Scams and fraud are a fact of life – and of business. Every day, businesses are scammed and fraud is committed. The rate at which these crimes are perpetrated is increasing, both in the number of instances and the amount of money lost. This is especially evident during the holiday season.
According to Black’s Law Dictionary, fraud is defined as “knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Fraud must be intentional— the person committing fraud knows they are not being factual and honest. There are 2 general types of fraud that break down into more specific types. The 2 general types, according to The Balance, are:
- Fraud of commission, in which someone states a fact that they know is not true “That car has never been in an accident,” (knowing that it has been) or
- Fraud of omission, in which someone conceals a material (important) fact, as in knowing that a car has been in an accident and not disclosing it.
The best way to avoid scams or fraud is to be aware of how they work and what types there are. Here is a list of the types that commonly affect businesses:
Bankruptcy fraud – includes hiding or undervaluing assets, concealing information, or destroying documents.
Mail fraud – using the postal service to make false statements with the goal of personal profit.
Employment fraud – lying on applications or employment forms such as not reporting convictions before being hired.
Insurance fraud – falsifying insurance claims.
Wire fraud – using electronic means ( Internet, TV, radio, and more) to make false representation.
Identity theft – stealing business or personal information, usually electronically, to assume someone else’s identity.
It is not just individuals that are at risk of fraud— businesses can be targeted as well. In fact, businesses have some unique situations that make them even more vulnerable to fraud.
Employee/Insider Fraud
The most common type of insider fraud is theft of assets. If this is done by employees, it is called embezzlement. This can include stealing supplies, money, or writing fake checks to themselves. Insider fraud accounts for 76% of all fraud incidents in the US, according to a 2009 Price Waterhouse Coopers survey. Of that 76%, 42% of fraud was committed by middle managers. This trend makes sense because employees know the inner workings of a business, making it easier to find weak spots to exploit.
A few ways to prevent employee fraud are to require background checks during the hiring process, separate the financial duties so no single person controls everything, count inventory to see if any goes missing and let employees know you are watching for thefts. These methods are useful for small individual businesses.
Customer Fraud
Customer fraud is when a non-employee defrauds a business. This can include shoplifting, using stolen credit cards, or returning an item they didn’t purchase. A common scheme sees a customer with a stolen credit card ordering an item from a big box store like Home Depot and selecting in-store pick up.
A good secure way to have larger items delivered is by using secure transportation services which partners with retailers to be their designated shipping method. This helps smaller businesses compete with Amazon’s shipping prowess.
Be wary of customers’ rapidly changing their contact information, as this could be a sign that a thief is trying to hide. Confirm the contact details with the customer to ensure they are correct before shipping a package to them. If a phone number becomes disconnected, try contacting the customer another way before shipping.
Another good way to tell that a sale might be fraudulent is if the price is too good to be true. Sales do happen, but an absurdly low price is an indication that the sale might not be honest. Be cautious when dropping off packages at storage units or empty warehouses, as these are common locations for people running scams to set up.
It is a fact of life that fraud and scams will always be around. You can protect your business by being vigilant and careful. Monitor your employees, track inventory, confirm customer contact information, and avoid sales that are too good to be true.
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