Types of Credit Fraud - Credit Managers Beware

With COVID-19, credit fraud can be tempting for some as desperate times will call for desperate measures.

As businesses try to figure out what to do, or how to reopen, the financial pressures will be more than some of us can bear. The demands to meet payroll, pay rent, and keep the lights on while running in a limited capacity, is going to make some of our citizens do some crazy things - including some less than acceptable business practices. In other circles, fraudsters love this kind of chaos as it makes us regular citizens more prone to being victimized.

Some types of credit fraud are exquisite and well-executed, while others are of a more "smash-and-grab" operation. Here are two common forms of fraud using credit and one elaborate credit fraud that raked in millions for its perpetrators:

Credit Card Chargebacks

Business owners who are desperate for sales will be particularly susceptible to this type of credit fraud. An order comes in from an unknown customer for some goods you sell. The order is significant, and it is usually urgent. The buyer is willing to pay by credit card and needs the order shipped ASAP. Because the order is large everyone is excited about the badly-needed sale. The cardholder is usually traveling and is unable to meet your pre-established credit card acceptance policy of obtaining a copy of the front and back of the card and a signed credit card authorization form. The business owner decides to complete the transaction and ship the goods. The perpetrator uses a stolen credit card or, more commonly, does a credit card chargeback. The credit card company is told the goods were not received or damaged in shipment, and the credit card company almost always sides with the cardholder, not the merchant. The Government of Canada offers more information on Credit Card Fraud.

The Bogus Purchase Order

The closing time is 5 pm, and a customer rolls into your yard at 4:45 pm needing a big-ticket item for their job site and presents you with an official-looking purchase order from a well-known oil and gas producer or power supply company for a $50,000 generator. There is no time to check the PO's authenticity, and the customer is commenting on how their site is down. Without power, it costs them thousands of dollars each hour. It sure would be nice to make a $50,000 sale. Things have been a little slow lately. The customer seems legitimate, and his story isn't unusual - plus, he has presented an official signed purchase order. What could go wrong?

And Finally The Credit Managers Nightmare

The Perfect Credit Application

About four years ago, our firm received six cases for collection, all against the same company. In each instance, the debtor company applied for credit and received unanimous approval from each credit manager. The debtor company was engaged in the construction business, so it is not uncommon to see 100 or 200 thousand dollar orders. The debtor company was incorporated in Ontario and maintained a bank account at one of Canada's largest financial institutions.

Each credit manager did all the right steps, calling the trade references, and getting a commercial credit report. The debtor company was relatively new, so the credit report was a little thin; however, the bank check revealed a seven-figure balance on deposit and no borrowings. The debtor company managed to "check all the boxes" for each credit manager. Over two million dollars of credit was extended to the debtor company that purchased all manner of construction products. They also bought a complete trailer load of tires from a Michigan-based supplier and had them shipped to an address in Quebec.

Our firm began to examine the backup from each of our clients. We noticed a fantastic coincidence. Every credit application was completed in full, correctly, and legibly. If you have been in the credit manager role for longer than 15 minutes, you will agree that credit applications never meet all the attributes mentioned above. Our next question was, how did the debtor company manage to keep the trade suppliers happy that were used on the credit applications? Now that was easy. They made them up! Each trade creditor was bogus, including their websites. If a credit manager wanted to call the trade credit reference, their number was prominently displayed on the fake site, and the call was immediately answered by the trade creditors finance person who gave a glowing testimonial.

In The End, This Is What We Uncovered

A Vietnamese woman incorporated a legitimate company in Ontario, opened a bank account, and deposited over 1 million dollars. She and some accomplices created bogus trade suppliers. They had someone answering calls from the targeted credit managers who were performing their due diligence. Numerous credit applications had been filled out, and Bona Fides established with the bogus company using credit fraud to steal over 2 million dollars of goods. It was a highly organized attack, and the perpetrators knew precisely how our credit-granting system worked.

Like the old axiom says, "When something seems too good to be true, it usually is." The tactics mentioned above are easy to spot in hindsight; however, put yourself in the place of a business owner or a sales executive whose business isn't doing well. Fraudsters can and do easily take advantage of these situations.

In Summary

We encourage our readers to share this credit fraud post far and wide to as many of your legitimate hard-working colleagues as possible. If more people learn of these credit fraud tactics, the better it is for all businesses. These types of credit fraud affects us all in the form of higher prices, insolvent suppliers, and unemployed friends and neighbours.


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