Clearing the air: scrupulous scrap metal processors can work to overcome wider industry ethics issues.

Many companies that manufacture metal products can rightfully ask themselves several questions about the scrap processors they use, including: Are they getting paid for the correct amount for their scrap metal? How do their organizations audit their scrap weights? Do they trust their current scrap service providers?

These are important questions that every manufacturer should think carefully about. Scrap is worth real money. For some larger manufacturers, it could mean hundreds of thousands of dollars every year.

Corporate fraud is a major concern in today's business world. It is essential to protect the integrity of markets, like scrap metal, by punishing those who falsify information for sheer greed.

SMOKE AND FIRE, Several years ago, the United States Department of Justice began investigating the business practices of several scrap metal dealers. In 2004, two Cleveland area companies were accused and indicted. The Justice Department levied fines totaling more than $10 million against these companies. Furthermore, executives from both companies were fined and given jail time.

Also in 2004, a Michigan company pied guilty to defraud suppliers. That company was ordered to pay criminal fines as well as restitution to its victims.

The Department of Justice has now moved the investigation into Chicago. Currently, four Chicago area scrap companies are under investigation. One of the mare issue being investigated is the practice of short weighing. Short weighing occurs when misrepresented, lighter weights are used to pay the supplier/customer.

Short weighing typically happens two ways. The first method is very straightforward. The scrap dealer, for example, picks up a scrap container from a customer that does not weigh its own material.

The second method, which was used by the Michigan company that defrauded its clients, is a little more complex. This situation involved the reprinting of weight tickets. The scrap dealer's scale weighed accurately; however, it was reprinting weight tickets with lower weights and sending those to its customers. The supplier/customer received documentation with weights; unfortunately, those weights were inaccurate.

To keep legitimate competition at bay, scrap dealers that short weigh will falsely "pay" a price back to the supplier/customer that is at or significantly above the steel mill market price. This should raise a red flag right away. How could a dealer that is reselling the material to a mill pay its customers a higher price than they could sell it for? Checking against published pricing can keep manufacturers informed of what their scrap is actually worth.

KNOWLEDGE BASE. L. Krinsky and Sons, the fifth-generation family-owned and managed scrap metal dealer for which I work, advocates and teaches auditing practices to our manufacturing customers.

Whether it's providing a scale for customers to track their weights or having trucks weighed in at independent truck scale facilities, the company strives to give customers assurances that their weights are accurate.

When short weighing occurs, it can cost a manufacturer significantly. For instance, 25,000 pounds of No. 1 Steel Busheling, purchased at $220 per gross ton, yields $2,455, while 20,000 pounds yields $1,964. Getting paid on 20,000 pounds vs. 25,000 pounds equals a loss of $491 per transaction. Thus, being short weighed by 5,000 pounds at $491 for 52 pickups each year means a potential loss of $25,532 throughout the year, or $51,064 throughout the year if scrap is picked up twice per week.

The more volume a manufacturer has, the greater the risk if an audit is not part of a scrap program.

What is the next step for customers that suspect they are being cheated?

TESTING THE VENDOR. The following are some warning signs and questions for manufacturers to consider when evaluating the scrap recyclers they work with:

* Too much consistency on the amount of scrap being paid for when several variables make consistency highly unlikely; i.e. fluctuation in volume of parts produced, use of different gauge material, a wide range in the percentage of scrap generated between different part numbers, etc.;

* Scrap pricing that remains level while the market is continually fluctuating;

* Pricing that is considerably higher than any other competitor and at times higher than what is posted in the market (Many purchasing agents and even business owners are fooled into believing they are getting the best price when in fact it could be the opposite if their scrap is not completely accounted for.);

* Attempts to lure business owners and employees with offers of cash and/or favors;

* A front office that does not know what or even how many loads of scrap are picked up; and

* The back operations not knowing if every load and every pound of material is accounted for when (or if) it is paid for.

It is also recommended that a business test its scale if it has been provided by a scrap vendor. The customer can have it calibrated by a third party of its choosing rather than by the scrap processing company. Scrap generators should be on the lookout for scale manipulation, such as setting containers off center, over the edge or not fully on the scale.

Onboard truck scales can also be manipulated by entering an inflated tare weight. Some scrap vendors have been caught stealing weight from companies by putting inflated tare weights on containers ranging from drums, boxes, dump hoppers, luggers, roll-offs, trailers, etc. About 20 loads from dump hoppers may be used when filling a lugger or roll-off.

EASING THEIR MINDS. Scrap companies can increase their customers' comfort by helping provide answers to such questions as:

* Is there an itemized statement including date of pickup, type of material, weight of material, price per unit weight? More importantly, is there matching documentation?

* Is a company receiving fair market value and payment in full?

* Does the company have its own scrap auditing process?

* Does it know if the scrap is being graded correctly? (It's not uncommon for some scrap companies to take advantage by downgrading material.)

* Does a company use published scrap pricing to establish whether or not it is receiving fair market value?

If customers can answer "yes" to all of the above questions, they are protected and are more than likely receiving fair market value for their scrap.

But, if they answer "no" to some of these questions, their businesses have a little work ahead of them to get to an optimal auditing level. And, if they answered "no" to most of the questions, they probably should be concerned about potential impacts to their bottom line.

If a scrap dealer is working with a new customer that has concerns that it has not always been serviced honestly in the past, the new service provider can help that company by avoiding cash payments. While it is common in the manufacturing industry to accept cash payments for their scrap metal, it could cause trouble for those that do not claim it as income and that deal with a company that eventually finds itself under investigation by the U.S. Department of Justice.

There are many scrupulous companies in the scrap business, and generators of scrap metal should not be shy about insisting that their scrap service provider clear a few hurdles to prove its trustworthiness.

The author is president of L. Krinsky & Sons Inc., Chicago, and can be contacted at [phone].