Matthew B. Greene International Law Blog on Lawyers.com

ACFE statistics established that the most costly business fraud violations generally target or occur within organizations with less than 100 employees.  This is in part because smaller companies do not reserve adequate budgets for security services, background checks or legal services.

The vast majority of fraud is committed by individuals rather than by businesses.  The FBI in cooperation with the National White Collar Crime Center established that 60.1% of fraud cases are perpetrated by individuals only, 22.1% by individuals utilizing business structures or assets, and only 17.8% are perpetrated by a business as a whole.  Thus, in most cases specific individuals are committing the fraud, predominantly in cooperation with other individual perpetrators.

FBI statistics also show that 92.2% of all business fraud world-wide was originated by perpetrators in or from the United States.

Fraud compromising or preventing the effective acquisition of professional services by the organization constitutes 18% of all internal business fraud, resulting in the greatest average losses of approximately $300,000 per year for every company.  Most alarmingly, the statistics evidencing that this type of fraud is the most damaging to company operations do not consider the consequential damages and losses due to failure to procure needed legal and security services to defend the company’s essential assets and infrastructure at critical times.

Corrupt insiders involved in this type of fraud generally abuse the authority and weight from their corporate position to avoid or prevent the hiring of professional legal or security services, interfere with the work of a security firm or law firm, or undermine the services firm’s relations with the client company.  Such operational sabotage is usually intended either to avoid detection, or to reserve the company’s budgetary funds for continued diversion or embezzlement to maintain a level of fraudulent profits.

Most business fraud perpetrators act as independent “business consultants,” “investment consultants”,  middle-men, or “deal brokers”, and are most often presented as “friends” with “connections” related to urgent needs of the company to be defrauded. Based upon statistics developed by the FBI in cooperation with the National White Collar Crime Center, federal investigative experts conclude that one of the highest risk areas for external business fraud is relations involving an individual “representative” on a foreign territory, entrusted with selection, management or performance of professional services.

PROTECTIVE RECOMMENDATIONS:

A lack of understanding or reluctance to believe the nature of business fraud fuels the opportunities for this criminal industry, and adds to its damages and costs.  Executives are often reluctant to believe that fraud is committed by their own employees or independent contractors, and because of the clandestine nature of the offenses, most perpetrators are not even investigated until significant losses are incurred or critical commercial projects undermined. 

Criminal investigative experience shows that the most damaging risk comes primarily from corporate insiders, as key enabling players who assist local outsiders in taking advantage of economic security weaknesses of the company.

Accordingly, the most powerful and effective way to protect yourself and your organization against business fraud is simply to carefully analyze and evaluate the individuals whom you do business with.  This approach consists of the following 8 elements:

(1)       Give priority to firms and organizations for professional services and representation of your commercial interests, instead of placing trust in individuals or “friends” with “connections.”  Be suspicious when employees or partners attempt to discourage you from hiring professional services to protect your business interests, especially when licensed expert services are involved.

(2)       If you are dealing with a representative, call the company to make sure that person really works there or has contractual relations.  Verify that the company does what the representative says, and is prepared to back up or follow through on promises made by that individual.

(3)       Before entrusting individuals or employees with new or important projects of high commercial value, investigate and analyze their current professional and personal circumstances, to detect pressures that can be motivations or warning signs of a risk of business fraud.

(4)       Research and evaluate the person and firm you would be dealing with.  Do not be distracted with the quantity, type or prestige of its office locations, and similar superficial criteria which con-artists only take advantage of to give false confidence.  Concentrate on its capabilities, ability to clearly and transparently explain its proposed services and methods of providing services, and generally its level of preparedness to perform the work promised.

(5)       Do not rely only upon “open source” or standard “due diligence” information, especially from anonymous sources on the Internet, to “investigate” a person or firm who you plan to entrust with an important project.  Such information is often superficial, unqualified or even misleading, often falsely provided by competitors.  Look further for other relevant information to get a clear and accurate representation of the whole truth.

(6)       The most accurate indicator of reliability is that the firm or company relies upon its corporate name, image and reputation, and conducts business under that one trademark identity.  Individuals or businesses that maintain multiple corporate registrations under unrelated names, frequently change them, do not use most of them, or do not conduct the majority of business under any one name or trademark, present a risk factor.  Legitimate and successful companies actively build their brand, use it, and work to uphold its image.

(7)       Closely examine the basis and merits of any proposed business or investment offer, or proposed modifications or extensions of an existing business or investment, preferably with professional legal or financial advisors.  A key indicator is the transparency and disclosure of detailed mechanisms of the proposed transaction or methods of work to be performed, prior to signing a contract or making payment.  If you hire “secret” services, you are likely to get equally “secret” results.

(8)       Continue to monitor the performance of the project, business or investment, giving priority to first-hand professional information, directly from those actually performing the work, instead of relying upon assurances of individual representatives or referral agents.

Matthew Greene and STILAS avoid accepting any business from the general public.  Consultation is generally provided only to government agencies and banking institutions.  Provision of services to the private sector may be considered only upon introduction through trusted partners or colleagues of Matthew Greene and STILAS.