Fraud is soaring to an alarming level. Catching the perpetrators is difficult because they have usually disappeared before the scam is detected. A bust out scheme is a fraud scheme in which the identity and credit line of a business are used to obtain loans and goods with no intention of paying.
These bust-out artists typically set up bogus companies or take over legitimate ones, order merchandise on credit, sell the goods for cash and disappear without paying.
Bust-outs are becoming more sophisticated, making it difficult to detect. There are, however, some clues credit risk managers can be on the look out for. According to the National Association of Credit Management, the greater number of signs, the greater the odds that a fraud may be occurring.
Signs to watch for:
Same name scam: Bust-out artists use names that are confusingly similar to legitimate businesses. Pay attention to correct spelling and the address. Watch for new ship-to addresses.
Phony references: Be wary of trade references in the same geographic area. Question references that offer glowing reports or have impressive sounding names. Be cautious when references are answered with an answering machine. Is the reference listed in Dun & Bradstreet?
Rush orders: Forced shipments without a thorough credit check may be suspect.
Change in ownership: Watch for ownership changes of established accounts. Learn the background of the new owners.
Questionable source of capital: If principal’s former occupation isn’t congruent with a large capital investment, it may indicate a front for the hidden owner of the business.
Unsolicited orders: Be wary of large orders placed by unknown customers at trade shows
Flawlessly completed Credit Application packages: Question unsolicited requests for credit that are perfectly completed, containing photocopies of mercantile credit reports, financial statements & profit and loss statements.
Unknown background: Beware if the applicant refuses to divulge their background or comes from a background unrelated to the current business.