Sam Talby considers the resurgence of of long and short term commercial fraud and some of the steps and checks that can protect your business.

Fraud, amongst other things, can be categorised as a;

  • Scam
  • Con
  • Swindle
  • Extortion
  • Sham
  • Double Cross
  • Hoax
  • Confidence Trick

The Long Firm Fraud

During the 1960s, a popular fraud practised by well-known criminal gangs (The Krays and The Richardsons) was called the long firm fraud.

It is a fraud that uses a trading company set up for fraudulent purposes.

The company is an apparently legitimate business which buys goods and pays its suppliers promptly to secure a good credit record. Confidence and trust is built up. Once the company appears to be established, the fraudsters purchase larger orders on credit and disappear with both the goods and profits from previous sales. The goods are then sold elsewhere.

If you thought this type of fraud had disappeared, then think again…

An example from the recent past - Worcester: MI, CMT and BCC Companies

The controlling directors of the above companies operated a long firm fraud. The companies were based in the Midlands between 1995 and 1997. The fraud resulted in over £1 million worth of consumable goods being supplied from over 50 trade creditors before the fraud was brought to a halt.

Each business was purported to be involved in a market trade in commodities purchased from suppliers and the managing director used the companies to build up the confidence of suppliers and banks. During May and December of 1996, the fraudsters used the businesses to obtain goods that they had no intention of paying for.

Several bank accounts were opened with a number of separate High Street banks, so no single account manager had a clear picture of the companies’ business activities.

One of the main deceptions operated on suppliers was to bogusly induce them to supply goods or persuade them to wait for payment by producing false VAT returns for high value rebates of VAT allegedly paid on goods exported to the Eastern Europe.

Other deceptions identified included:

  • Post-dated cheques which were stopped by the fraudsters.
  • Payment promises which were never kept.
  • Payment promises made on the receipt of VAT refunds to the businesses.
  • Assurances that the businesses were financially sound. False accounts and trading forecasts were provided to suppliers to support the deception.
  • Falsely claiming that a freezer had broken down, ruining the contents supplied, and seeking to defer payment until an insurance claim had been processed.
  • Claiming that goods supplied were faulty when they were not.

The directors were charged with an offence of conspiracy to defraud the creditors and one director was charged with two offences of fraudulently evading VAT.

In July 2000, the miscreant director was convicted of both offences and sentenced to a 5 year term of imprisonment and later a confiscation order being made, assessed at £1.3 million, which the director was ordered to pay, or serve an additional 5 years in gaol in default.

Whilst the long firm fraud is less common today, with long paper trails accompanying business transactions, even the most astute businessman is sometimes prone to being taken in and this gives heart to the fraudster.

The Short Firm Fraud

Similar to the long firm fraud but this takes place over a much shorter period. The fraudulent business usually does not try to establish any form of credit history, trust or credibility. It may file false accounts at Companies House if it's a limited company.

Often these are internet based businesses and only operate for a few months if that!

It is not untypical for the fraudsters to steal the identities of innocent companies and their directors to conceal their fraudulent activities. Murky paper trails muddy the picture to their advantage.

The fraudulent business has no day-to-day trading activity. The fraudsters use credit to obtain goods that are delivered to third-party addresses and often multi sites too. The goods are sold on for cash and the fraudsters disappear.

What can you do to protect your business against long and short firm fraud?

  • If you have been dealing with a business customer for a relatively short period of time then before accepting much larger orders from that business evaluate the risk to you should they prove to be fraudulent.

  • Check the trading history of the business you are dealing with. Look at the internet, digital press and collate a picture of who you are trading with.

  • Ask the business for trade references.

  • If you have asked for trade references then a must is to verify the authenticity of the referees. The referees may be part of the fraud!

  • If testimonials have been given ask to speak with the provider of the testimonial. Again be wary that they are not part of the collusion.

  • Check the identity of the individuals and companies you are dealing with. You can use credit reference agencies such as Experian, Dun & Bradstreet and Equifax UK.

  • Physically visit the business premises i.e. an on-site inspection.

  • Check whether the accounts are credible given the trading period.

  • Ensure they have been prepared by a reputable qualified accountant.

  • Check the credit histories of the people managing the business.

  • Check publicly-available databases i.e. Companies House, to see if the individuals are bankrupt, or otherwise disqualified from acting as directors of a limited company.

  • Check who owns the domain names of any website the business uses.

  • Ensure that goods are delivered to identifiable individuals and real addresses.

  • Avoid goods being cross-loaded to unidentifiable vehicles waiting at the delivery location.

  • If web based, ensure that there is a physical location to the business.

 

We at PCR are experienced Recovery & Insolvency Accountants. As part of our role we are constantly undertaking identification procedures. On your behalf, we can quickly undertake assignments to establish provenance and risk assess customers / clients, so you are able to make an informed decision whether to engage or not.

The long and short of it is that forewarned is forearmed… better to discover a hoax or scam than be a victim.

Sam Talby
Partner

 

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