Purchasing Scams and How to Avoid Them 9780566089619, 9780566082818

Citation preview

Purchasing Scams and How to Avoid Them

PURCHASING SCAMS AND HOW TO AVOID THEM Trevor Kitching

Gower

© Trevor Kitching 2001 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission of the publisher. Published by Gower Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England Gower Publishing Company 131 Main Street Burlington, VT 05401-5600 USA

Trevor Kitching has asserted his right under the Copyright, Designs and Patent Act 1988 to be identified as the author of this work. British Library Cataloguing in Publication Data Kitching, Trevor Purchasing Scams and How to Avoid Them 1. Swindlers and swindling. 2. Small business. 3. Commercial crimes. I. Title. 364.1´63 ISBN 0-566-08281-0

Library of Congress Cataloging-in-Publication Data Kitching, Trevor, 1952– Purchasing Scams and How to Avoid Them / Trevor Kitching. p. cm. Includes index, hardback. 1. Fraud—Prevention. 2. Industrial procurement. I. Title. HV6691.K57 2001 658.4´73–dc21

Typeset in Plantin Light by IML Typographers, Birkenhead, Merseyside and printed in Great Britain by MPG Books Ltd., Bodmin, Cornwall.

00–059612

CONTENTS List of figures ix Foreword xi Acknowledgements

xiii

1. Introduction – the nature of a scam

1

Purchasing scams and purchasing professionals 1 Decentralization and devolvement – the way in for scam merchants So what is a purchasing scam? 2 Consumer scams 3 Telesales 5 Conflicts of interest 6 Why scams happen 6 Corporate culture continued 7 What are scam merchants like? 7 Barriers to entry 8 What sort of a person gets scammed? 8

2. Getting the purchasing function right

1

10

Importance of purchasing 10 Shopping and purchasing 11 Organization of purchasing 11 The five rights 13 Purchasing positioning – moving purchasing to the next dimension Whole-life costing 15 Techniques in low-value purchasing 16 Purchasing cards 17 Separation of duties 18 Local arrangements 18 Three-way matching 19 Supplier relationships 20 Supplier-base rationalization 20 Operating in strange markets 21 Systems support 21 Legal issues 22 Dealing with salespeople 24 The specification 24 Purchasing ethics 24

14

vi

CONTENTS

3. The bogus directory scam How it works 26 Fax directories 26 Telephone directories 28 Industry directories 30 One-off directories 34 Directories in cyberspace 34 How to avoid the directory scam

34

4. The paper scam – and other consumables The paper scam 36 It’s for you – the phone variant of the paper scam 40 A real-life case study 41 Other office consumables 43 General commodities 44 Specialist items 45 You can’t beat a brand name 45 How to avoid the paper scam and its variants 45

5. The Nigeria scam It is not really a scam 47 The world’s most widespread scam 47 The European connection 47 How does it work? 48 Can we trust you? 50 Bogus connections 51 The Nigeria scam, also known as the 419 scam 51 The official line 52 Variants of the 419 scam 54 Who falls for a scam like that? 55 Nigeria e-scams 55 The black money scam 55 Sometimes the good guys win 56 How do you become a target of the Nigeria scam? 57 A final warning 57 How to avoid the Nigeria scam 57 Other correspondence from Nigeria 58

6. Bogus consultants

59

BS 5750 consultants 59 Grant consultants 60 Rating consultants 61 Energy consultants 62 Beyond scams 63 How to avoid consultancy scams

64

36

CONTENTS

7. Charity scams

vii

65

Advance fee fraud 65 Requests for donations 65 Phoney advertising 66 Is it a big deal? 68 Who can help? 68 How to avoid charity scams 68

8. Borderline scams

70

Junk faxes 70 Premium-rate phone lines 73 Misleading personalized advertising 74 Overpriced warranties and other whole-life costing issues Vanity publishing 78 Rentals 78 How to avoid borderline scams 79

74

9. The Internet – the new frontier for scam merchants Is it a big problem? 80 Only joking? 81 Old scams brought up to date 81 Spam, spam, spam 82 Theme and variation 83 Whose site is it anyway? 84 The ghost supplier scam 84 A few legal problems 85 Keeping records 87 What about payment? 87 Security 87 Futurology 88 Beyond scams 90 How to avoid Internet scams 90

10. Checklist for scam avoidance Organization of purchasing 92 Ordering 92 Dealing with telephone salespeople 93 Dealing with documentation 93 Overseas transactions 93 Buying advertising or publication listings High-pressure sales techniques 93 Dealing with consultants 94 Checking out suppliers 94 Premium-rate phone lines 94 Buying on the Internet 94

92

93

80

viii

CONTENTS

Payment 94 Being charitable 95 Trust 95 Reporting a scam 95

Index

97

LIST OF FIGURES Figure 1.1 Figure 2.1 Figure 3.1 Figure 4.1 Figure 5.1

Continuum of business practice 2 Purchasing positioning diagram 14 An example of the type of document used in the directory scam An example of the type of document used in paper scams 37 A typical Nigeria scam letter 49

31

FOREWORD Much legislative effort has been directed by government, at all levels, to the protection of domestic consumers but little has been directed to the protection of businesses. This may well present a problem even for large businesses with professionally run buying departments. It is certainly a major headache for the million plus small businesses that are at the heart of UK industry and commerce. In large companies, low-value purchasing is often delegated to people without specialist purchasing knowledge or training. Small firms often do not have professional buyers who can easily detect and counter scams. They are run by often overworked individuals who can be just as vulnerable to scams as any domestic customer. Indeed this message has often been passed to legislators and I believe that it may finally have got through to some, but not all and by no means fully. The only major protection that we can provide for business in the current climate is to make sure that scams are widely publicized to warn the intended victims. Chambers of Commerce and often other partners do a lot to spread the word in raising awareness of such scams. I was therefore delighted when I was approached by the author, Trevor Kitching, to not only provide background data from our records but also to provide a short preface to this book. This is a book that I would recommend to all businesses, small and large, since it provides an insight into how to avoid scams directed at business targets, but I must also repeat an important message from the book. Never assume that you know all the scams that could be played on you. Even if you have come across all the ones highlighted in this book, innovative scam merchants are constantly coming up with new ideas and variations on a theme, so the message is to stay alert and help stamp out these practices. Tony Bradley Research Director Birmingham Chamber of Commerce and Industry

ACKNOWLEDGEMENTS There are a number of individuals and organizations without whose help this book could never have been produced. First, I would like to thank my good friend Ted Linzey. I call Ted my purchasing guru because he is so wise in the way that all things related to purchasing operate. Ted gave me encouragement in starting out on this book; he proofread it part way through and he suggested ways of filling some of the gaps that existed at the interim stage. Some of the more memorable one-line observations, which hopefully pepper this volume, originated with Ted. Derek Roylance, another respected wise man of the purchasing world provided some useful insight into the difference between purchasing and shopping. The failure to understand this difference is often where people who fall victim to scams go wrong. I also need to thank my colleagues at KSA – MMM Consultancy Group Ltd who as a minimum showed polite interest as the book progressed and, in some cases, actually helped. John Southcombe was particularly useful for his specialist purchasing input; Tony Wright kindly bombarded me with the relevant press cuttings and scam letters that he came across. Birmingham Chamber of Commerce were invaluable as they provided me with sight of a large amount of original scam material which is rarely gathered together in one place. They also provided copies of some of the warning material that they have issued to their members over the years. DC Dave Parker of West Yorkshire Police Fraud Squad provided useful information, particularly in relation to the Nigeria scam. Most of us that come into contact with this scam are sensible enough not to engage in protracted contact with the perpetrators. Dave was able to point out some of the things that can happen to victims who foolishly get drawn in to this particular web of deceit. I would also like to thank the many individuals and organizations that share their knowledge about scams via the World Wide Web. These are too numerous to list in total but some of the most useful ones include the Better Business Bureaus in the US, Chambers of Commerce in the UK, Scambusters, The Office of Fair Trading, the Charities Commission, Oftel, the 419 Coalition, the Business UK and the Federal Trade Commission. Keep up the good work. Finally, I must thank my wife and children for their constant encouragement. In the case of the children the desire that I should complete this task seemed to spring from their belief that huge quantities of the book would be sold and that I would divide the proceeds equally between them. I hope they are not doubly disappointed. Trevor Kitching

CHAPTER ONE

INTRODUCTION – THE NATURE OF THE SCAM Purchasing scams and purchasing professionals When I talk about purchasing scams to purchasing professionals, they tend to know exactly what I mean. During the early years of a purchasing person’s career, time is usually spent in processing low-value transactions – using cheap, inexperienced staff is one of the ways of keeping the cost of processing such purchases within reasonable limits. During this time, they will frequently come across examples of the various scams described in this book – bogus invoices, solicitations that look like invoices, deliveries of unordered goods. In various forms these occur in every sector of commerce and industry. The scepticism that seems to be an in-built element of the character of the typical purchasing professional picks out most of these scams. The curiosity and eye for detail which also seem to be part of the mindset of such people drive them into reading the fine print that many others would overlook. Buried within the fine print is the truth about the nature of the deal on offer – it has to be there to provide some sort of defence for the scam merchant from the charge of fraud. If channelled through a professional procurement unit, therefore, I believe that most purchasing scams would be detected. The scam merchants know this and their target is therefore the non-professional buyer with delegated purchasing responsibilities. This is sort of person that spends 5 or 10 per cent of their time buying. Such people would never consider themselves a buyer; they have never had a day’s training in buying, and will tend to think that buying is the same as shopping. Sometimes the target of the scam merchant is the clerk or secretary (if they are part-time or temporary, so much the better for the scam merchant); on other occasions it is the Finance Director or Managing Director, particularly in the case of smaller companies. No one with the power to commit the company’s money is safe from the attention of the perpetrators of these scams.

Decentralization and devolvement – the way in for scam merchants A major management trend in recent decades has been the decentralization and devolvement of responsibilities. One of the side effects of this trend has been the explosion in the number of staff of every discipline who incorporate the role of part-time buyer within their job. Decentralization and devolvement of responsibilities are not inherently bad. Blindly following the trend without understanding the consequences is, however, a recipe for disaster, and imagining that it can be applied to the purchasing function without controls, training, improved systems and coordination will have the scam merchants out there rubbing their hands with glee. Companies that think that they are eliminating risk by limiting junior staff to £1000

2

PURCHASING SCAMS

or £500 spend limits on each transaction are misguided. Certainly, the risk of the employee committing fraud for such a small return is low. However, scam merchants are quite happy to take £300-400 from you in return for very little, especially when they know that there are thousands more companies out there whose systems are just as lax as yours.

So what is a purchasing scam? My definition is ‘a mechanism by which unscrupulous people take advantage of naive purchasers and lax business systems to extract unreasonable sums of money for goods or services which are less than the customer expected’. It is important to note that usually this practice is carried out in such a way that the scam merchant can attempt to claim that it is entirely legal. If a rogue spots a situation within which an innocent servant of a negligent organisation can be duped, who can be surprised by the result? And who is responsible - the rogue’s desire to make easy money, the employee for their ignorance and carelessness, or the employer for permitting money to be paid out with no evidence of anything worthwhile in return? Some might argue that the law and its enforcement officers are at fault for not being able to prevent the scam merchants from trading. But the principle of ‘caveat emptor’ (let the buyer beware) applies. If the scam merchant states the nature of the deal quite clearly in the documentation, who is really to blame when the buyer does not read the information put in front of them? In defence of all the past victims of scams, it is probably fair to point out that scam merchants are pretty adept at the art of deception. This is not usually deception in the criminal sense (as we shall see below, scam merchants studiously try to avoid being vulnerable to the charge of criminal deception). Rather, it is deception as practiced by the conjuror; a smoke and mirrors act designed to confuse, to deflect the victim’s attention from reality. Examples of this are documents that look like invoices but are not really invoices at all (see Chapters 3 and 4). The objective of the act is to lull the victim into paying a higher price than the market rate, often by creating confusion and making the buyer think that they are getting a bargain. My definition of a scam differs a little from the dictionary definition because I am trying very hard to distinguish between a scam and a fraud. The Oxford English Dictionary is particularly unhelpful in this regard since its definition of ‘scam’ is ‘to perpetrate a fraud; to cheat, trick or deceive’, whereas, according to the OED, ‘fraud’ is ‘to defraud, cheat or deceive’. It is a little difficult to spot the difference between the two definitions. Other dictionaries are more helpful; Chambers defines a scam as ‘a scheme for making money by dishonest means’ whereas fraud is ‘the crime of obtaining money or some other benefit by deliberate deception’. Thus the distinction is made between a scam (which is a scheme) and fraud (which is a crime).

