Business Law Notes
Winter 2003 Edition
Businesses are the frequent targets of fraudulent schemes, great and small. Here are some of the more common scams practiced on businesses and some tips on how to prevent them.
The Advanced Fee Scheme
In an advanced fee scheme, a victim pays in advance a finder’s fee or commission to someone who claims that he can arrange a loan, a lucrative contract, or investment opportunity. The money disappears and the loan or other business opportunity never materializes.¹ A business that has fallen into financial difficulty and is desperate for refinancing is especially susceptible to this type of scam. Attempting a workout with creditors or filing a Chapter 11 Bankruptcy are much safer and more effective alternatives for a business in financial distress.
Letter of Credit Fraud
Letters of credit are a common method for securing payment in international transactions and many other commercial situations. Some letter of credit frauds are perpetrated on banks by presenting false documentation. Another type of fraud is when a letter of credit is offered as an investment, with the promise of high financial return. Legitimate letters of credit are never sold or offered as investments.
Prime Bank Note Fraud
In one common scam, the con artist tells the victim that he has access to certain “bank guarantees” which can be bought at a discount and sold at a premium. The legal documents may contain non-disclosure and non-circumvention provisions. The usual goal of the con artist is to encourage the victim to send money to a foreign bank.
In a typical Ponzi scheme, the investor is promised high returns on his investment and, in the early stages of the scheme, the investor will receive “dividends.” The dividends are actually paid from a portion of the proceeds from other new investors. The victim does not know he has been duped until his “dividends” suddenly stop.
Office Supply Schemes
The con artist usually tries to target an employee who is unfamiliar with purchasing procedures. The office supplies that are delivered are of inferior quality, greatly overpriced or much greater quantity than the amount actually ordered. If you object to the order, the con artist may attempt bullying, negotiating or requesting payment for a “restocking fee” in order to accept the returned merchandise.
Phony Invoice Scams
These types of scams take many different forms, frequently as simple as submitting a phony invoice for a small amount of money. Another common scam is a phony Yellow Pages invoice scam. The business receives a legitimate looking invoice concerning the “Yellow Pages” which may include the “walking fingers logo.” Sometimes the invoice it is actually a solicitation for an alternative Yellow Pages directory that is not widely distributed and is of little or no value; other times there is no directory at all.
This is a common type of fraud for consumers, but businesses can also be victims. Con artists seek key pieces of the victim ’s identity, name, address, date of birth, Social Security number and mother’s maiden name. Businesses should avoid collecting unnecessary information; when it is necessary to obtain such personal information, the information should be maintained in locked files or under other secure procedures.
Some Common Sense Tips
Know who you are dealing with – legitimate businesses understand that you want information about their companies and they are happy to provide it.
Examine carefully any deal that requires you to sign non-disclosure or non-circumvention agreements that are designed to keep you from investigating the company or people that you are dealing with.
Verify all invoices with the persons who would normally have authorized them. At least two people should approve an invoice before it is paid.
Educate your staff about possible frauds.
And finally, as we all know, if an offer seems too good to be true, it probably is!
¹In North Carolina, legitimate loan brokers must file a disclosure statement with the North Carolina Secretary of State and are prohibited from accepting a fee prior to closing the loan.
We are happy to announce that Jean Winborne Boyles, Esq., has become associated with our law firm. She has 29 years legal experience including employment as in-house counsel with a major teaching hospital and medical school, appointment to the NC Attorney General’s staff, local government attorney and most recently in private practice concentrating in health law, corporate law, bankruptcy and creditors’ rights, commercial leasing, antitrust and state administrative law. She is a certified Superior Court mediator. Ms. Boyles brings superb legal talent and experience to our firm.
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