Aftermath of September 11th: Business fraud and bust-outs on the rise--steps to protect your credit sales. (Legal Corner).

September 11th has changed our lives. On the commercial credit front, credit professionals are experiencing greater risk and slowing of payment with their open account sales. Customers are warning of earnings shortfalls; they are unable to borrow; orders are down; and many are facing extraordinary business insurance premiums that may threaten their survival. In this environment, certain customers may attempt to stay afloat by providing inaccurate or fraudulent financial information to vendors in order to obtain product and ride out the down economy. In other instances, a company may be created by operators solely for the purpose of obtaining a vendor's product by fraud. What steps may a credit professional take to protect himself or herself from a customer's fraud or being ensnared in a bust-out?

Fraud and Bust-outs on the Rise

Given the problem economy, a credit professional must be especially vigilant of customers taking steps to stay afloat, including fraudulent accounting and reporting practices. Vendors should also be mindful that the FBI and policing agencies are focusing on homeland security, making white-collar crime and bust-out schemes a lower priority. The Justice Department has shifted its focus from investigating and prosecuting past crimes to investigating threats of future terrorist attacks. Given the focus of law enforcement on combating terrorism and not domestic business fraud, bust-out artists may sense an opportunity to conduct fraudulent schemes against vendors.

The Bust Out in Action

A bust-out is a scheme devised to defraud vendors of their merchandise through the use of planned bankruptcies and business failures. Bust-out schemes are usually orchestrated in two stages. The first stage lays the groundwork for the bust-out, with the second stage executing the scheme.

In the first stage, the usual practice of bust-out operators is to create a fake corporation (a fast, inexpensive task), establish a credit account with one or more vendors, make small purchase orders and pay within invoice terms on the limited credit provided. In this way, the bust-out operator establishes good credit and favorable references with vendors. Bust-out operators have found that having a Fortune 500 company as a reference can shortcut thorough credit checks.

Vendors become unwitting participants to a bust-out when they do not conduct thorough credit checks of new customers. A vendor's resources to do so often are limited, while increasing competition in many fields has pushed large numbers of vendors to relax their credit standards. Unsuspecting companies of any size, including Fortune 500 companies, are vulnerable to bust-out schemes.