Fair trading

Figure 1.1

Sharp practice

Continuum of business practice

Purchasing scams

Fraud

INTRODUCTION

3

By my definition, the scam fits somewhere in the continuum of business practice shown in Figure 1.1. Fair trading is what happens when a supplier charges their customer a price which reflects the effort, risk and resources that go into providing goods or services and yields a profit margin which is not excessive. It is impossible to say what constitutes an excessive profit margin because the effort, risk and resources will vary with every transaction. Most transactions are fair – they have to be because in most industries competition creates rival suppliers who will undercut each other to earn a fair profit but who would not be able to sustain a business if they consistently traded in a way that yielded less than a fair profit. Sharp practice occurs when suppliers exercise their knowledge of the cost of goods or services to them (the supplier) and the value of those goods or services to you (the customer) to price the goods or services at such a level that the return that they get for their effort, risk and resources is disproportionately high. Thus sharp practice falls short of a ‘scam’ by actually delivering what the customer thought they were going to get, albeit at a higher price than they need have paid if their knowledge of the market was better. The scam takes this questionable activity of the supplier one step further. When a scam takes place, the scam merchant knows that the buyer does not realize the true value of what is being offered and actively exploits the buyer’s ignorance. Thus, not only does the buyer not recognize that they are not getting good value but they usually have no real concept of what they are buying, if indeed they realize that they are entering a purchasing agreement at all. In order to protect themselves, the scam merchant must try to achieve this without employing what the courts would recognize as deceit or misrepresentation – otherwise they would clearly be straying into the ‘fraud’ area of the diagram above. Scam merchants will try to build for themselves a legal defence in anticipation of the inevitable complaints and investigations. They have no need to commit prosecutable fraud; there are enough part-time buyers willing to commit their employers’ funds to the purchase of useless or grossly overpriced goods or services. You should note that perpetrators of the Nigeria scam (Chapter 5) do not play by these rules or indeed any others. Fraud involves deception or misrepresentation but scams can cover a range of practices that a reasonable person would see as unacceptable or objectionable. The law in most countries does not fully control trading malpractice of the kind described in this book because laws tend to be created with an attempt at avoiding paternalism and taking into account the actual or prospective impact on the victims. Businesses have been seen as being able to look after themselves against the unconscionable practices of the scam merchants. Also, if they fall prey to these practices the impact is generally relatively small financially. Fraud is not specifically defined in English statute. The courts decide the point at which dishonest conduct becomes fraud. Scam merchants who stray over the line into the fraud area leave themselves open to prosecution under the Theft Act of 1968. Section 15 of this Act covers obtaining property or pecuniary advantage through deception. A person who by any deception dishonestly obtains property belonging to another with the intention of permanently depriving the other of it commits an arrestable offence. This is why the true scam merchant spells out exactly what they are doing in the small print of their documentation to avoid the accusation of deception. Some of the practices I

4

PURCHASING SCAMS

describe in this book do stray into the area of fraud. This is inevitable, given the very grey area between a fraud and a scam.

Consumer scams The range of purchasing scams covered in this book is limited to those perpetrated on businesses. A whole plethora of other scams are perpetrated on the consumer, but it would be impossible to detail all of them in this volume. Examples of consumer scams include: ●

●

●

●

●

Counterfeit goods, although these too can be a problem for business, particularly in areas such as software (where annual industry losses to counterfeiting are estimated as $10–15 billion per annum) and high-value (for example, aerospace) components. Pyramid selling, the traditional name for what is now often more politely referred to as multi-level marketing, network marketing or multilevel franchising. This can be legitimate business but it often does not involve the transfer of a legitimate product or service in return for money paid out, in which case it is illegal. Share pushing, often perpetrated on the small business owner/manager but anyone else suspected of a reasonable level of personal wealth may be targeted by salespeople promoting shares in obscure companies about which they have inside information which they are prepared to share with the investor/victim/sucker. Chain letters – sometimes these are a moneymaking scam, but more often they are simply a nuisance. One version claimed (honestly) to raise money for a leading hospital for children. The hospital is still trying to stop it because it is such an embarrassingly wasteful means of raising funds. In the UK, most chain letters involving money are illegal under the Lotteries and Amusements Act. In the US a similar chain letter cascaded through the Internet alleging (wrongly) that 3 cents would be given to The American Cancer Society every time the message was forwarded. The Ponzi scheme (named after its pioneer Charles Ponzi) is a combination of share pushing, multi-level marketing and a chain letter in which someone sells shares in their ‘company’. The first group of people to buy are rewarded with generous ‘dividends’ and tell all their friends to buy more shares. This goes on until the pyramid has grown so large that the people at the bottom cannot get anything and the person at the top gets a lot.

I also will not cover dodgy timeshare salespeople, home-working scams (for example, stuffing envelopes), garages that ‘clock’ second-hand cars, ‘cowboy builders’ or any of the scams aimed primarily at the domestic consumer or ‘shopper’ (as opposed to ‘purchaser’). The reason for omitting such ‘consumer’ scams from this book is that so many other sources of information, guidance and protection are available to the consumer that they should not really need to read about them here in a book which is primarily intended to help businesses and business people. If consumers fail to notice the television programmes, press reports and police warnings about the sort of activities listed above, then the Office of Fair Trading or the local Trading Standards Office or some similar equivalent watchdog will be concerned to protect their interests. A recent White Paper issued under the auspices of the UK Department of Trade and Industry (note Trade and Industry) entitled ‘Modern Markets: Confident Consumers’ focused almost exclusively on ‘domestic consumers’ and included various measures to

INTRODUCTION

5

deal with ‘rogue traders’ but nothing that I could identify as dealing with the scams on business purchasers that are described in this book. The White Paper aimed to ‘benefit all consumers but the government will focus in particular on the needs of those with less developed consumer skills, those who are socially excluded and those on low incomes who can least afford to make a bad purchase.’ I would translate this as ‘if you run a small (or large) business and an unscrupulous person scams you out of a few hundred pounds then you are on your own and we are going to do little or nothing to deter them doing it again to somebody else.’ This has been pretty much the case whichever political party has been in power. This judgement may be a little harsh given that the White Paper also states that ‘the government wants to know whether small business should be protected by current consumer law’ – which would be a help. Also helpful would be the government plans for: ‘a power for the courts to grant injunctions against specific practices carried out by specified traders; a power for the courts to ban from trading for a period of time those traders with a history of disregarding their legal obligations; a power for the Secretary of State for Trade and Industry to make orders by secondary legislation specifying that certain practices which have been shown to be harmful should be made illegal; the power to seek injunctions and banning orders will be made available to local authorities as well as the Office of Fair Trading.’ Currently, the same level of information and protection that is available to the domestic consumer is not available to people in business and the small businessperson in particular may not have the resources to research what is going on. This book also concentrates on scams perpetrated on purchasing people rather than those by purchasing people. It is not unknown for companies to set themselves up in business, acquire goods on credit then dispose of the goods rapidly before going out of business without ever paying the creditors. This is often referred to by the term ‘long firm fraud’ and can involve the fraudster in the acquisition of several businesses. The reason for acquiring a variety of businesses is that they can give each other references when these are requested by suppliers in order to extend credit. Alternatively, the crook may acquire an established but struggling business. Such a business will provide ready-made goodwill and references. Using this vehicle, the operator of the ‘long firm fraud’ obtains supplies (for resale, but which will not be paid for), company cars (to be stolen) and loans. You could sometimes obtain protection from this sort of fraud by using a good credit-reference agency, but these fraudsters will do their best to make sure that their business passes this test.

Telesales A lot of the scams that are the subject of this book are driven by telesales, that is, sales over the telephone. Most telephone sales calls are made by legitimate businesses offering value-for-money goods or services. However, the rest include some highly dubious investment opportunities and the sort of misrepresented products and services described in some of the following chapters. For both the legitimate business and the scam merchant, everyone who has a phone is a prospect, whether or not you become a victim depends on your response to the calls. However the telesales person got your name (and it is ridiculously easy), they can make the assumption that you are receptive to a bargain, you have sympathy for people

6

PURCHASING SCAMS

in need and that (in all likelihood) you are greedy. The deal that you are offered by a scam merchant will seek to exploit one or more of these characteristics. Scam merchants promoting their deals through telesales may well tell lies, they will charm, they will frighten, and if helpful to their cause they will bully and harass. Scam merchants are more likely than legitimate salespeople to switch into the hard-sell mode. However, they are usually very good at it. They get lots of practice and you get very little practice at fending them off. You may be interested to know that it has been estimated that 10 per cent of all telemarketing in the US is fraudulent.

Conflicts of interest The scams described in this book are generally carried out by anonymous, remote (often overseas) individuals with whom you are never likely to come face to face. You should not lose sight, however, of the potential dangers posed by your own staff. When it comes to outright fraud, your own staff are prime suspects. Scams such as inflated invoices can also arise if your staff’s loyalty is not exclusively to you. For example, imagine a situation where the office secretary is responsible for calling in a plumber as and when necessary. If she is married to a plumber, who is she going to call? If he charges more than the job is worth, who is going to complain?

Why scams happen The simple answer to the question ‘why do scams happen?’ is that they are seen by the scam merchants as an easy way of making substantial sums of money. If they are true scams (by my definition), they keep the perpetrators on the right side of the law (just), thus not exposing them to any real risk. Scams that work are inevitably repeated again and again, thus avoiding any effort in thinking up new ideas. They generally fleece the victims of relatively small amounts of money, thereby reducing the chance of irate victims making too much fuss, getting the police involved or attracting much attention from the media. Scams happen because of the human characteristic of greed. However, the greed of the scam merchant is not the only driver in the process. Frequently, scam victims too are greedy people and the scam merchant exploits this human frailty by giving the appearance that the deal on offer is ‘something for nothing’ or at least a real bargain. An example of the ‘greed culture’ is shown, in my view, by the success of the corporate hospitality industry. Whenever there is a major sporting occasion or theatrical event the best seats are reserved for corporate hospitality. Corporate hospitality also extends to driving tanks, paintball games and the obvious travel and lavish accommodation. Yet who pays for all this? Well, clearly, the organization that wants to influence the recipient pays for it, usually by selling them something. So we are left with two possibilities: (1) the corporate hospitality wins influence with the buyer – which in my view is corruption; or (2) the corporate hospitality does not win influence – in which case the shareholders in the company providing the hospitality have been badly served by their staff who purchased the hospitality. In most cases, therefore, such hospitality is difficult to justify, yet ‘everybody’ does it. One of the reasons that everybody does it is because it is encouraged by the senior members of staff in most organizations. These are the people most likely to benefit from such hospitality and most likely to offer it to their peers in an attempt to win

INTRODUCTION

7

influence. So how do they expect junior members of staff to behave if offered a gift voucher or half a dozen glasses as a ‘thank you’ for placing an order? The senior staff are establishing a corporate culture which encourages scams. They should be laying down clear guidelines on what is acceptable business practice and what is not. If they don’t, how can they complain about scam merchants overstepping the line? Another aspect of questionable corporate culture that I have observed is that senior staff often have differing views on outward corruption and inward corruption. For example, I once carried out a project to review the print-buying practices of a major bank. The bank was concerned that a senior buyer was very close to some regularly used suppliers and frequently ‘won prizes’ in these suppliers’ regular golf competitions. As part of my review, I visited some of the printers and there in the Managing Director’s office was a photograph of the supplier’s MD proudly displaying a television that he had won in the bank’s golf competition. Shortly afterwards he took out a large business loan with the bank. This highly respectable financial institution thought it was perfectly in order to offer prizes to help win business but not acceptable for one of its employees to accept such prizes. Another reason that scams happen is that they are allowed to happen. Although I refer throughout this book to purchasing scams, in many respects they would be better described as payment scams. Often they happen not because of the purchasing function but because other people don’t follow the guidelines that purchasing people set out. One example is payment in advance. It is not good business practice to pay in advance. With occasional exceptions (for example, training courses where they want to make sure that you will turn up), you should only purchase from sound businesses prepared to operate normal credit terms. If businesses adopted a firm rule of only paying after they had received satisfactory goods or services, none of the scams described in the following chapters could happen.

