The High Cost of Penny-Ante Scams

Former prosecutor Robert Silbering explains why small-business owners are some of the easiest marks for con men and embezzlers

They come into his office and break down in tears -- small-business owners who have lost everything to scammers and crooked employees. Their stories differ, says Robert H. Silbering, president of New York City-based Forensic Investigative Associates (FIA), but all made the same mistake: None investigated that seemingly stellar investment opportunity or merger proposal with the diligence it deserved. Same with employees, whose sparkling resumes may be tissues of lies concealing all manner of dark secrets, from past firings to convictions for fraud. In all those cases, Silbering says, an the ounce of prevention -- be it a little checking or taking the time to validate references -- would have saved a ton of heartache.

Silbering, whose firm specializes in corporate fraud, asset-tracing and recovery, due diligence, and global intelligence, was formerly a special narcotics prosecutor in New York City. He spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow:

Q: You've been a special prosecutor for the New York District Attorney's office, investigated narcotics crimes. and done asset-tracking for international law enforcement agencies. How many small-business owners does your company deal with?

A:

We are hired by government entities, law firms, corporations, and financial institutions, but we also deal with small- and mmidsize-businesses owners all the time. It seems like a new one comes in every day, and most of them have the same story: They have limited amounts of assets, they're reluctant to spend money on anything that isn't generating revenue, and so they don't do the proper due diligence before they make deals and hire people. Unfortunately, they get burned quite often.

Q: How are they burned?

A:

They get taken in business deals, they get defrauded in scams, and they get into business with people they never should have gotten involved with. For instance, we had a guy come to us who had taken on a partner in his business. He had some reluctance, but he went ahead with it anyway. After they started working together, he got more and more suspicious of this guy and finally he came to us. We looked into it and it turns out his new business partner is connected to one of the organized crime families here in New York City.

Q: And he didn't realize this ahead of time?

A:

No. It's amazing how much people don't realize. I had a frantic call the other day from a small-business owner in the metals industry. He noticed that some paperwork from the bank didn't match what he thought was the amount of his deposit. The next day, his bookkeeper/secretary did not come to work and she couldn't be found at her address. We checked it out and found that the $3,000 bank deposit was just a drop in the bucket: Over the past three or four months she had stolen about $300,000 from him.

Q: What other kinds of security concerns do small-business owners face today?

A:

There are all kinds of things entrepreneurs should be aware of. We've been working with a small company where some intellectual property was stolen, we think by a former employee. We brought in a computer expert to discern exactly who took it, what was stolen, and who it was given to. It looks like this guy went to work for a competitor and brought his former boss's client list and other proprietary information with him.

Q: Are small companies particularly at risk for fraud and embezzlement?

A:

Oftentimes, they are. They don't have inhouse departments set up to prevent it, and they don't have the funds to hire the Big Four accounting firms to do audits and make sure that money isn't disappearing. Unfortunately, they're also reluctant to spend even a small percentage of a $10,000 deal, even a $100,000 deal, to make sure they're doing business with the right people. They do mergers, acquisitions, make investments in other companies -- and they haven't done their homework and their money is just taken.

Q: Why are small-business people such easy targets?

A:

They tend to be too trusting. They don't exercise good judgment in finding out who they are really dealing with. Most of the time, these scammers are good talkers, they have a lot of superficial paperwork that looks great, they have flashy Web sites -- but there's no real company behind them. It's a shell or they're actually going bankrupt.

Q: What advice do you give to prevent this kind of fraud?

A:

It's like they say in busines: Know your customer. Know who you are dealing with. Try to find out everything you can about the person you're giving money to, or buying services from, or hiring, or merging with, or acquiring.

We had a small boat manufacturing company in New Jersey as a client. They had hired a local contractor to expand their facilities so they could build more boats. This guy asked for two-thirds of the money upfront for materials and they gave him $2 million. Needless to say, he gambled the money away or whatever, and the work never got done. They're now drowning in legal fees, suing this guy, and they're looking to attach his assets, so they hired us to do a background check. We came back to tell them that he'd been convicted twice for fraud, he's presently under indictment, and will probably be in jail in six months. And they gave this guy $2 million!

My advice: Before you sign a contract or hire somebody important or invest money or give money away, know who you're really dealing with.

Q: How does a small-business owner find out about someone's background?

A:

Check references, but also go beyond that. For instance, a lot of resumes are completely fraudulent. Sometimes, the references are phony -- the phone rings at [their] friend's house. And most of the time, the references that are listed on a resume will say nice things, even if it's just to get rid of a problem employee. So, go past just calling the numbers that are listed. Call the schools that are mentioned and verify if the person really was a student and really did get that degree. Call the employers listed in the history and check to see if someone was really an employee during the dates they list. If this is a dishonest person, you'll find out pretty quickly, and you'll know you don't want him working for you.

If it's a business deal, don't rely simply on a personal endorsement. Other people may be getting defrauded also. Make sure you see the operation firsthand before you invest or set up a partnership. Make certain that you get full access to the books and that your accountant looks at them. Do the figures really add up? If there's any uncertainty at all, look further and hire a professional to come in and investigate.

Q: How much does a professional charge?

A:

It depends on what's required, but a simple background check can be done for as little as $1,500 and it will let you know about this person's references, whether he's had any bankruptcies, liens, judgments, been charged with any crimes or been named in any civil suits. A lot of times, the mom-and-pop companies are reluctant to spend $3,000 on investigative work and due diligence, but they're doing million-dollar deals! And once the fraud has occurred, the scammers move the money offshore and you can't find it.

Q: What happens then?

A:

A lot of times, it's just too late. [Defrauded busines owners] wind up spending tons of money in legal fees and still don't recover much -- if anything. When a [huge conglomerate] loses $2 million, or $10 million, in a deal, it's a drop in a bucket.When a small business loses that, it's the entire business and they can't recover. They come in saying, "Oh God, what have I done?" And they're not stupid people. They just haven't remembered to be proactive. What I wish I could tell them ahead of time is: Do your homework up front before there's a mistake made.

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