Fraud Signs and Prevention

The fraud triangle involves opportunity, pressure, and rationalization. Similar to the fire triangle: oxygen, heat, and fuel, all three must be present for a fraud to occur. 

Questions to ask include the following:

• In which area do you have control? 
• In which area do you have no control?
• One person's "pressure" will be different from another person's pressure. What are some examples of pressure?
• What are some examples of rationalization?
• What are some examples of opportunity?

Unsolicited Orders

• "Too easy to be true".
•  Normally, sales reps have to work to get an account; care should be exercised when it's the other way around.

Rush Orders

• Attempt to force a shipment without a thorough credit check.
• Attempt to play sales off of credit. "If we don't extend credit we will lose the sale."

Phony References

One of the foundations of the credit extension process is the credit reference. As such, the fraud artist will sometimes set up their own. Warning signs of phony references include the following:

• Overly glowing reports from the reference
• References all in the same geographic area
• References that have impressive sounding names, like "International, National, American, Liquidators"
• Reference's phone is answered with something other than the business name
• Reference's phone is answered by a machine or service

If something does arouse your suspicions, check the following resources:

• Directory assistance to determine if reference is listed with phone company
• Credit rating books. Is the reference listed in standard credit books?
• Municipal business licensing department.
• Office of the Secretary of State

Abnormal Number of Credit Inquires

With fraud, legitimate trade or bank references often report an abnormal number of credit inquires relative to their volume of business with the prospective customer.

Problem: Few companies ask about this, and when the information is volunteered, the individual taking the credit information down for the inquiring company does not make a note of it.

Solution: Add a question to the bottom of a standard credit reference form, which asks simply: Have you received a number of recent inquiries lately? (In many instances, there may be a legitimate reason for increased ordering.)

Background of Principal is Uncertain

• Principal refuses to reveal his or her background
• Principal has background with no apparent relation to his or her current business
• You are unable to verify the background that has been supplied

Source of Capital Uncertain

• Principal's age or former occupation would not normally enable such a large investment.
• A large amount of capital, relative to the person's background could indicate that he or she is a "front" for another who is the real owner of the business.

Change in Ownership

• Fraud artists who take over companies cause the greatest amount of losses of any type of fraud.
• Monitor carefully any ownership changes. Learn the background of new principals. Meet with them, if possible.
• Their goal is to gain control of a good company name and its assets. The amount of liabilities which they incur (often yours) is generally irrelevant to them. Their real purpose is to convert the assets to their own use, and ultimately let the company collapse.

Name Similar to Another Well-Established Business ("Same Name Scam")

• One of the most difficult to spot
• Attention to detail is the key. Make sure order entry personnel ask for full spelling and address of subject.
• Pay attention to new ship-to addresses.

Source: W. Stephen Albrecht, PhD, National Association of Certified Fraud Examiners