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Warning Bells and "The Bust-Out".

As I pulled the credit application off my fax machine early Monday morning, I jokingly said to my assistant Sue, Now if someone was going to try to commit fraud against us, this is what he would send. "After all, the applicant typed the application, included all fax numbers for his trade references, attached his year-end profit and loss statements and balance sheets, personally guaranteed the account, and even helpfully enclosed a month-old Dun & Bradstreet report on his company.

Maybe that was why my credit manager "warning bells" started softly chiming. We usually have a problem with incomplete applications so this full compliance was unusual. In fact, we receive quite a few applications that look like they were written by an angry gopher, yet this application was nicely typed on what appeared to be a manual typewriter.

My warning bells were ringing because a few years ago, I had attended an NACM fraud seminar on "bust-outs." What I learned has stuck with me.

A bust-out is a company that, from start to finish, is meant to defraud. Usually these efforts are well-thought out and financed. A new company is created, sometimes with a principal who is well respected and maybe known in the industry. Quite often, he is unaware of the scheme, and will eventually go down the drain himself The new company sets up nice offices, warehouses, staffing and letterhead just like any new company. Accountants draw up initial financial statements, showing adequate solvency, and these financials are gladly given to suppliers who are evaluating opening credit.

Usually, a number of suppliers will approve credit terms based on financials, the guaranty of the principal, and after checking with the company's bank to confirm healthy balances. They are pleasantly surprised with the prompt paying habits of their new customer and limits are quickly raised as the fledgling company grows. Payments continue to come in fast and furious, and drooling salesmen flock to its doors, snidely back-stabbing each other.

Orders get bigger and bigger, until, WHAM! One night, a year or two later, the company disappears. Well not exactly. There are empty offices and warehouses, and maybe a confused ex-president and employees (not in on the scam) wandering around with dazed looks wondering where their desks are. Suppliers start screaming, crying and scuttling for their attorneys and everyone's running for cover. Meanwhile, somebody somewhere is counting his loot and maybe planning his next bust out.

I remembered all of this as I looked at the application I had received from Ameriland Distributors (not the real company name). I gave it to Barb to start processing the application. We were given two trade references, and she faxed requests to the references for their history right away.

Before the references came back, Ben from Ameriland Distributors called and anxiously asked if we had everything we needed, and if everything looked to be in order. Barb reassured him that we were already working on the application.

She also pulled a Trans Union credit report on the principal, Bill Thomas, (not his real name), and ran into the first discrepancy. The file had been created in November 1998, and there was only one reference, a charge card, which was opened in December 1999 with a high credit line and a balance of $750. So far, all payments had been made on time and it was rated "R01."There weren't any mortgages, car loans, installment loans, additional credit cards or any other open credit lines. This was certainly not what you'd expect for the principal of a $5 million dollar company. There were also 18 inquiries on him in the last 15 months. My warning bells started ringing a little more loudly.

The trade references came back the same day. The first one handwritten by Sam, the accounts manager for BS Import Company Inc., said Ameriland opened their account in November 1997 and that they carry an average monthly balance of $55,000 with a high credit of $52,837.63. Maybe the guy was a little confused about the high credit, but he helpfully added, "They always pay before the due date." As if unsure I would get the message, he also typed a letter on BS Import letterhead that read, "Ameriland Distributors has been our customer for the last 29 months. Ameriland has a net 60 days credit account with our company with a credit limit of $75,000.Their March 29th statement is $52,837.63. Ameriland has established an excellent credit rating with our company and has always been current on paying their balances on a timely basis."

The second reference from T.N. Industries (not the real name) was also typed on what appeared to be a manual typewriter. Coincidence? William Robertson, another "accounts manager," reported that they opened an account for Ameriland in December 1998 with a high credit of $71,234 on net 60 day terms with an average monthly balance of $60,000. He said payments were "discount/prompt."

I asked Barb to pull a new D&B report because even though the report Ameriland had enclosed looked authentic, I'd rather be prudent. She gave this back to me right away, and it matched the report given to us by Ameriland. She also gave me the application for approval along with the Trans Union Credit report, D&B report and trade references, adding as she walked back out of my office, "Let me know as soon as possible, they called me two more times asking when their account will be approved."

She hadn't panicked at the fact they had called three times in two days. She remembered lesson number one: don't let yourself be rushed into making a decision before you have completed your investigation. But it was interesting to know they were applying this much pressure.