Corporate culture continued On the subject of corporate culture, it is probably worth considering the merits of promoting a ‘whistle-blowing’ culture within your organization. I wonder how many scams and frauds progress despite someone in the business thinking ‘that’s wrong’ or ‘that’s strange’, but not doing anything about it because ‘it’s not my job’ or ‘it’s not up to me to tell them that there is a problem’. Too many businesses retain a ‘them and us’ culture that stifles communication in general and whistle-blowing in particular.

What are scam merchants like? Throughout this book I use the term ‘scam merchant’ to describe the people trying to take your money from you in a somewhat unfair way. Other writers may have chosen the term ‘con-artists’, ‘tricksters’ or even ‘fraudsters’, but in my view what they are doing is not really a confidence trick, and by my definition given above it is not usually fraud (Chapter 5 is the exception to this). Scam merchants are driven by various influences, but amongst these will be the following considerations: ● ●

Opportunity – how easy is it to perpetrate the scam? Incentive – how much money will they make?

8

PURCHASING SCAMS

● ●

Detection – will they get found out? Sanction – will they be in trouble if they are found out?

Those people are mistaken who think scams are unimportant because the typical financial loss each time is low. Not only are you likely to be targeted repeatedly if your systems permit scams to be successfully carried out on you, but the cost of restoring your ways of working to a suitably secure state will be higher if carried out retrospectively than if you had got it right first time. Equally important, if your systems permit scams, the chances are that they also permit clearly fraudulent activities of many other types. Other general inefficiencies are likely to occur in your business if you do not operate sound practices. Being scammed, therefore, can be a symptom of serious failings in the way your business is run.

Barriers to entry One of the things that people need to consider when starting a new business enterprise are the ‘barriers to entry’ into their chosen line of business. For example, it is much easier to start most service industry businesses than manufacturing ones because the amount of start-up capital required is generally much less. Equally, some businesses (such as medicine and law) are relatively difficult to start up because of legal or regulatory restrictions. The barriers to entry if you are inclined to get into the scamming business are minimal. Once you have shed your inhibitions about fair play, all you need are a list of names and a telephone or a simple printer and you are on your way. The advent of the Internet (Chapter 9) means that entry to the world of scamming is easier than ever. It makes scamming easier, quicker and more global.

What sort of a person gets scammed? The glib answer to this question would be a naive, unsophisticated person, but that would be under-rating the ingenuity and tenacity of the scam merchants. These people know that everyone in business sometimes makes mistakes and that accounting systems have weaknesses that they can exploit. You will not be surprised to hear, however, that scam merchants will try to deal with staff who are unfamiliar with purchasing procedures. All sorts of organizations are scammed from the largest to the smallest, but the favourite target is probably the small to medium-sized company. These companies generally lack sophisticated, computerized control systems and they rarely employ purchasing professionals, but they are big enough for all decisions not to be in the hands of the owner/manager (although owner/managers are by no means immune from being scammed). The scam merchants will find life easiest when dealing with inattentive employees in inefficient businesses, particularly if functions such as purchasing and accounts are in discrete organizational compartments. Within these companies, the scam victim will range from the temporary secretary ordering a few items of stationery to the finance director setting up a deal with consultants which ‘can only save money’ (don’t you believe it!). I have said previously that this book only deals with scams perpetrated on purchasing staff and not by purchasing staff. When I use the term ‘purchasing staff’, however, I am using it in its widest possible sense. Scams are not limited to the purchasing department (indeed they will rarely be found there). Other areas of activity, especially those such as

INTRODUCTION

9

marketing, where staff often fail to perceive the value professional purchasing input can bring, are far more likely to fall victim to the scam merchant. It is also not just the order placer that needs to be aware of the practices described in Chapters 3–9; staff involved in ‘downstream’ aspects of the purchasing process, for example, payments, must also be aware of what to look out for to avoid being scammed. As mentioned earlier, one thing that the victims will often have in common with the perpetrators of the scams is greed. Scam merchants will offer something that appears to be good value (or even free) to the victim’s company. They will also often offer something to the victim themselves (a ‘thank you for your first order’). People accepting these without obtaining further information and/or a second opinion invite the scam merchant into their lives. There are, however, inevitably problems in dealing with scams once they have happened. If you try to obtain redress from the people who have taken your money, you will fairly quickly discover that they are (or claim to be) legally in the right, or you have great difficulty contacting them, or the time and effort involved in fighting your case is out of all proportion to the value of your loss. Perhaps one blessing is that people who realize that they have been scammed are usually so annoyed that they take steps to make sure that it never happens to them again. For practical reasons, therefore, this book is not intended as a manual for recovering from a scam but as a guide to avoiding them in the first place. Initiatives in relation to scams must focus on prevention rather than cure. I hope to help protect the unwitting from the unscrupulous. If you would not consider yourself unwitting, I hope you learn a few useful extra facts about scams that you never realized before. Never assume that you know all the scams that could be played on you. Even if you’ve come across all the ones highlighted in this book, innovative scam merchants are constantly coming up with new ideas and variations on a theme. If you have been scammed and want to avoid the same thing happening in the future, if you think that your purchasing systems may be vulnerable to scams or if you still haven’t quite worked out what a purchasing scam is, read on.

CHAPTER TWO

GETTING THE PURCHASING FUNCTION RIGHT Throughout the next few chapters, I will describe various scams perpetrated on businesses. Each chapter will conclude with a description on how to avoid that particular type of scam. How do you prevent yourself becoming a victim of scams altogether? The answer is to operate your purchasing function in such a way that only properly authorized and justified purchases are paid for. It seems so obvious, yet companies still neglect purchasing – one of the core functions of their business. In reality, the effect of companies ignoring and being ignorant of purchasing is that in many instances they are not buying at all, they are allowing people to sell to them.

Importance of purchasing Various studies have shown that most organizations spend between 50 and 80 per cent of their turnover on bought-in goods and services. Despite this, the typical company will devote far more time and effort to managing the money spent on staff than they do on the money spent with suppliers. A round of pay rises will create more debate in the boardroom than a round of supplier price increases. The importance with which these functions are regarded means that you are far more likely to meet a director of human resources than you are to meet a director of purchasing. It is not just in comparisons with human resources that purchasing often looks like the poor relation in the corporate family. There are still a large number of businesses that regard purchasing as a back-office function that is well down (or nowhere) on the list of boardroom priorities. This to me reveals a lack of understanding of what business is all about. Whatever business you are in, you will buy things, add value and sell things. This applies whether you are a manufacturer (who adds value by assembling the bought-in components), a retailer (which adds value by breaking down large volumes of bought-in products and distributing them to a convenient location for the consumer) or a service provider (who uses bought-in goods and services to create an environment within which the services can be designed, developed and delivered). So, given that all businesses buy things, add value and sell things, why is it that most companies employ more salespeople than buyers? Why are they generally better paid than buyers? And why are they better trained than buyers? The importance of purchasing is underrated in many, many businesses. There are a few enlightened, honourable exceptions, but in most organizations purchasing is underresourced, under-researched and misunderstood. It is under-resourced not just in terms of the absolute numbers involved in purchasing but also in their status and grading. If you pay peanuts, you will get monkeys. If you use the function as the dumping ground for the sick, the lame and the lazy in your company, then there will not be much room for

GETTING THE PURCHASING FUNCTION RIGHT

11

alert, pro-active, energetic, professional purchasing people who could help set up systems to detect and prevent scams. It is under-researched because suppliers know far more about the transaction than the buyers. The supplier will know the costs of manufacture, the importance of the customer in terms of ‘top 20’ position, and the likely future market developments – how often is the buyer aware of all these things? Purchasing is misunderstood because too many people see it as a routine clerical function that could be undertaken by anyone (‘well, we all go shopping at the weekend, don’t we?’). Professional purchasing for business needs to be managed professionally. If it is not, the scam merchants will definitely take advantage; they really are professional at what they do. Neglecting purchasing and letting the scam merchants in has been likened to leaving the plug out of the bath. Whilst the flow of resources into your business may significantly exceed the leakage, you should not allow your resources to drain away to waste.

Shopping and purchasing I hinted in the previous paragraph that many people believe that their weekend shopping expeditions somehow qualify them as ‘buyers’, with skills that can be transferred to the workplace. There is an important distinction to be drawn between shoppers and buyers who have a professional approach. Shoppers are people who make their buying decisions based on their emotions or feelings. They will choose a product based on the fact that they like the salesperson or if something sounds right or feels right about a purchasing proposition that is put to them. Salespeople in general and scam merchants in particular love to deal with customers who let their emotions dominate their purchasing decisions because they are so easy to dominate and manipulate. Buyers who adopt a professional approach will base their purchasing decisions on facts, not feelings. They are not impulsive and will weigh up all the possibilities and alternatives before reaching a decision. They will routinely check what they are told by salespeople and make objective decisions based on the facts. Salespeople offering good-value products or services are always happy to deal with competent buyers. Scam merchants will recognize such buyers quickly and not waste too much time on them.

Organization of purchasing I don’t want to give the impression that there has to be a professional purchasing person involved at every stage of the acquisition process to prevent scams. What is required is that the purchasing process is controlled and managed at every stage within an appropriate framework. This is normally best achieved by viewing the purchasing function at three levels: strategic, tactical and operational. Strategic tasks are concerned with long-term planning and policy. They include: ● ● ● ● ● ●

gaining an overall view of the organization’s expenditure in order to aggregate where possible; analysing long-term trend and risk; selecting and managing key suppliers; make or buy decisions; developing procedures; setting tactical objectives;

12

PURCHASING SCAMS

● ● ●

developing purchasing skills amongst staff with ‘tactical’ responsibilities; introducing purchasing modules to business software systems, and ensuring the maintenance of appropriate ethical standards.

The strategic level of purchasing management sets the tone for purchasing in the organization and has key roles in scam prevention, including establishing purchasing systems and procedures. In those businesses that have devolved tactical and operational-level purchasing, the strategic level is responsible for managing the empowered organization. Tactical tasks are those that focus on medium-term issues (typically looking at the next year’s needs). They include: ● ● ● ● ● ● ● ●

managing and controlling major contracts; sourcing new suppliers; letting and managing call-off contracts; developing contracts; managing the tender process for major purchases; obtaining user feedback; monitoring and managing suppliers’ performance, and undertaking ongoing market analysis.

