwide Widgets, or American Widgets, or National or Universal Widgets? If so, this may be another attempt to lull you into complacency.
   
   Orders and Reorders:
7. Is the first order paid promptly with re-orders in significantly larger dollar amounts? 
8. Are re-orders sent more frequently than your usual "turnover" experience? 
9. Are re-orders received from a new account even before the previous invoice[s] are paid? This is a common technique of the fraudulent operator. 
10. Is the order marked for "immediate" or "rush" delivery from a customer who is not known to you? Is the buyer unusually demanding or insistent? 
11. Is there a significant change in the buying pattern of an account? This may be an indication that there is "New Management" and that the new "owner" [who may have put little or no money down] is buying a business with an established credit record for the purpose of buying goods, selling them for cash, pocketing the money and disappearing before the scam is discovered. 
12. Does the merchandise ordered seem unrelated to the customer's line
    of business? For example, is a beauty supply company ordering video games?
13. Is the order placed by an out-of-state company? A fraudulent 
    operation frequently avoids placing orders in its state of residence.
14. Is the Purchase Order signed. Is the signature on the purchase order a facsimile stamp? This tactic may be used in order to process a large number of purchase orders in a short period of time. 
15. Are the orders placed by telephone rather than in writing so as not to reveal additional information about the customer, thus avoiding a "paper trail"? 
16. After shipping the order, are there inordinate complaints relative to returns, shipping, prices, shortages, quality, etc.? A fraudulent account will use these tactics to delay payment and to prolong its operation time.
17. Beware wary of COD sales to unknown companies. Payment may 
    be stopped, the account may be closed, the check may be returned because of insufficient funds.
18. Is the business less than one year old? If the business is incorporated, you can check with the Secretary of State's office in the State in which the corporation is registered to find out. 
19. Request a completed, signed and dated credit application prior to shipping the first order.
    
    Credit References:
20. Are you receiving an inordinate number of credit inquiries for an account with whom you have little or no credit history? If so, this should be a red flag to your company. 
21. Does the address of the credit reference have a suite or unit number number? If so, it may be a private post office box, or an answering service, or even a residence or apartment. 
22. Are the trade reference calls answered by a company or by an answering service? Does the reference answer the telephone using the digits of the number, i.e. "6754"? If so you may be dealing with an answering service - making the credit reference suspect. When in doubt, ask: "Is this an answering service?" 
23. Is there information on the credit application that cannot be verified? 
24. Are all or most of the credit references localized, i.e. in the same city or state as the applicant? 
25. Are the companies provided as references unfamiliar to you and not generally known in your industry? Do you recognize none of the references listed? 
26. Are the credit references not listed in the telephone directories or unknown to directory assistance? Rather than using the telephone number provided on the reference sheet, contact directory assistance in the reference's city. 
27. Do the telephone references provide an immediate, and extremely favorable credit rating? If the person you speak to does not have to check his or her records before responding to your questions, this could be a "Phone Drop" which has been set up by a fraudulent operator. 
28. Beware of using "800" numbers to verify a credit reference. Multiple 800 numbers can be located at the same address and answered by the same person using different company names. 
29. Do the references advise that your call will be returned later? This could be an answering service for the "credit reference". 
30. On telephone credit inquiries, instruct your credit personnel to ask "Have you had many inquiries on this account?". 
31. Is the customer's attitude overly friendly, or instead demanding when the order is placed and when references are requested and checked? A credit criminal relies on a short time frame between order placement and shipment and needs a rushed credit decision to be successful. 
32. Is there information on the credit application that cannot be verified?
    
    Financial Statements:
33. Is the customer reluctant to provide financial statements? When submitted, is the customer's financial statement unaudited, or internally prepared? Beware of financial statements from a foreign country. 
34. Does the balance sheet show a significant value for intangible assets? If so, the financial statement will have an inflated net worth. Many companies extend credit to a customer based on a percentage of net worth - so an inflated net worth is potentially a serious problem. 
35. Is the financial statement consistent with your knowledge of industry standards?
    
    Banking Information:
36. Has the applicant's bank account been established for more than one year? What is the average balance? Has there been any "unsatisfactory experience" i.e., NSF or dishonored checks? [Note: In the event the debtor's bank will not provide reference information, ask your bank to inquire for you.] 
37. Does the applicant have a borrowing relationship with the bank? A lending relationship implies that a credit investigation by the bank has been performed. A borrowing relationship is a positive indication.
    
    Sales Representative:
38. Is the account known to your sales representative in the territory? Utilize your representative to visit the account and to inspect its premises. 

Source: Jim Dempster, written for the Manufacturers Credit Cooperative

Edited by Michael C. Dennis.  Mr. Dennis is a business credit consultant and can be reached at mcdennis13@yahoo.com