Case study - how fraud can strike your business

Z Enterprises (Z), a small family owned and operated winery located in northern New South Wales, became a victim of a type of corporate fraud known as long firm fraud. This form of corporate fraud occurs when an apparently legitimate business is set up with the intention of defrauding at some point in the future.

The business will go through the process of establishing a solid reputation and credit record by purchasing a number of low dollar value items from a variety of suppliers and ensuring they pay for them promptly. However when the fraudsters are ready they will place several large orders and upon receipt of the goods they (and their business) will promptly disappear. The goods will be on-sold from various trading locations.

XX Limited (XX) contacted Z Enterprises with a proposal to order a large shipment of wine for an event they were hosting. They visited the winery to taste the wines and proceeded to place their order.  They signed a credit contract with Z agreeing to pay the monies owed within 30 days of the delivery date.

The size of the order was significant and would provide a substantial boost to the profitability of Z Enterprises however they wanted to ensure that XX would pay the bill on time. They decided to conduct a trade references check and asked XX to provide them with three companies they could contact. The references confirmed that XX was a good payer and accordingly Z fulfilled the order.

When the bill passed the 30 day credit term that had been agreed Z attempted to contact XX to request payment however the business had simply disappeared. They could not be contacted via phone, email or fax and the premises (which Z discovered was not an actual commercial address) were empty.

Further investigations revealed the way in which long firm fraudsters set up their business to make it appear like a legitimate organisation. Z discovered that:

  • all of XX's previous orders had been for small amounts of money - they had all been paid promptly allowing XX to establish good trade references
  • the business had been in operation for a relatively short time - just two years - which is common for organisations that conduct fraudulent activities.

Z Enterprises also discovered that their business was a prime target for this type of fraud. The fact that Z is a small business increases the likelihood that it would be attracted to the promise of a large order and that it would not carry out extensive checks on the operation which may reveal that it is not a legitimate business. In addition, the goods they supply are easy to dispose of quickly and without trace which is a critical factor for fraudsters.  

Reduce your risk of long firm fraud

Z Enterprises could have avoided becoming a victim of long firm fraud by taking their background checks to the next level. This includes investigating items such as:

  • the length of time that the company has been trading
  • the company's trading record - is there any connection with companies that have failed, particularly any that have failed with no apparent reason?
  • key personnel - pay close attention to bankruptcy and judgment information as this data can provide vital clues on an individual's trading history.

This case study was taken from D&B's Guide to Cash Flow and Credit Risk. Click here to find out more>>

D&B Guide to Cash Flow and Credit Risk.bmp

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