Beware of "Overpayment" Scams

Before toasting your "dream" sale, consider whether it came from a new client paying via a cashier's check. It could spell fraud

The CEO was overjoyed: Her company had generated its biggest sale of the year, and a cashier's check had arrived to cover the payment. Then the client called: He needed to cancel part of his order -- could he get a partial refund?

The grateful entrepreneur complied, succumbing to a kind of fraud running rampant. Randall Hoth, president and CEO of the Better Business Bureau in Milwaukee, says "overpayment" scams use startlingly authentic-looking phony checks to defraud small-business owners distracted by seemingly large orders.

Smart Answers columnist Karen E. Klein recently spoke with Hoth about the consequences of these scams and, more important, how to avoid falling for them. Edited excerpts of their conversation follow:

How does the overpayment scam work?

What happens is that a company, typically one that's selling or marketing itself online, gets an order accompanied by an "official bank check" or a cashier's check. Then the client contacts the company to say it needs to reduce its order and ask for a refund of part of the money. Typically, the client has sent a very large check -- maybe $50,000 or $70,000 -- and ask for $4,000 to $7,000 back.

So, the business owner is willing to refund such a small portion in order to keep the client happy. It takes 10 to 15 days to find out that the original check is bad, by which time the business is out the money it sent as a "refund."

Who's getting taken in this scheme?

We've seen several local hotels here in Wisconsin turn up as victims when some person or organization books a large block of rooms and meeting space for a conference, sends in a check to cover the reservation, and then says it has had some cancellations and need to refund some portion of the money.

The scam has also victimized people like caterers, event planners, and companies selling high-end products like jewelry, sports equipment, vehicles, and things like that. The common thread seems to be businesses that advertise themselves on the Internet, either through business directories or with their own Web sites and online marketing materials.

Why are these scammed perpetrated primarily by online companies?

Well, it's wonderful when companies can open up their businesses to the global marketplace, but with that global marketplace come global scam opportunities. We're encouraging small companies to market using the Internet, but we're also very concerned that it opens up the opportunity to be surfed and scammed.

How often is this happening?

Three years ago, I had never heard of an overpayment scam. Now, I'm hearing about them all the time -- they're becoming rampant. We even put out a statewide alert to companies in the hotel and convention industry after a half-dozen local hotels were victimized recently.

Can't bad checks be identified quickly through national financial databases?

Personal checks are returned right away, but these scammers use what looks like a cashier's check, and those don't move through the electronic check-verification process quickly. It takes up to two weeks, by which time the victim has already sent the refund and sometimes even spent some of the money.

Small companies typically don't have in-house credit managers to check out large payments, and the owner figures if the money has arrived in advance, everything must be O.K. These checks also tend to be for very large amounts, so the small-business owner is excited to make such a big sale and often doesn't question it too closely.

What happens when the check is returned as a phony?

Well, the refund that has been requested has typically already cleared the victim's bank account. Sometimes, the merchandise has been drop-shipped to a third-party destination, where it is then fenced. And in the worst-case scenario, the victimized business has already spent some of the money it thought had come in.

Banks hold business owners liable for returned checks, plus service fees and return charges. So, all of this becomes a loss. For very small companies, it can amount to a catastrophic loss.

If businesses report these crimes, do they have a chance of getting their money back?

In the cases I've dealt with, I've never seen a small business get a recovery of the funds. It is so hard to trace the check back to the source -- it's virtually impossible. That's why it's so critical to warn people about this problem.

How can entrepreneurs avoid overpayment scams?

Beware of any significantly large, unusual order -- especially if it comes from a new client and you're convinced it's the best sale you've had all year. That's the time when you could get burned.

Take any check you're unfamiliar with directly to your banker and have it verify that the check is authentic before you send any refunds or release any merchandise.

Do these checks typically look authentic?

Absolutely. You can go to the Internet and, without any identification or bank-account information, you can order checks or create checks with any kind of routing and order numbers on them. Law-enforcement agencies are trying to shut down that possibility, but they haven't been successful yet.

The fact is, technology and Web services are readily available to criminal elements, and they can create a better-looking check than the one that comes from your bank stock.

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