Sunday, June 28, 2009

Double Factor Fraud

This scam is designed for a merchant to rip off its factor. Amazingly simple, incredibly effective.

Narrative:
  1. Merchant creates a factoring agreement to sell & its accounts receivable to a factoring house (a form of financing).
  2. The factor records a UCC-1 financing statement to secure its position as holding the primary claim on all accounts receivable of the Merchant.
  3. Merchant sells receivabes to factor, receiving cash up front. Factor bills the customers.
  4. Suddenly, the Factor stops receiving payments on the invoices.
  5. Factors contacts invoiced customers to attempt to collect, finding that they claim to have already paid.

What Happened?

  1. The Merchant set up a second company, with a similar or the same name as the Factor.
  2. Merchant has the new 'fake factor' company bill his customers immediately following the real Factor's bill, as an address correction. He might even offer a discount.
  3. Customers pay the new fake factor, thinking they have paid the correct party.

Result:

Merchant has received the advance from the first factor, and the payment from the customer, getting paid 75%-80% more for each invoice, until he is found out. This is often done when the Merchant is on his way out of business.

Prevention:

Contact each customer prior to purchase. Make sure they understand that there is to be no assignment without your involvement. If you learn of one customer paying an imposter factor, the rest are too. Contact authorities and file a criminal scam report. You will likely be told to file a civil action to get an injunction.

Saturday, June 27, 2009

Negotiated, Willful Blindness Scam

This is a commercial finance scam designed to either create a fall guy for an intentional default, or a fall guy for an exhorbitant amount of risk.

A retail lender seeks an investor to purchase or expand its business. The value of any retail lender depends on the its own credit. The more money the lender is able to move, the more valuable it is.

The retail lender locates a wholesale line of credit provider. This wholesale lender wants to issue the line of credit, as its value is determined by the amount of "assets" it has. Since each issued line of credit is considered an "asset" they are anxious to get the line of credit on the books. This is especially the case in hot market scenarios.

The wholesale lender requires that the retail lender provide audited financials from a CPA firm. These of course transfer liability to the CPA firm if the financial information provided is not accurate. However, most applicants can not provide financials substantial enough to qualify for the wholesale line of credit. This leads to a notorious game of willful blindness.

CPA firms make the bulk of their income by charging the fees for audited financial statements in situations like these. The younger, newer accountants are hungry for the new accounts of smaller companies getting their first sets of audited financials.

With all three parties motivated toward exactly the same result, the situation is ripe for a classic case of willful blindness. The result causes the CPA firm and the wholesale lender to begin direct communications. The result is negotiated financials and other qualifications, in which all three parties negotiate directly with eachother to produce qualifying documents, despite the lack of real qualification of the retail mortgage company.

Each party to the negotiation seeks to interject what it sees as necessary to provide for plausible deniability later. The CPA wants bank statements to read as they need them to read. The wholesale lender wants the CPA to produce audited financials which they can point to later as proof that the retail lender is financially qualified. The retail lender desperately wants the line of credit, and may create false documents to fulfill the requirements set forth by the CPA.

Finally, the retail lender produces false statements, so that the CPA can produce blindly audited financial statements, so that the wholesale line of credit provider can issue its line of credit to the unqualified retail lender.

When the line of credit goes into default, the wholesale lender attempts to collect from the retail lender, which often declares bankruptcy. This brings the audited financials into question, and the CPA firm. This brings into the arena the errors and omissions insurance of the CPA firm itself.

In some cases, even the institutions providing the bank or other statements used in the preparation of the audited financials, are accused by the wholesale lender of collusion.

The entire objective is to get an outside party to cover the debt. Either the errors & omissions insurance of the retail lender or the CPA firm, or the financial institution which provided statements, will have to pay up for the scam of the three in collusion.

Once the line of credit is provided by the wholesale lender to the retail lender, there is a great increase in market value of the retail lender. They then attempt to obtain an investor or sale of the firm before the resulting default takes place.

This is a method of conspiracy to defraud a lender or an investor, but it is seldom caught or prosecuted.

Friday, June 26, 2009

Overpayment-Refund Check Scam

Also known as the Cashier's Check Scam, the latest iteration is slightly more sophisticated than predecessors.

Here's how it happens:

  1. You advertise something for sale. It could be an item or a service. You advertise it on the internet, usually somewhere with no ID checking capacity, such as craigslist.
  2. A potential buyer contacts you and expresses interest in your offer.
  3. The buyer explains that they will provide a cashiers check or corporate check to pay in full.
  4. To put you at ease, the buyer gives you all of the details of the cashiers check, or of the corporation and its corporate check on the way.
  5. If you call the issuing bank to confirm the validity of the check, it may be validated. This only means that the check bears a real account number, routing number, and matching issuer name.
  6. The buyer then tells you they have sent, or are sending an amount greater than the price of your offering. The overpayment, and that they need you to send the difference back to them, or pay it to a person affiliated with them, such as a son or daughter in your local area.
  7. The check arrives as promised, for a larger amount than required.
  8. You deposit the check as expected.
  9. You wait for the check to clear. It does.
  10. You refund the overpayment to the buyer.
  11. The check later is returned by your bank, leaving your without the funds you sent to the buyer as overypayment.
  12. The buyer is nowhere to be found.

What happened?

  1. The "buyer" is a scammer, who had obtained the information on the check provided by copying it from an actual check, viewed by the scammer at sompoint.
  2. The scammer then goes fishing for anyone who will accept the check of an overpayment.
  3. With a "mark" in his sites, the scammer then forges the check or cashier's check. This is easily done with standard desktop publishing.
  4. When you deposit the check, it clears the account of the unsuspecting owner of the account.
  5. The company on who's bank account the check was drawn (the "maker") reports the fraudulend check to their bank.
  6. The maker's bank retracts the payment, charging your bank for the amount cashed. Your bank then charges you.