The tactical level of purchasing can have a major impact on reducing the risk of being scammed. By putting in place call-off contracts with preferred suppliers (under which small quantities are ordered from an annual framework agreement), tactical purchasers can take away the need (or excuse) for end-users to spend money with new, unknown organizations. Also, by creating functional specialists amongst the community of tactical buyers, the ability to spot out of the ordinary transactions is increased. For example, if all telecommunications-related purchases are channelled through one individual, that person is likely to know if an ‘invoice’ for a directory entry is legitimate or not; if such ‘invoices’ are processed at various points around the organization, the chances of a rogue one getting through are multiplied. This style of purchasing organization has been around for a long time in many businesses. The tactical specialists are variously referred to as centres of responsibility or centres of expertise. Operational (day-to-day) purchasing tasks include: ● ● ● ● ● ●

placing orders; obtaining quotations; monitoring quality; producing specifications of requirements; using call-off contracts; expediting and record keeping.

The operational area is the scam merchant’s playground. Unless the people involved in operational-level purchasing (who in most organizations will generally not be purchasing professionals) are properly trained, supported by appropriate systems and guided by a clear procedural framework, scams will get through your business. At this point, it is important not to run away with the idea that all will be well if operational-level staff are not given any purchasing powers and every financial transaction is approved by a senior member of staff. Senior members of staff tend to be busy people and if faced with a mountain of paperwork, they are likely to rush through the ‘trivial’

GETTING THE PURCHASING FUNCTION RIGHT

13

material and focus on the items that they find interesting. Scam merchants usually make every effort to make their documentation look routine and mundane – theirs are the documents that busy people would sign without a second glance. Think about the people in your organization who have the power to purchase – by using a purchase order form, asking for something over the telephone or giving an on-site contractor variation instructions. Would it be a good idea to give each of these people a company chequebook? If the answer is no, do you have the mechanisms in place to restrict these empowered people to purchasing within their competencies?

The five rights I have hinted more than once that I would expect a purchasing professional to be more likely to spot a purchasing scam than, say, a secretary or a goods-receiving clerk or even a finance director. These people and others in the organization need to be protected from scams by systems and procedures developed by people with purchasing training and a purchasing mindset. However, it must be recognized that not all purchasing people are the same, and nowhere is this more evident than in their attitude towards ‘the five rights’. ‘The five rights’ are the things that traditionally trained buyers would look for in a purchase – the right goods (or services), from the right supplier, to the right place, at the right time, for the right price. Now, whilst nobody could argue with the principles involved in ‘the five rights’, there are problems with simply accepting them as the model on which you are going to base your purchasing philosophy. For example, which of the ‘five rights’ is most important? They are not always of equal significance. For example, some purchases are less pricesensitive than others; timing is more vital if you are working to ‘just-in-time’ principles than if you are topping up stock; there is a greater need to buy from an ‘approved’ supplier in some industries and for some products than for others. The danger with simply adopting ‘the five rights’ as your purchasing mantra is that you are in danger of losing sight of the business’s priorities. For example, if you work for an organization whose overwhelming ethos is to be environmentally friendly, the ‘right supplier’ principle covers your requirement up to a point but does not capture the total environmental impact of the purchasing activity. The greatest danger is that people focus on only one of ‘the five rights’ and lose sight of the bigger picture. The one that usually catches their eye is the one that is easiest to measure and is most likely to win them praise from their bosses and peers – the right price. So where does the purchasing scam fit in this ‘five right’ model of perfect purchasing? Well, if you have the ‘right supplier’, it will not be a scam merchant, so perhaps the danger is covered. However I still worry that the ‘five rights’ are not prioritized well enough for specific purchases and that there are some things missing. For example, you must have the right people involved in the process, the right systems to support them, the right business ethics and the right level of control over your processes. For some organizations, it may be that having the right level of environmental impact is of greatest importance; for others, it will be working with the most innovative and original suppliers. I tend to summarize my view as being that effective purchasing is about getting everything to do with the purchasing process right. The most important

14

PURCHASING SCAMS

factor will never be getting the level of scam avoidance right, so unless a more holistic view is taken, the danger may persist. The former Manager of Liverpool Football Club, Bill Shankly, made the famous comment ‘Football is not a matter of life or death, it’s more important than that.’ Similarly, in my view purchasing is not a matter of value for money, it’s more important than that. If you organize purchasing in such a way that you obtain cost advantages over your competitors, it also reflects the style of your company. If you organize it such that you only deal with the most ethically sound suppliers, you are making a clear statement about your company’s core values. If you organize it such that you let the scam merchants take your shareholder’s money, you really do give the impression of a business that does not know what it is doing.

Purchasing positioning – moving purchasing to the next dimension The fundamental problem of the five rights is that they do little or nothing to challenge the ‘one-dimensional’ view of purchasing, that is, that it is just a transactional process in which requisitions get processed into orders and invoices get processed into payments. The purchasing positioning diagram (Figure 2.1), which is a close relative of the familiar ‘Boston matrix’ so beloved by marketing people (and especially consultants) is actually a useful stimulus to deeper thinking about the role of purchasing in an organization. In the diagram, the value of each purchase is plotted against the importance of that purchase to the organization. Items in the top right-hand box (high value, high importance) are of strategic importance to the organization and demand a lot of dedicated time and attention from senior, high-level staff (especially purchasing professionals). Items in the bottom right-hand box are of high value, but are not so critical to the well-being of the organization – these are ideal purchases for the wheeler-dealer style of buyer to get involved in (the sort that think purchasing is all about negotiation). In the top left-hand box are those few items that the organization cannot manage without but which don’t cost much – it may be counter-

LOW VALUE/HIGH IMPORTANCE

HIGH VALUE/HIGH IMPORTANCE

LOW VALUE/LOW IMPORTANCE

HIGH VALUE/LOW IMPORTANCE

Low

High

High

Importance/ risk

Low

Value Figure 2.1

Purchasing positioning diagram

GETTING THE PURCHASING FUNCTION RIGHT

15

culture for a supply chain consultant to tell you this, but you ought to think about keeping a few of these in stock. That leaves us with the bottom left-hand box. These are the low-value, low-importance items that nobody will ever receive great kudos for managing. In some organizations, the processing of transactions for this type of item is what purchasing is perceived to be all about. How many companies do you know where the purchasing department is involved in buying the stationery but not involved in appointing marketing consultants or making major capital investments? Despite having said earlier that purchasing scams are more likely to be detected if a purchasing professional is involved, I am not advocating that their activities should be confined to this bottom left-hand box of the purchasing positioning diagram (where most of the goods and services pushed by scam merchants will fall). Indeed, only a small proportion of their time should be devoted to these items and this time should be spent in planning procedures and creating supply framework arrangements for them as opposed to routine transactional tasks. The key to success in dealing with items in the bottom left-hand box is to minimize the administrative effort and cost associated with each purchase whilst maintaining a framework to control levels of expenditure and the value obtained. Specifically, if you create slick systems for low-value transactions that allow you to pay scam merchants even more easily and quickly, then you ought to think again.

Whole-life costing One of the other problems with ‘the five rights’ is that they usually refer to ‘the right price’ rather than ‘the right cost’. Defenders of ‘the five rights’ would probably argue that ‘total cost’ issues are covered by the other ‘rights’. However, I remain concerned that many purchasing decisions are taken on the basis of price rather than cost. The difference between price and cost are sometimes easy to see. For example, if you are buying a new car, the price will be as quoted by the salesperson (including any discount and so on that you’ve managed to achieve). The cost, on the other hand, will incorporate the price paid, any additional insurance premium, fuel consumption based on your driving patterns, maintenance, spares and so on together with the price that you can obtain when you need to sell or trade in the car when you have finished with it. This is the ‘whole-life cost’. Purchasing for business has its own set of additional costs which many people forget when they are concentrating too hard on price. The cost of processing each order can often exceed the value of the goods being purchased. In addition, the cost of adding a new supplier to your accounts payable database will frequently exceed any perceived ‘saving’ made by going to a ‘cheap’ source of supply. I have come across innumerable examples of non-buyers focusing on price instead of cost. For example, we carried out supply chain projects for the National Health Service designed to improve the efficiency of getting supplies to hospital wards. One complaint from nursing staff was that they could buy cornflakes cheaper at the supermarket than the price charged by the NHS Supplies Agency. This totally overlooked the fact that the Agency arrangement included the cost of reviewing stock levels and delivering replenishment stocks to the ward shelf. Fixed prices for a year was another benefit not offered by the supermarket. Some staff in many organizations often feel stationery can also be

16

PURCHASING SCAMS

obtained ‘cheaper’ through an opportunistic purchase than from a ‘top-up’ service provider, but the cost of reviewing stock levels, ordering, delivering and paying is usually being overlooked. Travel is another area where non-specialist buyers often think that they know better than the expert does – but do they give any thought to whether the ticket from the bucket shop (that is, a dealer in surplus tickets) is as flexible as the one obtained under the corporate contract? Scam merchants know that most purchasing decisions by non-specialist buyers are made on the basis of price and not cost. Yet to maximize their income they want the transaction to be the highest possible cost to you. A number of the scams described in this book therefore incorporate ways by which the scam merchant includes extra costs beyond the original scam. Examples include directory entries that run on year after year and charge you extra if you want a copy (Chapter 3), maintenance agreements with ‘inflation plus’ escalation clauses (Chapter 8) and over-priced products that keep being delivered long after the original order was placed (Chapter 4).

Techniques in low-value purchasing Whilst the problem of the high administrative costs associated with low-value transactions has gained a lot of publicity in recent years (for example, the National Audit Office Report highlighting the £1.50 padlock that costs the Ministry of Defence £75 in purchasing process costs), it is a problem that the purchasing function has been working on for years. The traditional way of dealing with low-value orders was to give them to junior staff to deal with. This reduced the cost per order (because junior purchasing staff were/are not paid much) and provided relatively safe transactions for them on which to practice/train. Provided that each buyer was restricted to a relatively narrow range of commodities, it also kept the scam merchants at bay. This is because the buyer’s instincts would alert them to out-of-the-ordinary transactions, they would seek clarification from their purchasing colleagues and the way that the scam worked would be explained to them. Junior staff carrying out largely paperwork tasks are, however, a declining species in most organizations. Headcount reductions have been demanded as a means of improving efficiency and the tasks previously carried out by buyers have frequently been delegated to originators of the purchase or at least someone closer to the user. This is often a good idea, but the process has to be one of delegation and not one of abdication. Too often, the purchasing specialist is cut out of the process and the end-user, who has no training, fragmented understanding and little interest in purchasing, is left to spend their budget (more or less) as they wish. This is the ideal scenario for the scam merchant who can prey on the naive, occasional purchaser. Other mechanisms are available to reduce the level of paper processing in purchasing. For example, arranging call-off contracts brings numerous advantages (increased purchasing leverage, consistent quality, reduced delivery charges, easier supplier management), whilst at the same time cutting out the need to constantly seek prices, compare bids and so on. If a call-off contract is combined with summary invoices from the supplier, the volume of paperwork at the invoice-processing end of the cycle can also be drastically reduced. What the scam merchant relies upon is that, where call-off arrangements are in place, end-users frequently ignore them and try to do better deals elsewhere or simply don’t know that the arrangements exist.

GETTING THE PURCHASING FUNCTION RIGHT

17

One of the more obvious methods of improving matters is to computerize the purchasing process. It is more difficult for a scam merchant to beat the system if a computer is in place trying to match various stages in the purchasing process up to each other. A surprising number of organizations still do not have properly integrated computer systems looking after the purchasing process. Almost invariably the company’s main computer system will look after the invoice-processing stage, but the order-placing stage is still often manual or on some local remote system. The use of EDI (electronic data interchange) for ordering from a select group of preferred suppliers also cuts any potential scam merchant out of the process, but the increased use of the Internet (e-commerce) could bring mixed blessings in this area. Being able to source suppliers, order goods and services and arrange payments over the Internet offers huge potential for efficiencies but, as discussed in Chapter 9, it also offers a range of new opportunities for the unscrupulous.