The application showed they were a corporation that had commenced business in 1995 with annual gross sales of $5 million. They were estimating $30,000 in monthly purchases from us. Their P&L statement showed 1999 sales of just under $4.5 million, so maybe the $5 million was anticipating an aggressive sales increase. The balance sheets showed a very healthy current ratio of almost 9:1 and more than $900,000 dollars in equity. The D&B report listed a total of $200,000 in trade references and 100 percent were paid within terms. Ameriland's November 1999 financials were included in the D&B report. These, and the trade references, obviously impressed this ratings giant enough that they rated Ameriland 2A1--which is a very good rating even though the financials were unaudited and prepared from Ameriland's books.

I looked a little harder at the report and noticed something else. Dun & Bradstreet reported that Ameriland incorporated in Illinois on December 28, 1998, only a year and a half ago, yet they began operating in 1995. This seemed kind of unusual, because that meant they were probably a proprietor before they incorporated. I also couldn't see them converting from a popular limited liability corporation or from a Sub Chapter S. Both of these would have been in the corporate directory anyway. I couldn't sniff out any other principals, so it was unlikely they were previously a partnership. So unless their recent growth was astronomical, they had been a huge proprietor. Possible, but not likely. I could clearly hear the warning bells now.

Heeding my instinct, I decided to check out the trade references who had so glowingly reported their beautiful relationships with Ameriland. First, I examined the references they had faxed to me. Ameriland was a Chicago company with a 773 area code prefix. BS Imports Company Inc. was a Naperville company, with a 630 area code. I looked at the fax transmittal and the fax came from a 630 number. The same was true of T.N. Industries; Their 708 area code matched the fax transmittal also. So far, so good.

I checked out their phone numbers and both were listed accurately, but neither had a listed address...I knew it was entirely possible to have phone numbers routed from one exchange to another.

Every year I purchase a book called the Certified List of Domestic and Foreign Corporations from the Illinois Secretary of State. I looked up the first reference, BS Import Company, and got my first shock. I saw who was listed as the principal of BS Import Company. It was, (gasp), Bill Thomas, who you might remember as the principal of Ameriland Distributors! I eagerly leafed through the book to look up the principal of T.N. Industries, feeling somewhat let down when I couldn't find them in the book. Illinois is usually behind on getting this directory out, so even while my book was the most current one, it was still somewhat out of date. I called the Corporate listings division for the Secretary of State, and the helpful public servant who answered said that T.N. Industries was a corporation not in good standing. They hadn't paid their yearly stipend to the state. Then he added, "the principal is listed as Bill Thomas."

The warning bells stopped ringing. They had done their job. I knew I was unlikely to extend credit, but I was curious. I looked more carefully at the references and application.

You'll remember that the application was typed on what appeared to be a manual typewriter? So was the reference from T.N. Industries. I placed these two documents next to each other, and I did my best to look like Sherlock Holmes as I squinted and looked for any clues that they were typed with the same typewriter, like a hanging "g" or something. Nothing.

Somewhat disappointed, I scanned the BS Import reference from Sam, the accounts manager, and noticed something I had missed before. This reference, though it came with a typewritten letter, was handwritten, in a very distinctive loopy back-slanted cursive. The most distinctive letter was the letter "p" in the word "Import." It had kind of a weird curlicue that I couldn't copy if I tried. I compared this with Ameriland's credit application, and darned if it didn't exactly match the "p" in "president" after Bill Thomas' signature. Slick Bill had written his own credit reference!

The rest was anticlimactic. I sent Ameriland a letter stating simply that "after a careful examination of the information you provided, we regret we must decline your request for credit." I expected and received a concerned call from Ben of Ameriland and, somewhat tersely I admit, answered his inquiry by stating I have a policy of not extending credit to someone who gives themselves as a credit reference.

Then I began calling members of my NACM distributors trade group and alerted them that we received an application from and denied credit to Ameriland. We have a flash report that goes out once a week, but I had already sent it the day before. One of them had an order for $12,000 pending with Ameriland.

Was Ameriland putting together a "bust out?" I don't know. Maybe they were just looking for quick and easy credit. But, I can't ignore the fact that extending credit is based on trust. If someone is going to deliberately mislead me in obtaining credit, I would have to assume the worst about his intentions. Fortunately, I had the tools to sniff out this deception, including the corporate directory, Trans Union, Dun & Bradstreet, my NACM trade group, and most of all, those warning bells.

Norman E. Cowie, CCE, is vice president, finance at Evergreen Oak Electric Supply and Sales Inc. in Crestwood, IL and a member through NACM Chicago-Midwest. He can be reached at 708/597-4220.
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Title Annotation:preventing commercial credit fraud
Author:COWIE, NORMAN E.
Publication:Business Credit
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Jul 1, 2000
Words:1947
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