While fraud has been a part of the produce industry for decades, Blue Book Services has seen a noticeable spike in fraudulent activity in recent years.
We know of several instances where an individual (or group of individuals) establishes a new company with the intent to buy produce or acquire freight services, then becomes unreachable shortly thereafter.
We’ve also seen instances of a newly listed company conducting legitimate transactions for a period of time to build trust and a credit history—with the intention of eventually buying large quantities of produce on credit, selling the product, and disappearing without having paid creditors—this is known as a “bust-out.”
There have been variations of these schemes, including the use of stolen identities or impersonating a legitimate, reputable business and/or person who has built trust in the industry. Unfortunately, unsuspecting sellers can end up with uncollected receivables in the hundreds of thousands of dollars.
Small, But Packs a Punch
Why is fraud so successful, as it seems to be?
It’s not always successful, but the pain felt by a handful of victims often causes ripple effects within an industry, from victims scrambling to make up for losses to sellers and transportation providers that are waiting to get paid.
Agencies such as law enforcement and others involved will analyze a fraudulent event, looking for clues and building profiles for the “next time.”
There are often countless hours devoted to not making the same mistakes twice, yet as soon as one scam is figured out, the next one has already taken a different shape.
In produce, as in any industry, the proportion of fraudulent transactions to legitimate ones is microscopic. But the few times a year we see fraud in produce, it’s devastating and, frankly, maddening.
The hours spent recovering from the fraud supersedes what really should be happening: getting back to buying and selling, fulfilling operational tasks, and moving a business forward. And for some, the losses are unrecoverable.
Onboarding New Customers
How does someone become a victim? Remember, a fraudulent customer is usually a newer customer.
New business is what we all chase, because this is a way to grow. Yet experience shows us that new customers present greater challenges than well-established customers.
According to a survey conducted by the Association of Certified Fraud Examiners (ACFE), 11 percent of respondents say onboarding a new customer is extremely challenging, 41 percent say it’s moderately challenging, and 34 percent considered it as only slightly challenging. Another 14 percent of respondents say it’s not a problem at all.
The same respondents were asked about the effectiveness of their organization’s screening and onboarding of new customers: 13 percent consider it extremely effective, 34 percent say very, 40 percent say moderately, 9 percent say minimally effective, while about 4 percent say not at all.
So 87 percent of respondents believe they have an extremely to moderately effective screening process for new customers, while the other 13 percent seem to roll the dice.
What’s curious is more than half say it’s at least moderately challenging to onboard a new customer, while a little less than half consider it only slightly or not at all challenging. Quite a dichotomy.
Chuck Curl, director of risk and compliance for Bancroft, WI-based potato and onion shipper RPE, LLC BB #:105471, is a firm believer in due diligence.
“A company becomes a fraud victim by not following through with due diligence in vetting and approving a new customer,” he says. “To prevent possible losses due to fraud, a company must have a credit policy that follows a defined process.
“At RPE, any new customer must be vetted and approved by the credit manager before the company can be set up in the system.
“A sale cannot be entered until all components of the credit policy have been reviewed and approved,” Curl says, adding, “This firewall is a must and should be followed with every new customer request.”
Yudi Persaud, managing partner at S.K. Cornerstone Group Inc. BB #:209965, a broker in Kingsville, ON, concurs.
“A fraud victim becomes a victim primarily due to improper due diligence, such as inadequate background checks, insufficient credit checks, and failure to verify references. Without thorough vetting processes, individuals and organizations can fall prey to deceptive tactics and fraudulent activities.”
This is an excerpt from the Credit and Finance department from the September/October issue of Produce Blueprints magazine. To read the whole issue, click here.
