fraudulent schemes

Fraudulent behavior isn’t necessarily perpetuated by people hiding their identities. For example, legitimate customers sometimes use the credit card chargeback process to their advantage — and to the disadvantage of merchants. Others routinely abuse chargebacks to steal merchandise. Here’s how to protect your business from these types of “friendly” and sometimes dishonest fraud.

Chargeback mechanics

Friendly fraud pivots on a customer’s failure to communicate with a merchant. Instead of contacting a seller to discuss a problem with a good or service, some customers immediately dispute a charge with their bank or credit card company. They generally provide plausible reasons for the dispute and don’t mask their identify at any phase of the process.

A chargeback takes time and effort to resolve. And if the bank or credit card company honors a customer’s dispute (which they often do), the merchant must assume the loss.

4 steps

To prevent such chargebacks from harming your bottom line:

1. Track shipments. Keep an “eye” on orders from the moment they leave your facility to their arrival at a customer’s location. For shipments worth more than a certain amount, consider requiring the customer’s signature to release it from the shipper’s possession. With a robust document trail, you’ll be able to support your denial of a chargeback — even if a customer claims he or she didn’t receive the goods.

2. Communicate your refund policy. Create a detailed refund policy and communicate it to customers throughout the shopping process and when the sale is made. For example, post signs in your store or notices on item pages of your website. Just keep in mind that an overly restrictive refund policy may create an incentive for customers to go directly to their credit card companies to dispute a transaction.

3. Invest in customer service. Some customers resort to chargeback requests because they’ve had trouble contacting or reaching a resolution with the merchant. Make sure you provide customers with multiple support channels, such as phone, email, and instant message. Additionally, give customer service personnel the authority to resolve disputes quickly — including to issue refunds or credits without supervisory approval.

4. Watch customer activity. Collecting and analyzing customer data can deepen your company’s understanding of purchasers’ behavior and help detect anomalies. For example, if a customer frequently checks the status of his order and then denies placing the order, you may be able to use this fact when disputing a chargeback.

Play defense

It’s important to understand that not all chargeback requests are hostile or intentionally fraudulent. But you also need to protect your business from bad actors. Contact us for more information on “friendly” fraud.

Your company has landed a lucrative new account, and the customer has already placed several small orders, paying in full, on time. Now the customer wants to place a larger order, but has requested that you first expand its credit account. Warning! There’s a chance that you could become a victim of bankruptcy fraud. Your new customer may be planning a “bust-out” — a common bankruptcy-related scam.

Bust-out scams

In a bust-out, fraudsters create a bogus company — often with a name similar to that of an established, reliable business — to order goods they have no intention of paying for. In fact, they plan to sell the products for fast cash, file for bankruptcy and leave you, the supplier, holding the empty bag.

In a variation of the scheme, bogus operators buy an existing company and use its good credit to order the goods. Either way, they sell the products they order below cost, for cash, and then file for bankruptcy, writing off the amounts of the supplier’s bill.

You can avoid becoming a bust-out victim by carefully vetting businesses that were formed only recently. Also be wary of established companies with new ownership — particularly if the new owners seem to want to keep their involvement under wraps. And pay particular attention to customers that have:

Warehouses stuffed with high-volume, low-cost items,
Disproportionate liabilities to assets,
No corporate bank account, and
Principals previously involved with failed companies.

Fraudulent conveyance schemes

Bust-outs are far from the only bankruptcy-related scams. In fact, the most common type of bankruptcy fraud is concealing assets — or fraudulent conveyance. This scheme involves hiding or moving assets in anticipation of a bankruptcy. The owner of a business on the brink of collapse may, for example, transfer property to a third party — most commonly, a spouse — for little or no compensation. The third party holds the property until bankruptcy proceedings have concluded, and then transfers it back to the business owner.

Alternatively, the business owner files for bankruptcy and then, with the court’s approval, sells property below value to a straw buyer. The owner’s relationship with the buyer isn’t disclosed, but the buyer holds the property until the owner is ready to reclaim it at an agreed-upon price.

In either case, the goal is the same: to keep property and monetary compensation out of the hands of creditors.

Prevention first

Fighting bankruptcy fraud typically requires professional legal and financial help. The best protection is prevention, but if you suspect one of your customers is trying to pull a fast one, contact us at 205-345-9898.

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Fending off “friendly” fraud

Don’t become a victim of bankruptcy fraud