Purchasing cards One of the constraints that may apply to Internet scams (Chapter 9) could well be that the normal form of payment for business-to-business transactions will be expected to be the purchasing card. Purchasing cards have been hailed for several years as the answer to the problem of high administrative costs associated with low-value orders. To date, their adoption has been less rapid than most purchasing specialists would have expected or hoped. Purchasing cards operate in a similar way to the familiar credit card, although because payment is required in full shortly after each statement (usually via direct debit), they are, technically speaking, actually charge cards. They have a number of other features that conventional credit cards do not provide. For example, they group the various items of expenditure into ‘merchant category codes’ and provide more detailed management reports. They also enable a high level of control over the value of individual, daily and monthly transactions. In addition, they are potentially capable of capturing customer reference data (for example, job number), although the systems supporting this functionality are by no means foolproof. One of the reasons for the slow adoption of purchasing cards by business was the requirement by Customs and Excise for documentation showing the details of the amount of value added tax (VAT) relating to each transaction. For several years, therefore, purchasers were required to collect and collate paper invoices in parallel to their card statements. This problem was partially overcome when the major banks managed to obtain agreement from Customs and Excise that the card statement was a VAT-valid document, but this is only the case if certain additional data is captured at the point of sale. This change requires upgrading of the merchant’s card machine which not only costs more but also requires changes to staff practices. Some suppliers to business have therefore shown significant initial reluctance to accept purchasing cards and then to update the data capture equipment. The reluctance of some suppliers to accept purchasing cards will be driven by the fact that they have to pay a merchant fee of typically 2–4 per cent, although this is partly offset by improved cash flow. All this is a shame because not only does the use of cards improve purchasing efficiency, it also reduces the chances of you getting scammed. The banks issuing the card machines (‘acquiring the merchant’ in their terminology) do not do so without some

18

PURCHASING SCAMS

care. The users of credit cards have a case not only against the merchant, but also against the organization arranging credit if this sort of transaction goes wrong (the users of charge cards may have less legal protection, but the agreement with their bank usually limits the risk substantially). Also the amount of hassle, cost and bad public relations that a bank would attract if they helped facilitate a scam would clearly not be worthwhile. Having said that, I have come across examples of the bogus fax directory scam (see Chapter 3) where the reply form carries the American Express, Eurocard, Mastercard and Visa logos. I am unable to ascertain whether this is just a ploy by the scam merchant to appear respectable (in other words, they didn’t really have the facility to accept card payment at all) or whether some of the acquiring banks had made a mistake. I suspect that the use of the logos is just a marketing ploy by the scam merchant to appear more credible.

Separation of duties One of the earliest lessons that a purchasing professional learns is that in order to avoid fraud or the suspicion of fraud, it is necessary to have more than one person involved in the key elements of the purchasing process. It should not be possible for a single individual to be responsible for duties which if combined would allow the processing of a complete transaction. It is still possible to commit fraud even if duties are separated, but there would need to be collusion or gross negligence as well. In practical terms, this means that the same individual should not be responsible for deciding what money is to be spent and for selecting the supplier. The same individual should not order and also certify that the invoice is correct. The same individual should not certify the invoice and authorize payment and the same individual should not approve expenditure from a budget and authorize payment. Whilst not strictly necessary to achieve separation of duties, it can also be a good idea if the person opening the post is not involved in purchasing or payment. This is sometimes difficult to achieve, particularly in small businesses or outposts of larger organizations, but if good separation of duties is not possible, other controls should be put in place. If organizations stick to these basic principles, it means that the scam merchant has to get past two people in order to obtain their money. In practise, the ‘authorize payment’ stage at which someone (usually the accounts payable function within finance) is supposed to make sure that all the previous stages have been carried out correctly often involves only a cursory (if any) check. This is particularly likely if the invoice certification has been carried out by someone fairly senior in the organization. Having said that separation of duties means that two people need to be involved in the process, it is important to be aware of teams that operate in too close a fashion, particularly if they tend to defer without question to a strong leader. Rotation of staff between different roles is often good practice from a control point of view (and staff development), although the newness of staff to a role can also be exploited by the scam merchant.

Local arrangements One of the problems with establishing separation of duties is that many businesses have a remote regional office or a specialist department where the team is so small or so unusual that normal organizational models do not apply. These outposts do not welcome having

GETTING THE PURCHASING FUNCTION RIGHT

19

to report back to head office every time that they want to buy anything and so are frequently given purchasing powers outside the normal rules. The scam merchant has the greatest chance of success when he is selling something to someone for whom the purchase of that commodity is not a core competency. Staff in these outposts will often fit this description, so you should be particularly vigilant to detect and prevent scams in such circumstances.

Three-way matching Hand in hand with the concept of separation of duties goes the idea of three-way matching. This is basically the process of comparing the purchase order with some evidence of satisfactory delivery of the goods or services and then checking that these match the invoice from the supplier. The proof of satisfactory delivery is usually a ‘goods received note’ (GRN) or some equivalent (the name of the relevant document tends to vary from one organization to another). If people followed the principle that everything paid for has to demonstrate a three-way match, scam merchants would never get paid. So what goes wrong? Why do people not go through the three-way matching process for everything? It should not be too onerous, especially given that in many businesses at least two out of the three documents are computer-generated. Well, what goes wrong can be put into one of two categories – people or systems. People are probably the weakest link in a business’s defences against scam merchants. They think that they do not need to raise a purchase order because they have been given delegated powers. They think that because it is their budget, that it is their money (it is not, it is the shareholder’s money and the budget holder is obliged to make the best possible use of it). They think that they know best and quite often they think that a scam is a legitimate transaction – and they get things wrong. To an extent, they cannot be blamed even when they get things wrong. Their employer should ensure that personnel have capabilities and knowledge commensurate with their responsibilities. During recruitment and staff training, they must be certain that the competence, integrity, qualifications and personal characteristics of anyone involved in the purchasing process is of the right standard. Systems that are supposed to support three-way matching often fail to do so. This is always down to people again really, usually because they have modified the system to make it suit a particular individual. If the finance function refuses to pay an invoice unless it has been certified as being a fair price for a delivered product/service, there is no problem with scams. There could be problems, however, with executives who are ‘too busy’ to deal with ‘paperwork’ yet have time to place telephone orders, who cannot complete a goods received note (or the equivalent computer screen) but will happily complete a ‘questionnaire’ (which is in reality an order form) from the publishers of an obscure directory. If exceptions are made to the principles of three-way matching for ‘the boss’, directors, managers, marketing or any other group, this is where the scam merchants will get through. When carrying out any review of the purchasing function, the place to start is the accounts payable/bought ledger/finance department. What we usually find is that only a small percentage of invoices representing purchases are covered by formal purchase orders. Of these, many are often ‘confirmation’ (retrospective) orders and the purchasing commitment was made verbally, usually over the phone. In other words, the purchase order is often raised in response to the invoice instead of the other way round.

20

PURCHASING SCAMS

The company’s auditors should have as part of their remit the responsibility to highlight any aspects of the company’s systems that leave the company vulnerable to fraud. All being well your auditors will adopt the slogan ‘in God I trust – everyone else is subject to audit’.

Supplier relationships There are various reasons why large organizations are less likely to fall for purchasing scams than small ones. These include the necessity to adhere to formal systems, clearer areas of responsibility and the presence of functional specialists, including purchasing professionals. If they are run on the basis of commitment accounting (in other words they want to know how much cash is going out of the business next month), they are more likely to insist on formal purchase orders for everything. Another reason is that these organizations are more likely to have close relationships with a few suppliers for their key commodities. Depending upon the nature of their business, they may well also have very clear preferred suppliers for items such as stationery, and scam merchants peddling one-off special deals are unlikely to succeed. This style of supplier relationship whereby a small family of suppliers worked closely with their strategically important customers blossomed briefly in the 1990s under the title of partnership sourcing. Whilst many still advocate this approach, some of the organizations that embraced it most enthusiastically in the past, for example much of the motor industry and retailers such as Marks and Spencer, have dropped long and loyal suppliers in the pursuit of immediate price advantage. In my view, they may be overlooking some of the benefits of dealing with an established and well-understood supplier base. Any smaller businesses which have a constant ‘low price’ mindset without considering the soundness of their suppliers will undoubtedly fall prey to the scam merchants.

Supplier-base rationalization Hand in hand with the idea of close relationships with a small family of preferred suppliers goes the concept of reducing the total number of suppliers on the vendor database. Whenever we carry out a review of a company’s purchasing function, one of the first steps is to create a Pareto analysis of the supplier base. This invariably shows that the vast majority of expenditure is conducted with a small percentage of the total number of suppliers. Pareto’s rule that 80 per cent of expenditure will be with 20 per cent of suppliers is usually not far wrong. In those instances when it is wrong, 80 per cent of expenditure is with even less than 20 per cent of the suppliers, usually because the company is relying on a few key suppliers for a small number of very expensive production items (ingredients or components). The significance of this 80/20 relationship is two-fold: first, if the purchasing professionals focus on the small number of suppliers responsible for most of the expenditure, the purchasing function can add great value even if it is under-resourced; and second, if the ‘tail’ of suppliers who are large in number but small in significance (in terms of value) is controlled/reduced, the administrative effort in maintaining supplier records, paying invoices and so on can be reduced. This concept of supplier-base rationalization is important in relation to scams because it is usually enforced by introducing barriers to the addition of a new supplier to the accounts payable database. This obviously reduces the enthusiasm of users to add

GETTING THE PURCHASING FUNCTION RIGHT

21

new suppliers ‘willy-nilly’ and means that someone in the finance function will scrutinize requests for new suppliers to be added to the system. Both these factors will make life more difficult for the scam merchant, assuming of course that they have not been scamming this business for years and are already on their database. This barrier can be lowered if the finance function tires of the hassle of adding new suppliers and adds a short-cut system (for example by inventing a ‘one-time supplier’ category that is easier to pay).

Operating in strange markets If a business were to start selling to a new customer and as part of this they extended normal commercial credit terms, it would not be at all unusual for them to run a creditworthiness check to improve the probability that they would get paid. Professional purchasing people run similar checks on new suppliers to make sure that they are sound and are likely to be able to deliver for as long as required. The type of people that fall for the sort of scams described in the following chapters are generally not likely to check out their suppliers properly before doing business with them. One occasion when it is particularly important to satisfy yourself that your supplier is legitimate is when you are dealing for the first time in part of the world outside your normal business territory. There are a number of international risk management consultancies that review the political and security aspects of operating in various hot spots around the world. Their market intelligence can be tapped into through a specialist report on a particular market or a general review of the state of business around the world. Anyone using this sort of information would never become a victim of the Nigeria scam (Chapter 5).

Systems support Perhaps surprisingly, the purchasing function has been one of the last in many businesses to be computerized. Finance systems are computerized because of the large number of transactions involved and the need for management information (a similar case could easily be made for computerization of purchasing). Manufacturing systems are computerized because the payback in terms of savings on staff, inventory or plant can be readily demonstrated. Purchasing systems in many organizations still retain a manual element that could be streamlined by the introduction of an appropriate computer system. Purchasing systems have traditionally been largely neglected not only by potential users but also by the computer software industry. Recent sales efforts have focused on ERP (enterprise resource planning) systems which in theory link together all the business functions via a common database, but in practice are sometimes weak in some areas. These areas tend to be supply-chain related, for example, warehouse management, inventory management and purchasing. The large ERP vendors have recognized this problem and are addressing it (at least in part) by acquiring specialist software companies with skills in the ‘missing’ areas. Together with the addition of e-commerce solutions that are being developed, this could lead to major improvements in systems support for purchasing. One of the complaints frequently levelled against some of the ERP systems is their inflexibility. However, this inflexibility could be a major asset in the fight against scam merchants if it is properly applied.

