The Importance of Due Diligence: Protecting your business against fraud

With the advent of the internet, fraudsters have become increasingly clever and global in their reach. They use a variety of tactics to commit wire fraud, which is why, in any transaction, it is important to be aware of who exactly you are dealing with so you can avoid fraud and protect yourself.

What is wire fraud?

Wire fraud is a type of fraud that involves the use of some form of telecommunications, such as the internet, telephone, email, and text messaging. Fraudsters use devise schemes and rely on telecommunications to extort money from others.

According to the Federal Trade Commission, US consumers reported losing more than $5.8 billion to fraud in 2021, an increase of more than 70% from the previous year.① The Federal Bureau of Investigation reported that international victims lost $6.9 billion in 2021.②

The “Pay Now, Get Later” Scam

A common type of fraud is the “pay now, get later” scam whereby fraudsters target victims and demand advance or upfront payments for non-existent goods. Fraudsters who employ this scam typically prey on new or naïve victims who typically order goods from a fake company. The company then issues an invoice or contract requiring you to pay before they ship the goods. However, after you pay, you never receive your shipment.

Case Study

Recently, we saw the aftermath of a “pay now, get later” scam. An Asia-based company was exploited out of tens of thousands of dollars by fraudsters masquerading as wholesale suppliers in the United States. Unfortunately, because the payments were made by wire transfer, the company has no recourse to compensate for this loss.

The fraudsters initiated contact with the company through email. While the email itself was suspect, the company replied to the email solicitation because the email advertised low prices and the company was eager to get a good deal. Ultimately, the company paid the fraudsters tens of thousands of dollars for goods that were never delivered.

The company came to us seeking advice for what it perceived to be a breach of contract dispute. When we reviewed the files, however, it became increasingly apparent that the company was the victim of wire fraud. What struck us, however, is that this incident could have been avoided entirely had the company conducted due diligence in an effort to know who exactly it was dealing with.

What is due diligence?

Due diligence is a critical stage of every transaction and is often a necessary step that must be taken to help prevent the occurrence of fraud. Simply put, due diligence refers to the actions an organization takes to know its partners. This process involves making relevant inquiries to determine whether a third party, existing or prospective, is honest and legitimate. Conducting a thorough investigation of the other party helps you to ensure that you are making a well-informed decision and negotiating on fair terms.

On the other hand, lack of due diligence can expose your business interruptions, financial loss, legal issues, and reputational damage, among other issues.

Know who you are dealing with

Fortunately, there are a several steps you can take to verify whether the business you are dealing with is legitimate or a fraudster., such as investigating their website, communication, and business practices. Conducting due diligence will allow you to determine whether

· Do not respond to email solicitations.  Do not respond to unsolicited emails from an unknown entity especially if the content of the email seems suspicious to you. Unfortunately, your inbox’s filters cannot identify all spam mail.

· Ask for references. If you have not dealt with a business entity before, obtain references from others in your industry and search the internet for any reports of wrongdoing.

· Proof of address. Verify the commercial address provided by a business entity. If you cannot find evidence that the entity occupies the commercial property, it should raise a red flag. Additionally, if the entity claims to operate out of a residential property, you should consider the type of business entity you are dealing with and whether it’s feasible for them to be operating out of such a property.

· Proof of incorporation and business existence. Ask the business entity for proof of existence. In the US, each state has a database where you can find information about registered business entities.

· Website and email address. You should also inspect the website and email address provided to you by a business entity and consider if it seems legitimate. Is the entity sending you emails from a domain email or a personal email? The latter is a red flag.

· Text messaging as the primary form of communication. If the business entity insists on communicating by text message, this should also raise a red flag for you.

· Bank verification. Verify the banking information provided to you. For example, if the account beneficiary is an individual rather than a business entity, this should give you pause. The beneficiary name on the account should match the details provided to you by the business entity.

· Verify all documentation. If an entity provides you with a contract, review it. If you find some provisions to be curious, ask yourself whether such terms are standard in your industry. Be suspicious of any last minute changes, particularly to payment details.

· Verify shipping logistics. If an entity provides you with shipping documents, inspect them thoroughly. For example, confirm whether the named vessel if scheduled to be in the port of discharge at the approximate time shipping is due to commence. Ask the entity to provide you with container numbers and a bill of lading. If they refuse or offer excuses, this should raise a red flag.

· Fraudsters pretend to be someone you trust and create a sense of urgency. Fraudsters typically make themselves seem believable by pretending to be connected with a legitimate company. They rush you into making quick decisions before you have time to judge the situation.

· Use your instincts. if something doesn’t feel right, proceed with caution or not at all.

If you would like some further advice about safeguarding your business from fraud or if you have been the victim of a fraud, contact our attorneys at Celeblaws, P.A.

① https://www.ftc.gov/reports/consumer-sentinel-network-data-book-2021

② https://www.ic3.gov/Media/PDF/AnnualReport/2021_IC3Report.pdf