SEPTEMBER 24, 2003

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NEWSMAKER Q&A


The High Cost of Penny-Ante Scams
[Page 2 of 2]

Q: Why are small-business people such easy targets?
A: They tend to be too trusting. They don't exercise good judgment in finding out who they are really dealing with. Most of the time, these scammers are good talkers, they have a lot of superficial paperwork that looks great, they have flashy Web sites -- but there's no real company behind them. It's a shell or they're actually going bankrupt.


Q: What advice do you give to prevent this kind of fraud?
A: It's like they say in busines: Know your customer. Know who you are dealing with. Try to find out everything you can about the person you're giving money to, or buying services from, or hiring, or merging with, or acquiring.

We had a small boat manufacturing company in New Jersey as a client. They had hired a local contractor to expand their facilities so they could build more boats. This guy asked for two-thirds of the money upfront for materials and they gave him $2 million. Needless to say, he gambled the money away or whatever, and the work never got done. They're now drowning in legal fees, suing this guy, and they're looking to attach his assets, so they hired us to do a background check. We came back to tell them that he'd been convicted twice for fraud, he's presently under indictment, and will probably be in jail in six months. And they gave this guy $2 million!

My advice: Before you sign a contract or hire somebody important or invest money or give money away, know who you're really dealing with.

Q: How does a small-business owner find out about someone's background?
A: Check references, but also go beyond that. For instance, a lot of resumes are completely fraudulent. Sometimes, the references are phony -- the phone rings at [their] friend's house. And most of the time, the references that are listed on a resume will say nice things, even if it's just to get rid of a problem employee. So, go past just calling the numbers that are listed. Call the schools that are mentioned and verify if the person really was a student and really did get that degree. Call the employers listed in the history and check to see if someone was really an employee during the dates they list. If this is a dishonest person, you'll find out pretty quickly, and you'll know you don't want him working for you.

If it's a business deal, don't rely simply on a personal endorsement. Other people may be getting defrauded also. Make sure you see the operation firsthand before you invest or set up a partnership. Make certain that you get full access to the books and that your accountant looks at them. Do the figures really add up? If there's any uncertainty at all, look further and hire a professional to come in and investigate.

Q: How much does a professional charge?
A: It depends on what's required, but a simple background check can be done for as little as $1,500 and it will let you know about this person's references, whether he's had any bankruptcies, liens, judgments, been charged with any crimes or been named in any civil suits. A lot of times, the mom-and-pop companies are reluctant to spend $3,000 on investigative work and due diligence, but they're doing million-dollar deals! And once the fraud has occurred, the scammers move the money offshore and you can't find it.

Q: What happens then?
A: A lot of times, it's just too late. [Defrauded busines owners] wind up spending tons of money in legal fees and still don't recover much -- if anything. When a [huge conglomerate] loses $2 million, or $10 million, in a deal, it's a drop in a bucket.When a small business loses that, it's the entire business and they can't recover. They come in saying, "Oh God, what have I done?" And they're not stupid people. They just haven't remembered to be proactive. What I wish I could tell them ahead of time is: Do your homework up front before there's a mistake made.

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