22

PURCHASING SCAMS

Legal issues One of the side effects of delegating purchasing responsibility to non-specialist staff (and of not properly managing the separation of duties and three-way matching) is that the purchasing process frequently takes place without involving anyone in the buying organization who has an understanding of the legal rights and responsibilities associated with the purchase. Have no doubt that people perpetrating scams will be well aware of the legal issues involved. They will know at what point you are committed to pay them and they will know just what they can do and say to stay just the right side of the law. One of the crucial aspects of law that anyone involved in the purchasing process should understand is the nature of a contract. A contract is a legally binding agreement between two parties. In order for a legally binding contract to exist, the following seven basic elements must be in place: ● ● ● ●

●

● ●

Intention – both parties must communicate their intention to enter into a contract. Offer and acceptance – there must be an unconditional offer by the seller and unqualified acceptance from the buyer. Consideration – money or ‘money’s worth’ must be exchanged as part of the deal. Capacity to contract – each party must have the capacity to enter into a contract. This does not mean that the supplier has to have a big enough factory to make whatever they are selling, it refers to the mental capacity of the parties. Thus, you could not create a legally binding contract to sell a nuclear submarine to a three-year-old child, because they would not have the capacity to understand fully all the implications. Consent – a legally binding contract cannot be obtained by fraud, deceit or duress. At this point scam victims may shout ‘eureka’ and assume that they are not obliged to pay the scam merchant. In fact, if they scrutinize the bogus invoice or solicitation to purchase or whatever document got them into the scam in the first place, they will usually find that the scam merchant spelt out the nature of the transaction in detail but the victim just did not read it. Legality – a legally binding contract cannot be for immoral or illegal purposes. Performance – both parties must be capable of performing their obligations under the contract.

Now, this may seem like a fairly onerous list and you may feel that entering into a contract is quite difficult. It is not. Imagine for a moment that you want to buy a chocolate bar. You enter a shop where chocolate bars are on sale, pick one up and hand over your money. If you recap on what just happened, you will realize that you intended to buy a chocolate bar and the shopkeeper intended to sell it (intention). You offered your money for the chocolate bar and the shopkeeper accepted it (offer and acceptance and consideration). Both parties fully understood the nature of the transaction (capacity) and no one was tricked into the deal (consent). The chocolate bar was not for immoral or illegal purposes (legality – for some reason, at this point when I am recounting this example on training courses, some delegates seem to find something amusing). Also, both parties are capable of fulfilling their part of the bargain (performance). So a contract is in place because all seven criteria have been met, yet not only is there no formal contract documentation, but nobody even said anything during the process. The reason that this is possible is that contracts can be entered into expressly in writing, expressly by word of mouth, or implied by the action of the parties. The chocolate bar example was designed

GETTING THE PURCHASING FUNCTION RIGHT

23

just to demonstrate how easy it is to enter into a contract – in this instance implied by the action of the parties. In practice, scams can involve expressed entry either in writing (for example, completing a form for a directory entry, see Chapter 3), by word of mouth (for example, agreeing to purchase stationery over the phone, see Chapter 4), or by action (for example, by paying a bogus ‘invoice’, see Chapter 3). The ease with which people can enter legally binding contracts should not be overlooked, particularly the ease with which they can enter a verbal contract. Scam merchants will use these where they can, particularly over the phone. Quite often they will back them up with written documents since these are very useful to them in any subsequent legal dispute (or in using the threat of legal action). There are, however, a number of examples where the courts have enforced a verbal contract (for example, the man who promised to give his friend £100 000 if he won £1 million on the football pools was forced to hand over the money when it actually happened). Unfortunately, it is not possible to circumvent the risk that one of your employees will unwisely commit to a verbal contact by writing to all your suppliers stating that in future payment will only be made against a valid, duly authorized purchase order, first because you probably would not write to the scam merchant anyway, and second because, in the event of a dispute, the court may well take the view that the most recent action (giving a verbal order) superseded the earlier one (insisting on formal written orders). You are also unlikely to earn the sympathy of the courts if an unauthorized employee places a verbal order with a supplier. If the supplier could reasonably assume that the employee was authorized, the order placed is likely to constitute part of a valid contract. Thus, whilst an office junior could not reasonably be expected to be authorized to order a new company car, they might reasonably be expected to order some office stationery. We worked for a client who had a director that commissioned a consultancy project worth over £1 million (not with us). The consultants that carried out the project did not know that his organization’s rules called for board approval for this level of expenditure and so they got paid even when the director was ejected from the organization. One of the other points to note about the chocolate bar example is that the offer and acceptance did not come about because the shopkeeper offered the chocolate bar and you accepted it. At the point that you offered your money, the shopkeeper could have declined because the displaying of the chocolate bar was an ‘invitation to treat’ (this is a legal term – it is entirely coincidental that the chocolate may be regarded as a treat) and not an offer. The point at which an offer and acceptance are made is often not totally clear – for example, when a major retailer accidentally advertised TV sets for £3 on the Internet, were all the orders they received a contractual obligation? What about the orders that had been acknowledged before anyone at the retailer spotted the mistake? I won’t attempt to answer those questions just now because legal issues surrounding Internet purchases are even more fraught with problems than ‘straightforward’ purchases (see Chapter 9). So what can be done to improve matters and put the buyer on a level playing field with the scam merchant in terms of understanding the legal issues? The simple answer is training. By that, I do not mean that everyone empowered to place an order needs to be a trained purchasing professional but they must be sufficiently trained to avoid a scam getting through. The training, therefore can be a general ‘core skills in procurement’ type course, a specific ‘legal aspects’ course or a tailored ‘scam avoidance’ course if the

24

PURCHASING SCAMS

organization feels particularly targeted or has a history of letting scams through their system. Alternatively, staff can be trained simply in the rules and procedure operated by their employer, provided that these rules are logical, clear and documented.

Dealing with salespeople The legal section above highlights the potential confusion regarding offer and acceptance. This is one reason why professional purchasers are careful in their dealings with salespeople. There are other reasons why caution is appropriate, not least the maintenance of commercially confidential material. The attitudes of a purchasing professional and an amateur buyer towards salespeople are entirely different. The professional will welcome salespeople offering relevant goods or services because they give the buyer access to information and knowledge about the product, the state of the market, competing products and so on. Armed with this information, the professional buyer will (if appropriate) then give the salesperson the opportunity to compete for their firm’s business against other potential suppliers that have been appropriately researched. A non-professional buyer on the other hand will listen to the salesperson and frequently make a snap decision based on the sales pitch (which is unlikely to present the full story). The basic difference between these two approaches is that the professional buys whereas the non-professional is sold to.

The specification A major difference between buying and being sold to is shown clearly in the use (or nonuse) of specifications. The specification is the description of what you want to buy. On occasions when businesses become victims of a scam, the specification stage of the purchasing process is invariably missing. The supplier instead tells you what you can have or they imply that you have already had it. If the organization insisted on a simple purchasing routine of (1) identify need, (2) prepare specification, (3) source, (4) purchase, the scam merchants would have to find new ways to get your money. The importance of getting the specification right is often overlooked in purchasing. In my view, far more money is wasted through mis-specification, particularly over-specification, than through any other aspect of poor purchasing practice. Job advertisements for purchasing professionals almost invariably state the requirement for a ‘good negotiator’ – in most cases I think that they would be better served if they ensured that they hired a ‘good specifier’.

Purchasing ethics I raised the subject of purchasing ethics with one client, whose reaction was ‘what are purchasing ethics?’ They had no concept of a set of rules by which to conduct business, a framework of principles to which everyone must adhere or a code of conduct that an employer should expect of their employees. Yet what happens if these things are not in place? Well, standards will decline; the easy, quick, hassle-free option will always be selected. Opportunism will be the order of the day and the interests of the individual will override the interests of the organization. This scenario is ideal for exploitation by the scam merchant. If buyers are not committed to achieving value for money for their

GETTING THE PURCHASING FUNCTION RIGHT

25

employer, they will not give adequate scrutiny to each transaction that they handle. If integrity is not demanded of them, they will be swayed by the prospect of ‘freebies’. The Chartered Institute of Purchasing and Supply (CIPS) has spent some years redrafting the personal code of ethics for its members. I will not reproduce the new code in full (I am sure copies are freely available from the CIPS on request), but feel that it is worthwhile commenting on selected aspects. The code states ‘members should raise any matter of concern of an ethical nature with their immediate supervisor or another senior colleague.’ Whilst presumably targeted at more serious issues than scams, this guidance does mean that potential scams will be highlighted, discussed and dealt with. The code also states that members should ‘enhance the proficiency and stature of the profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behaviour’ and ‘foster the highest possible standards of professional competence amongst those for whom they are responsible’. This echoes several of the points made above about adopting a professional approach to purchasing strategy and enforcing the strategy through trained staff working at the operational level. Other sections of the code state that ‘Business gifts, other than items of very small intrinsic value such as business diaries or calendars, should not be accepted.’ Non-professional purchasing people are often keen to receive ‘free’ gifts from suppliers. These gifts are not free. As the old Russian proverb tells us, ‘the only free food is in the mousetrap.’ Every legitimate business should adopt a code of business ethics, which sets out what is and what is not acceptable business practice. The purchasing elements of this code should not just apply to the purchasing department but to all staff of whatever level who are involved in any aspect of the purchasing process. Scam merchants are not fools; they will adopt the most appropriate mechanism to get through your purchasing systems. Sometimes this will be via minor bribery, sometimes by targeting the weakest links in your process. They will research you; maybe you ought to research them.

CHAPTER THREE

THE BOGUS DIRECTORY SCAM How it works People carrying out bogus directory scams generally operate in one of two ways. Either the victim receives a document that looks very like an invoice for an entry in a directory – they assume this has been placed by someone else in the organization and therefore pay the ‘invoice’, or the victim receives an order form for entry in a directory which they assume is free but in actual fact costs several hundred pounds (or several hundred pounds per year if not cancelled). Both types of scam will generally be selling listings in directories that have a very limited circulation, if indeed they are published at all.

Fax directories In the UK, the most commonly used ‘product’ used in the directory scam is the ‘fax directory’. Most businesses receive these at least once or twice per year but do not really know how to deal with the problem. UK law gives some protection from the bogus invoice type of scam by way of the Unsolicited Goods and Services Act 1971, which makes it an offence to send out unsolicited invoices. Enforcement of the Act is the responsibility of local authorities, usually via their trading standards department. To comply with the law, solicitations for entry into such directories must include the following wording: in the top left-hand corner of the page, ‘THIS IS NOT A DEMAND FOR PAYMENT. THERE IS NO OBLIGATION TO PAY’, and diagonally across the page, ‘THIS IS NOT A BILL’. During research for this book, I have seen thousands of fax directory invoices; I have only seen one that carried those words. The way the law is avoided is by posting the fax directory ‘invoices’ from outside the UK. The place of origin varies, but it is commonly Germany, Switzerland, Liechtenstein and, more recently, the Czech Republic. Even the ‘invoices’ of foreign origin, however, need to be ‘honest’ to comply with their own national laws (remember we are dealing with scams here and the operators will be keen to do all that they can to avoid the charge of fraud). They tend, therefore, to explain that the recipient is not obliged to pay the ‘invoice’. However, this explanation may well be hidden away in the small print of the conditions on the reverse of the ‘invoice’. Bogus fax ‘invoices’ tend to look very professional and often take the form of a twopart, multicoloured document set. The terms and conditions may well be on the reverse of the first sheet of the two-part set, thus making them that bit more difficult to notice. Various different companies send out this sort of document, but their terms and conditions tend to follow similar lines. Typical terms and conditions will read something like this (the footnote has been added for explanation only):

