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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | AUGUST 30, 2001 SMART ANSWERS By Karen E. Klein When a Deal Is Too Good to Be True What do you do if someone offers you a once-in-a-lifetime loan in return for an upfront payment? Get up, walk out -- and then call the FBI
Taking the advice of two attorneys who looked over the contract he was offered (a half-dozen others he consulted told him not to touch the deal), Stucky handed over a $1,750 "due diligence fee" the broker demanded in order to seal the deal. After months of stalling and additional fee demands, however, the promised loan never materialized. Without the bridge financing he needed, Stucky had to close the doors of his San Bernardino (Calif.) company, a national class-reunion service he had operated for seven years. That was during the 1991 recession. He now works for a construction company. Stucky was the victim of an "advance fee scheme," a white-collar crime frequently perpetrated on small business owners, some of whom have been taken for $40,000 to more than $4 million. Authorities say that the perennial fraud, in which a company or individual pays upfront fees in exchange for a loan that never materializes, has resurfaced in recent months as traditional lenders have tightened qualification guidelines and venture capital has dried up. INNOCENCE AND EXPERIENCE. "We see a correlation between these frauds and the economy, especially in times when money is tight and there are a lot of overcommitted borrowers and people whose funds are overextended. They're in need of cash, or long-term financing, which may not be readily available through traditional lending sources," says Laurie J. Bennett, an FBI supervisory special agent who works out of the bureau's Minneapolis field office. Bennett, who specializes in white-collar fraud (click here to learn more) and hate crimes, says advance-fee scammers typically prey on unsophisticated business owners, bilking hundreds -- even thousands -- of victims before they close their operations and move on under new names. Bennett tells entrepreneurs to be very careful about financial transactions in general, particularly those that seem "too good to be true," and offers this advice for anyone seeking funding outside of traditional channels: -- Check the name of the company, and particularly the names of the principals, to see if there are lawsuits pending against them, or even complaints filed with the Better Business Bureau. "Be skeptical," urges Bennett. "If anything sounds slightly off or odd, check it out further." -- Ask for a client list and be very suspicious if the company you're dealing with refuses to give you references. "Legitimate companies will give out names of other firms that have gotten loans through them, so don't buy the excuse that they're respecting their clients' privacy," she says. Ask which bank is backing them, or where the funding is coming from if not from a financial institution. "Any time you're consistently stonewalled about bankers, contacts, and other clients," says Bennett, "that should be a major red flag." -- Don't let the appearance of success or sheer wealth overshadow your better judgment. "People see plush offices and the trappings of success and it colors their thinking," Bennett says. Even if you're referred by a friend or trusted business colleague, do your own due diligence on the firm. Oftentimes, scammers solicit word-of-mouth endorsements from people before they realize they've been taken. -- While asking for money upfront for credit checks, or good faith fees, is not in itself illegal, legitimate firms typically will not ask for large sums on the front end of a deal. A real broker typically collect his fees or percentage after the funding comes through. If they do ask for money upfront, it should be a nominal amount -- say $50 for a credit check -- or it should be clear that they're taking your check and holding it in abeyance until the loan funds. When someone asks for a lot of money up front, for reasons that seem vague or illogical, they're usually running a fraud. -- If you suspect a firm is misrepresenting itself, or you believe you have been the victim of a fraud, report it. "Naive people keep justifying all the fees they're paying, and they believe the company when it gives them an excuse like, 'They money is tied up overseas,'" Bennett says. Others realize they've been had, but are too embarrassed to report it, or simply reluctant to pursue it because they believe they're not going to get their money back anyway. It is this kind of reticence that allows the scammers to operate for months, and even years, without being caught. In Stucky's case, he lost a relatively small amount -- just the initial $1,750, which had been loaned to him by the attorney who recommended he go ahead with the deal -- and did not pursue the scammer. As far as he knows, the man was never prosecuted. For more information on advance-fee schemes, check out the Web site of the Federal Trade Commission.  Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. 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