How to Avoid Fraud in International Business

A post by our collaborator Jan Jonckheere about how to identify and avoid fraud in international business.

As an export consultant, and taking care of export departments of various companies in various sectors, I regularly get confronted with intentions of fraud in International Business.  Cases where companies on purpose want to cheat their potential suppliers.

Thanks to my experience, I know how to deal with this, but every year I regretfully observe that some Small and Medium Enterprises (SME’s) don’t, and sometimes with drastic consequences for these SME’s.

Let me explain a first case here – in some other articles I will give some other examples.

CASE STUDY: International Business Fraud

I get about one mail every week from an important company, enquiring about certain products. With important companies I refer to companies like El Corte Inglés in Spain, Harrods or Debenhams in the UK, Galeries Delafayette or Eclerc in France etc.

Of course, if you get an e-mail from the purchasing manager or purchasing director of one of these companies, you immediately start thinking about “Big Business”. These mails usually inform you that the respective company has been studying your website and they found your products very interesting (usually, without indicating exactly about which products they are talking) and would like to receive some more information, including catalogues and pricing. In some occasions they will immediately tell you that they want to place an important order, but in some cases, they play it more subtle and ask some information first.

Obviously, most not well-informed SME’s will send information and prices, and this will be usually followed by another mail with an important order. An important orders means from 20.000,- to 50.000,- Euros, usually a very attractive order for most SME’s. Delivery conditions are usually that the SME delivers the goods at destination, and payment is usually 30 to 60 days date of invoice.

Most SME’s get of course alarmed when they find out about the payment terms, but on contacting the potential customer, this customer will ask them whether they have an export credit insurance (*) which would cover the risk of non-payment by the customer. In the case of an export credit insurance, the SME has to ask the insurance company whether it is willing to cover this customer. And of course, as we are talking about really important companies, they will clearly say yes (everybody will cover companies like EL Corte Inglès, Harrods, Galeries Lafayette,..).

Therefore, as the Insurance company is willing to cover the operation, the SME’s feel safe, and accept the operation. So, the customer places the order, the SME sends them an Order Confirmation (which the customer also accepts), the SME produces the goods or takes them from its stock and ships the goods to the indicated delivery address of the customer (in a foreign country). The goods are being delivered, and after 30 or 60 days, when the invoice is due, the SME contacts the customer, who…unfortunately, has disappeared. No sign anymore of the contact person, e-mails remain unanswered, nobody is picking up the phone.

The explanation

When the goods were delivered to the customer’s warehouse, the same day, these goods are being picked up from this warehouse by “your customer”, who takes them somewhere else and will resell them at low prices. As they didn’t pay anything for the goods (they didn’t pay your invoice), whatever price they can sell it at, will give them an interesting margin.

Of course, you will contact your Insurance Company who covered the operation, but when the Insurance Company contacts this important customer (eventually they will call the Headquarters of the customer, the HQ), this HQ will simply tell the Insurance company that they never placed any order. Of course, you can prove that there was communication (you have e-mails and documents), but the HQ will tell you that they don’t know this contact person and that he definitely doesn’t work for them. As a consequence, the credit insurance company will not pay you out.

You lose your goods and your money. And of course, as it usually concerns important invoicing values, this makes it even worse for you. Some companies have lost their complete annual profit with one of these fraudulent operations.

How to avoid fraud in international business

There are some basic rules that you can follow, which help you to avoid these cases.

1. Big companies don’t just contact you straight away with a big order. They have a clear purchasing process to follow (request fo information – request for quotation – negotiation a.s.o). So, whatever big company that contacts you, and however good the name of the company may sound, be careful. If they do not clearly indicate about which products they talk (usually they don’t specify which goods), or they talk about “big or important orders” before you even send them a quotation or offer, the chances are you have been contacted by crooks.
2. Check the e-mail address of the contactperson. If the Purchasing Director of an important company contacts you with a gmail.com- or yahoo.com-address, you may be sure it’s a fraud. Of course, some smarter and professional crooks will use “official e-mail addresses” which makes it more difficult.
3. If they refuse to pay anything at all on beforehand, of don’t want to work with financial instruments like documentary credits, bank guarantees etc…be alarmed as well. Usually even the biggest customer will accept to pay something in advance. But even then, some smart crooks may even be willing to pay something in advance, but if the amount gets too big, they will refuse, so if you ask like a 50% downpayment, they will refuse.
4. Whenever you get one of these mails, you should google around. Put the name of the contact person in Google with the word “fraud” next to it, and in a lot of cases you will find a lot of feedback from companies who have already been set up by these crooks.
5. If you’re still not sure, call the commercial representative office of your country (usually every country has an export promotion agency with correspondents in every country, like ICEX in Spain, FIT/AWEX in Belgium, Enterprise Ireland in Ireland), and ask them to verify the authenticity of this contact person. They can easily check a couple of things and in a lot of cases they will already be aware of various cases and tell you immediately it’s a fraud.
6. You can also call directly the company’s Headquarters (of course, not on the telephone your contact person gave you). So, you call the Headquarters and ask whether this person works there. In a lot of cases they will tell you they never heard about this person.

So, as a conclusion, whenever you are contacted by one of these really “important” customers, who you never have contacted before, be alert and check out everything carefully before you start doing business with them. Use the above mentioned tools to make sure you will not be the next victim of fraudulent activities!

Are you looking for an experienced consultant who can help you grow your business while avoiding these mistakes? Gedeth can help! Contact us for more information.