THE BOGUS DIRECTORY SCAM

27

Terms and conditions of business This offer becomes an order by payment or remailing of a signed reply form (1). The information given in the advertisement will be entered in the next edition of The International Fax Directory (2). The subscriber acknowledges and accepts the following terms and conditions of business (3) of Global Media (4). Main Office: Global Media, PO Box 99, xxxxxxxxx, CZ xxx xx Most (5). Place of jurisdiction is xxx xx Most, Czech Republic. Both parties are subject to Czech law (6). This database is produced on CD-ROM by the publisher mentioned above. One CD-ROM will be delivered to all insertion subscribers free of charge upon request (7). For subscribers who do not insert an advertisement the register can be ordered for a charge of US$400 (8). Any payment reaching the publisher after the editorial deadline (normally twelve weeks after receipt) will be held over to cover an insertion in the subsequent edition (9). The publisher shall not be responsible for any misprint, typographical error or any other mistakes in the International Fax Directory, and there will be no refund under any circumstance (10). The publisher will make every effort to correct any error or omission in the subsequent edition (11). Cancellation of an entry in the edition of the coming year will only be accepted, if the publisher receives a notice by registered letter or e-mail no later than the end of the current year (31 December)(12). Uncancelled entries will be automatically repeated and billed to the subscriber at the standard rate (13). Interesting features of these terms and conditions include: (1) Once you have signed the form and sent off your money, you have agreed to their terms and conditions. If you discover later that you have been scammed, there is no practical way that you are going to get your money back. (2) I made up the name International Fax Directory, although it is likely that some scam merchant somewhere has used it before. The names of the directories often feature the word ‘international’ (this is given added credibility because the ‘invoice’ comes from overseas). The word ‘telefax’ is often used instead of fax, ‘telex and telefax’ used to be popular as a phrase in the conditions but is becoming less so as the telex fades into disuse in most industries. (3) ‘The subscriber acknowledges and accepts the following terms and conditions of business’ – one can have little sympathy with the victim that signs the front of a document that carries these words on the back and at the same time has no understanding of what they are buying. The scam merchant relies on the fact that most people do not read the small print on the reverse of documents that they sign. (4) Global Media is another name that I made up, but both words commonly feature in the names of the companies operating this scam. Other common words are Communications, Data, Telecom, Services, World and International. The same company often operates under several different versions of the same name and may also use abbreviations or acronyms which often sound vaguely familiar and similar to those of well-respected legitimate operators in the telecoms sector. (5) The Czech Republic is one source of these ‘invoices’; as mentioned earlier, there are many others.

28

PURCHASING SCAMS

(6) ‘Place of jurisdiction is xxx xx Most, Czech Republic. Both parties are subject to Czech law’ – imagine for a moment that you have been stung by this scam but you are determined to bring the perpetrators to justice and to try to get your money back. How do you think you would go about it? Well, first, you would need to know if the scam was illegal – so what is the position in Czech law? Do you know the whereabouts of any experts in Czech law? Do you think that the cost of obtaining suitable legal advice would exceed the £300–400 that you paid for your directory entry? The scam merchant knows that in all probability at this point you are likely to give in. Similar words on other ‘invoices’ include: ● ● ●

Place of jurisdiction – Vienna, Law – Austrian law Place of jurisdiction - Eschen, Law – Liechtenstein law Place of jurisdiction – Zug, Law – Swiss law

(7) The directory is actually a listing on a CD-ROM. They will send you a copy when you pay your fee – but only if you ask for one. (8) Non-subscribers can also have a copy of the CD if they pay $400. Clearly, the number of people doing this is likely to be rather small, which raises the question of who is going to read your entry in the directory? The answer is hardly anyone, except perhaps other scam merchants who will have a ready-made list of easy victims. Some scam merchants promise a minimum number of CDs to be produced (say 3000), but how many of these do you think will be used by potential customers of the typical scam victim? (9) Even if you request your directory and your entry is incorrect or missing you will not get your money back. Let’s face it, there’s no way that you will get your money back. (10) ‘There will be no refund under any circumstances’ – just in case you missed the point made in the previous paragraph. (11) ‘The publisher will make every effort to correct any error or omission in the subsequent edition’ – this sounds very noble of them, except of course that you don’t want to be in the next edition or they will sting you for another £300–400. (12) Cancellation is by registered letter or e-mail. Registered letters cost yet more money. E-mails carry no proof of delivery. They do not make cancellation easy. (13) ‘Uncancelled entries will be automatically repeated and billed to the subscriber at the standard rate’ – so if you are unfortunate enough to pay one of these ‘invoices’, you could slip into a situation whereby you pay for useless directory entries year after year. One of the other features commonly exhibited by these bogus invoices is a ‘3 per cent discount’ for payments within 30 days. Thus, prompt payers get their useless directory entry slightly cheaper than people who allow the paperwork to hang around for some time before processing it. This special offer ‘discount’ is clearly simply a ploy to improve the percentage hit rate of the ‘invoices’.

Telephone directories In the United States, the most common directory scam is the ‘Yellow Pages’ scam. Because of the structure of the US telephone industry, a number of legitimate companies

THE BOGUS DIRECTORY SCAM

29

(for example, Bell Atlantic) produce and distribute Yellow Pages directories. There are also, however, many companies that mass-mail solicitations for directory entries which businesses may well mistake for the Yellow Pages directory that they normally patronize. These ‘phoney’ directories will have a very limited circulation if indeed they are published at all, and therefore provide little if any benefit to the businesses that pay for their listings. It has been estimated by the Better Business Bureau that one in every five US businesses has been targeted – I would guess that the true figure is much higher. The US Postal Service believes that the issuers of these phony invoices succeed in collecting from a significant percentage of all the bills that they mail and, based on the thousands of phoney invoices and solicitations sent out, the annual loss to businesses is put at billions of dollars. Obviously the UK’s Unsolicited Goods and Services Act provides no protection in the US, but federal laws relating to the United States Postal Service aim to provide similar safeguards. For example the words: ‘This is not a bill – this is a solicitation. You are under no obligation to pay this amount unless you accept this offer’ should appear in 30-point type against a contrasting background. Print colours must be reproducible on copying machines and cannot be obscured by folding or other means. If the solicitation is more than one page, the disclaimer must appear on each page and, if it is perforated, the required language must appear on each section that could be construed as a bill. Also, it is illegal to mail solicitations which include language that misleads the reader into believing that it is an invoice – for example, phrases such as ‘remit immediately’, ‘pay now’, ‘amount due’, are not allowed. The scam merchants, however, just choose other words. The sort of phrases that do appear on the bogus invoices include such things as ‘present listing information’, ‘prompt payment is necessary’, ‘renewal payment stub’, all of which are designed to cause confusion with invoices for legitimate Yellow Pages listings. The hope of the scam merchant is that the victim will rush to pay the ‘bill’ without adequate checks in a desperate attempt to avoid not being listed in next year’s directory (which could be a serious problem if it were the genuine Yellow Pages telephone directory). They forget that charges for the telephone directory that they want to be in are generally collected within the advertiser’s monthly phone bill. One feature common on the scam directory ‘invoices’ that is legally allowed is the familiar ‘walking fingers’ Yellow Pages logo. Although this logo was devised by AT&T, it was never registered as a trademark and is now in the public domain. The logo is used by virtually all the legitimate Yellow Pages publishers in the US and elsewhere in the world. This increases the likelihood that when victims receive a scam invoice featuring the logo they will assume the ‘bill’ is authentic and are therefore more likely to pay up. The primary difference between the phoney Yellow Pages directories and the legitimate Yellow Pages directories is their distribution. The scam merchants will produce few, if any, publicly available directories and thus they provide little or no benefit to their ‘customers’. Some bogus directory pushers promote the likelihood of a sale by including with their ‘bill’ a clipping from a legitimate Yellow Pages showing the victim’s genuine entry. The victim then assumes that the ‘bill’ is simply a renewal of their regular order and pays up without further thought. They may also include the name of a senior manager in the targeted business as ‘authorizing officer’. This name will have been obtained via telephone research by the scam merchant.

30

PURCHASING SCAMS

Note that including a clipping with a ‘bill’ is also used by scam merchants who send copies of advertisements, for example, job advertisements, from legitimate publications to the companies which placed the advertisement. Unsuspecting clerks assume that the bill relates to the advertisement and pay it. The scam merchants have built up considerable experience in calculating the most effective amount to charge depending on the size of the targeted business and the likely controls it will have in place. Thousands of payments for $100 or less may be more lucrative overall than a few ‘hits’ for larger amounts. In some instances, several copies of the same ‘invoice’ may be sent to the same company in the hope that they will pay more than once. An independent study commissioned by the Yellow Pages Publishers Association (YPPA) in cooperation with the Council of Better Business Bureaus (CBBB) reported that one-third of office managers said that their businesses had received bills for Yellow Pages advertising that they had never ordered. I suspect that the other two-thirds had not noticed the bills and paid or alternatively someone else in the organization had received them. YPPA estimate that the value of this business to the scam merchants is $550 million per year (in the US). The Yellow Pages Advertising Council has trademarked a ‘Get an Idea’ logo which is being used by a growing number of member publishers and should help to differentiate them from the cowboys.

Industry directories Conditions very similar to those described above in the fax directory example are often carried by order forms (sometimes posted, more usually faxed) that resemble questionnaires which recipients (for some reason) assume to relate to free entries in directories. This assumption is often fostered by the questionnaires being partly filled in by the scam merchant who will have researched contact names and other details via a quick phone call to the target company. The directories to which these ‘fax forms’ give entry are often trade directories and the questionnaire carries a few ‘tick boxes’ for the victim to indicate their size, product range and so on. An example of what these forms tend to look like is shown in Figure 3.1. The trade classification that is allocated to you is always very broad. It is also sometimes erroneous; this could be a deliberate ploy to encourage you to correct the form and send it back. One example of this type of form that we received carried a 19-digit alphanumeric serial number – they obviously get sent out in huge quantities! As I have indicated, recipients of the form sometimes complete it and return it because they assume that their entry in the directory is free. They would not think this if they actually read the document that they were signing. The scam merchant encourages the confusion with phrases such as ‘Please check the correctness of the details below and return the completed form immediately for an update of the data, even if you do not place an order.’ Thus, some recipients fill the form in and return it thinking that they are simply updating someone’s database – they do not have a clue as to the significance of their signature at the bottom of the form (despite it being under the word ‘order’ and labelled ‘legally binding’). The scam merchant also cultivates an image of being actually interested in your business by saying, ‘please enclose your company brochure/business card.’ If and when the directories are actually produced, they are simple listings of

THE BOGUS DIRECTORY SCAM

31

GLOBAL BUSINESS GUIDE ➲

➲

Please check the correctness of the details below and return the completed form immediately for an update of the data, even if you do not place an order.

Dear Sir, We are presently compiling commercial information for the Global Business Guide. In order to

A, VICTIM ANYSTREET ANYTOWN ANYSTATE ANYCOUNTRY

positively represent you, your company and your city, we ask you to fill in and return this form as soon as possible. We rely on your complete cooperation.

PLEASE CORRECT YOUR ADDRESS IF NECESSARY DESCRIPTION OF YOUR COMPANY AND YOUR OPERATIONS

PLEASE ENCLOSE YOUR COMPANY BROCHURE/BUSINESS CARD!

