Understanding Business Fraud and Business Identity Theft
The digital age has brought about new types of business-related fraud, and criminal enterprises have gotten smarter and more creative about how they take advantage of other businesses. According to the Association of Certified Fraud Examiners, the deceptive activity of business-to-business fraud costs US companies an estimated $7 billion every year.
To make matters worse, as the pace of business continues to increase, many types of fraud simply aren’t detected until it’s too late. Thankfully, there are ways to safeguard your business from customers or companies that are only out to make a quick buck at your expense.
The key to protecting your business starts with knowing exactly what to look for. That means, being aware of the different methods that fraudsters may use to steal from your business.
Types of Business Fraud
Business fraud can be divided into two main categories: internal and external. Internal fraud tends to cause the most financial damage – especially to smaller businesses. It is perpetrated by employees, shareholders, or anyone directly affiliated with the company that is being defrauded. Some examples include employee theft, tax fraud, or embezzlement, bribery, or insurance fraud.
External fraud is committed by any individual or entity outside of the company. Among the most common examples are credit card fraud and perhaps one of the most frightening deceptions – business identity theft. Businesses that extend trade credit are at high risk of being victimized by these types of shams, and the resulting financial damages can be significant.
Therefore, it’s vital that credit professionals understand exactly how these scam artists operate.
Business Identity Theft Definition
Business identity theft happens when one company illicitly uses another company’s identity for financial gain – to try to take out a loan or obtain a line of trade credit, for example. There are two common types of business identity theft – bust-out fraud and material misrepresentation.
Bust-out fraud is a common and growing type of business fraud. In a bust-out fraud scenario, the perpetrators create a seemingly legitimate company by using traditional “proofs of right” – registering with the Secretary of State, renting office space, and publishing a website, for example. Once established, the fake company applies for credit from multiple vendors, enticing them with the expectation of a mutually profitable business relationship. The fraudsters then draw upon the maximum amount of credit approved by each vendor. In a “straight-roller” bust-out fraud, the perpetrators make no attempt to pay. As their invoices go past due for 30 days, 60 days, 90 days, and so on, they may offer promises of payment or excuses while they complete their scam, but they never pay.
In more complex bust-out frauds, the perpetrators may pay some or all of the initial invoices in order to negotiate for an even higher credit limit. They will then “bust out” their new, more lucrative credit ceiling and then disappear without paying.
What’s most alarming about this scenario is how easy it is to carry out. Thanks to the Internet, setting up a fake business has become easier than ever. In just a few clicks, phony companies can register for state and local business licenses, establish virtual offices in prominent office buildings, and obtain other proofs of right as legitimate businesses.
Once the fake company is established, it can target multiple companies – both large and small – in a single operation; its fraudulent activities may fly under the radar of most traditional anti-fraud controls; and they can get away with the stolen cash or goods before their victims even realize they’ve been scammed.
Material misrepresentation is a form of business identity theft in which the criminal establishes a phony business with a name that is nearly identical to another company’s. They then use this disguise to prey on and steal from unsuspecting victims – either you or your customers.
Example #1: Let’s say you have an established customer whose company is called “Chutes and Ladders” and the scammer creates a fake company called “Chutes n Ladders”. They’re assuming that your finance team won’t notice the subtle difference how the business names are spelled, and therefore, they’ll be able to request credit or place orders without raising any red flags. Once the perpetrator gets what they want, they default on their account and disappear… and you’re left with the bad debt.
Example #2: In this scenario, the fraudster sets up a fake business whose name is nearly identical to your own company’s name. For instance, if your company is called “American Lenders United”, they might assume a name such as “American Lending United”. Posing as you, the crooks will then call, email, or mail correspondence to your customers in an attempt to collect payments that are owed to your business.
When customers fall for this scam, not only do you lose money, but you can also lose customers and your reputation. This is because while, unbeknownst to you, the scammer is collecting money from your customer, you’re still trying to collect from that same customer. The customer may ignore your requests for payment, assuming they already paid. If that happens, the customer could incur penalty fees for non-payment and consequently grow increasingly frustrated with what they perceive to be poor customer service. This could go on for months before the scam is discovered, and by then, you may have already lost that customer.
How to Prevent Business Fraud and Business Identity Theft
So now that you know some of the ways that people will try to swindle money from businesses, what are some of the ways you can make sure it doesn’t happen to you? Here are some simple tips:
- Research - If a company seems suspicious to you, do a quick background check by asking other creditors about them. Fraudsters are known to move from one supplier to the next, so if they’ve scammed before, you’ll find out. Credit Today has a subscribers’ forum that you can use to pose questions to other credit professionals.
- Ask for Guarantees - If you’re drafting an agreement with a new company and they’re not willing to sign a guarantee, they may not be in the deal for the long run.
- Perform Thorough Credit Checks - Anytime you’re dealing with a new company, make sure they have a Dun & Bradstreet D‑U‑N‑S® Number so you can look into their credit history. Dun & Bradstreet has several Finance Solutions that help you manage risk and avoid becoming a victim of fraud.
- Monitor Customers – Establish a process for monitoring early orders to see when balances are paid and when orders are placed to help reduce credit risk.
- Educate Salespeople - Make sure they know what to look out for, as they might be more susceptible to approving credit to a suspicious customer because they want to make a sale.
The key to not becoming a victim of business fraud or identity theft is to always stay one step ahead of the criminals. To do this, stay informed by reading up on the latest business fraud news and resources, share this information with your staff, and protect your company by implementing data-driven, risk-management solutions that can alert you to the threats you can’t see.