Anatomy of a Financial Fraud - Part II

            You wouldn't send money to Nigerians who contacted you through the internet on the premise that your payment to them will facilitate a much larger payment to you.  So why would you pay fees to businesses or individuals who promise to assist your company to procure lines of credit or other business opportunities?  Fraudulent schemes that target individuals are rampant, and estimates of losses due to those schemes range between two and four billion dollars annually.  Less publicized, however, are schemes that target businesses with promises of readily-available financing or low-cost loans.  Fraudulent schemes that target businesses are remarkably similar to the Nigerian internet schemes, differing only in the gloss of legitimacy that scammers have been able to create. 

             In my prior article, I described how one of my clients had been targeted by an unscrupulous individual who had created multiple layers of forged documents and websites in order to convince our client of the legitimacy of his financial resources.  Here, we describe a much simpler scheme that was used to dupe a company out of a substantial upfront payment.  Both schemes share a number of characteristics, including forged documentation that mirrored the existence of otherwise legitimate organizations.  By following the lessons of these schemes, companies can protect themselves from being the next target of scammers who rely on these techniques.

             The details of the scam that was presented to us are relatively simple.  The scam became apparent when a prospective client came to us to ask for assistance in closing a transaction for an international line of credit.  The client, which was a small business headquartered in Europe, had paid €10,000 to a company which represented itself as "Toyota Financial Services" and which claimed that it would be able to facilitate a line of credit to allow the client to pursue business opportunities in the United States.   This facilitator presented a one-page contract, which bore a "Toyota" logo and a New York City address, to the prospective client.  The contract was purportedly signed by the chief financial officer of Toyota Financial Services.  An internet search revealed that the name on the contract was, in fact, the name of Toyota Financial Services' CFO, and in all respects the contract appeared to be legitimate.

             Yet our prospective client had never spoken with this CFO and did not perform any due diligence beyond reviewing the contract that had been presented to it.  The client wired funds to an account that was listed in the contract.  Once the money was gone, the client lost all communications with the parties with which it had been speaking.  We were asked to intervene.  Our research quickly uncovered numerous problems with the contract and the entire transaction.

              First and foremost, the Toyota Financial Services address that was printed on the contract was non-existent.  Moreover, Toyota's headquarters address is in California and not New York as had been listed on the contract.  Moreover, the contract included none of the typical boilerplate terms that are included in even the most rudimentary agreements.  Finally, additional research into the individual with whom the client had been speaking suggested that this person had been using a fictitious name and identity.

              The prospective client's loss could have been easily prevented by simple research and due diligence, as well as by following any number of fraud detection systems and procedures that are generally implemented within business operations.  Businesses can find advice on those systems and their implementation in multiple locations.  Our analysis deconstructed the matter several steps deeper as we considered the factors that might motivate a business to ignore its systems and lead it into the hands of a scammer.  Those factors are easily summarized into four areas:

      1.   Desperation - The client had been unable to procure a letter of credit through its own efforts and latched onto the facilitator as a last resort;

      2.   Reliance on Famous Names - If the client had not thought it was dealing with Toyota Financial services, it likely would not have pursued the   transaction that led to the loss;

      3.   Mismatched Bargaining Power - This follows from the client's desperation and its belief that it was dealing with Toyota, specifically, the client did not challenge the contract it received out of a belief that it was not on par with Toyota and that any challenge would harm the transaction;

      4.   Inadequate Internal Review - The decision to work with the facilitator fell on one person's shoulders, and the client had not procured thorough legal, financial and management or operating approval prior to authorizing the release of funds to the facilitator.

            In addition to implementing fraud detection and prevention systems, businesses need to remain cognizant of these factors when entering into transactions with new entities, particularly where an outlay of capital is required to initiate any transaction.     We were unable to help this particular client to recover their funds, as the facilitator had long since disappeared when we were first contacted.   The client reported the matter to the district attorney, but the relatively small amount of the loss coupled with the disappearance of the scammer all but precluded an investigation at either a state or federal level.