NAME OF THE COMPANY

TELEPHONE NO:

STREET:

FAX NO

CITY:

E-MAIL:

PROVINCE/STATE:

INTERNET:

COUNTRY:

MANAGER/OWNER:

CULTURE

BUSINESS SERVICES

SHOPPING

PLEASE MARK THE APPROPRIATE BOX ❍ Art Galleries ❍ Hairdressers ❍ Cycle Dealers ❍ Delicatessens ❍ Fashion/Textiles/Uniforms ❍ Gift Shops/Fancy goods

❍ Household Stores ❍ Porcelain & Glass ❍ Jewellers/Watch repairs ❍ Leather Goods & Shoes ❍ Libraries and Bookshops ❍ Plants & Flowers/Garden centres ❍ Healthfoods/Homeopathy

❍ Records & Musical Instruments ❍ Software & Computers ❍ Sportswear & Sports Goods ❍ Tobacconists ❍ Toys & Games ❍ TV, Radio & HiFi

❍ Architects/Developers ❍ Banks & Financial Institutions ❍ Builders/Construction ❍ Caravan Sales & supplies ❍ Car Dealers & Distributors ❍ Heating & Plumbing

❍ Carpenters & Joiners ❍ Courier Services ❍ Graphic Designers ❍ Doctors/Dentists ❍ Driving Schools ❍ Dry Cleaners & Laundries ❍ Cleaning & Maintenance Services

❍ Employment Agencies ❍ Model Agencies ❍ Photographers ❍ Real Estate/Property Letting ❍ Sports Clubs & Water Sports

❍ Concert Halls ❍ Cinemas ❍ Clubs & Association ❍ Dancing Schools ❍ Education ❍ Galleries & Auction Rooms ❍ Recreation

Order

Figure 3.1

My business section is not on your list, please categorize me under:

❍

Small Print

An example of the forms used in the directory scam

32

PURCHASING SCAMS

company names and contact details, all the interesting information in your brochure is ignored. Returning the questionnaire creates the order because hidden away somewhere, for example, in the ‘small print’ box in the example above, will be words along the following lines: We hereby place an order with ‘XXX’ to print (80 mm x 40 mm frame) the above details given in the next and the following two editions of the ‘XXXXX guide’. The cost per insertion in each edition will be £342. At the same time we place an order for the directory at the price of £47 including shipping costs. The insertion order will be automatically reviewed each year in another edition unless a written note to terminate is given three months before the end of the calendar year. These costs will be charged annually and in advance. They are payable three weeks from the date of invoice, retroactive cancellation is not possible. The contract becomes valid and binding upon our receipt of this order. The publishing house reserves the right to edit and illustrate the text. The place of jurisdiction and contractual fulfilment is the Editor’s address. However, the Publisher reserves the right to sue in the legal domicile of the ordering party. These words (or similar) often feature just above a dotted line labelled ‘legal signature/company stamp’. People sign this and send off the form without reading the small print. Their attention is drawn to the small print if they do not pay the invoice that is sent off when the publisher (scam merchant) receives the order form. I have come across companies that claim that the above paragraph (or one similar) was added to a blank space above their signature after they had sent off their faxed form. I suspect that their memories may be playing tricks on them because all of the order forms I have seen carried such a paragraph (albeit in small type, often made even more difficult to read by virtue of being faxed). So what happens to the people that complete these questionnaires (complete with ordering paragraph) and return them to the scam merchants? Well, they get an invoice. At this point, the scam merchant may well have the law on their side. The victim has placed an order by signing on the dotted line under the ‘We hereby place an order . . .’ paragraph and the scam merchant will have created a directory entry. Not paying the invoice would therefore be a breach of contract. The scam merchant prepares for you being unhappy with this situation by telling you that the law of their country will apply but that they can sue you in your country. I came across an example of a company that chose to ignore such an invoice for 1177 DEM (Deutschmarks) – around £500. Two months later, they got another invoice. Then, ten days later there came a ‘reminder’. This time there were two additional items. In addition to the 1177 DEM, the victim was asked to pay 21.07 DEM interest, and 7.00 DEM ‘dunning fees’. That interest would be payable in the event of late payment is only to be expected from scam merchants – they often have the payment of interest (typically at 15 per cent) as one of their standard terms and conditions. In all my time involved in purchasing I had never come across ‘dunning fees’ before. The term does not appear in specialist purchasing dictionaries. I can only assume it is an extra charge to compensate for the additional paperwork created by late payment. ‘Dunning’ also does not appear in most general dictionaries but the Oxford English Dictionary defines it as ‘the action of importuning for debt’. In case you wondered, ‘importuning’ means (amongst other

THE BOGUS DIRECTORY SCAM

33

things) ‘persistent or pressing in solicitation; pertinacious; irksome through persistency of request’, which seems to sum up what was going on quite nicely. ‘Pertinacious’ means ‘persistent or stubborn’ and is therefore a useful word to describe these scam merchants and indeed scam merchants in general. Ten days later there came the ‘second reminder’, this time with 12.00 DEM ‘dunning fees’ and 25.97 DEM interest. A month later, the dunning fees had climbed to 30 DEM and the interest to 40.18 DEM. This information was contained in a letter headed Legal Department, Section Juridique, Rechtsabteilung, Reparto Legale, Seccion Juridica (they obviously have problem accounts in several countries!). The latter stated: ‘You entered into a sales contract with our company and payment in advance is a condition of contract’ and legally speaking they are probably correct. The next letter, ten days later, stated: ‘Despite our constant reminders, the undermentioned account has not been paid. Unless immediate settlement is forthcoming, we will be compelled to take legal action.’ Well, they didn’t but you should not assume that they would not. Someone from the victim’s company really should have done something to protect their legal position by refuting the basis for the invoice (which might have been difficult) – but they did not, so six months later, another invoice came along. The next invoice was for 1177 DEM again, because it related not to the original directory entry, but to the entry for the following year – no one had cancelled it! Together with this invoice came another statement for the original entry – this time the interest was 152.88 DM and the ‘dunning fees’ 40.00 DEM. These documents were accompanied by a letter saying ‘we are pleased to inform you that the 3rd and revised edition of the XXXX directory CD has just been published’ and pointing out that the total outstanding was now 2546.88 DEM. They also supplied a copy of the page in the directory containing the relevant entry. The next letter was inevitably from the legal department again and it said: ● ● ● ●

We hold a legally valid order form from you in our XXXX XXXX Directory. You are aware of our business conditions stating that your order is irrevocable and that payment in advance is requested. By creating your advertisement and by publishing it, we have fulfilled our term of contract. For these reasons, you are kindly requested to provide for settlement of our invoices XXX and XXX by return. Without a reaction within the week, your file will be transferred for full legal action without further notice.

How many people would pay up at this stage? This particular victim contacted their local Chamber of Commerce and was advised to send a letter cancelling and ignore the threat of legal action. However, they had endured a couple of years of hassle and, no doubt, worry about this stream of invoices simply because they had not read what they had signed. Having got that wrong, they failed to nip the problem in the bud by refuting the claims for payment at the outset. There is, however, some good news – the scam merchant did not get paid. The bad news is that the example page of the directory that they faxed to prove that the victim had been listed contained the names of around 300 UK firms who will have either paid up or been subject to similar intimidation.

34

PURCHASING SCAMS

One-off directories The publishers of this sort of directory are never slow to spot an opportunity. In November 1999 our office received three copies on the same day of a form giving us the chance to feature in ‘a special guide to celebrate the millennium’. The format of the form was very similar to that of the ‘Global Business Guide’ discussed earlier with simple ‘tick boxes’ to enable you to tell the guide’s readers whether you are a gift shop, a driving school, a financial institution/accountant, party planner or any one of various other possible businesses. The small print tells you that the guide will be published on four dates in the year 2000 and the cost of you being included in each edition is £475 plus value-added tax (VAT). The promoters promise that a minimum of 25 000 of the guides will be distributed. Now it could be that some people will read the small print and think that this is the ideal way for their business to spend £2000 on marketing (if this is you, please don’t apply for a job with my company). On the other hand, it is far more likely that some enthusiastic employee (or even a busy boss) will tick the boxes, sign the form and send it off without ever reading the small print. The publishers include a small box on the form which says ‘order number’ with a little note saying ‘left blank an official order number will be assumed unnecessary’ which of course it is. They have made an offer; if an authorized person in your company has signed the form, they have accepted it. If you don’t pay when they ask, there is a contract dispute and they are in a pretty strong position. By now you have missed the chance to feature in this special guide for the millennium but do not be complacent, there will be another opportunity along soon. It might be The World Cup Guide or maybe The Olympics or the G7 conference – they will think of something.

Directories in cyberspace Inevitably, the people promoting directories of the type described above are now peddling their wares on the World Wide Web. One example claims that its directory covers over 200 countries with over three million fax numbers. If this is true (and who would not believe them) and each of the numbers represents even a one-off payment of £300–400 (the scam merchants would hope for this each year), then they have taken over a billion pounds from people to be listed in their directory! Do you know anyone who ever looked up a fax number in a Liechtenstein fax directory? Amongst the three million plus numbers claimed are over 300 000 in France, over 200 000 in the UK, another 200 000 plus in the US, over 300 000 in China and one in Somalia. If these numbers are genuine, they show not only the magnitude of such businesses but also their tenacity, determination and imagination in persuading companies to subscribe. Another variant of the cyberspace directory is the promise to list your company details on a website containing information similar to that in the industry directory described above (not very much information basically). To enter your details, you just complete a familiar looking faxback form and await the annual bill of 995 Deutschmarks.

How to avoid the directory scam ●

The key to avoiding the directory scam is awareness training to make sure that anyone likely to receive a bogus invoice recognizes it for what it is and that the invoice

THE BOGUS DIRECTORY SCAM

● ●

●

●

●

●

35

payments section acts as an effective backstop if one gets through the system. When the next one arrives, circulate it together with an explanatory note to other potential recipients. Time management also has a role to play: if staff had sufficient time to read the ‘invoices’ in detail, they would be more likely to recognize them for what they are. One of the obvious routes to avoiding the directory scam is to read documents that you receive. They tell you that the ‘invoices’ or ‘data forms’ are orders and listing in their directory will cost hundreds of pounds. So unless you feel that entry in their publications is worth that, don’t sign the form. Having a dedicated purchasing point for everything to do with telecommunications can help. For the really technical purchases, you need some sort of specialist; if that specialist is also in charge of all directory entries, he or she will pretty quickly get to know which invoices relate to legitimate directory entries and which are not worth paying for. If you are not sure about the directory that is being promoted, ask to see a previous edition, details on the way that it is distributed, circulation figures, costs and so on. Also, check exactly what is being offered – if it is a one-line listing with no description of your company’s activities, is it of any use at all? (Bear in mind that legitimate directories usually provide this level of listing free anyway.) Before committing yourself to spending money with any directory publisher, think seriously about whether your company would benefit from an advertisement in the directory. In the UK, you can ask the local Chamber of Commerce if any complaints have been recorded against the publisher. In the US, the state consumer protection agency or Better Business Bureau will provide the same information. In the US, you can also complain, if appropriate, to the Chief Postal Inspector of the US Postal Service.

CHAPTER FOUR

THE PAPER SCAM – AND OTHER CONSUMABLES The paper scam Several years ago, I was asked to prepare a two-day training course on ‘Core skills in procurement’. The client was a large government department, which, in common with many public bodies, devolves its purchasing activities widely. The delegates on the training course were therefore wide-ranging in role, responsibility, experience and seniority, but they all purchased goods or services as a significant minority task in their job. Many aspects of the course emphasized the unfairness of the purchasing role – for example, suppliers are inevitably far more aware of the cost of providing the goods or services and therefore are in a better position than purchasers to decide whether the price being charged is fair. Another unfairness in the buyer/supplier relationship arises from the understanding of legal issues – the supplier’s employee or legal adviser drawing up the paperwork is likely to be far more aware of the relevant implications of contract law than the part-time buyer. I therefore included within the training course a short session on ‘legal issues’. This session was not designed to turn the civil servants into legal experts, merely to warn them of some of the dangers in commercial transactions. To introduce the ‘legal issues’ session, I circulated copies of example documents received by my office. Probably my favourites amongst these documents were those relating to the ‘paper scam’. I asked each of the delegates what they would do if they received copies of these documents through the post. Recognizing the similarity between the documents and legitimate invoices for paper deliveries, some delegates said they would ‘check if we’d ordered the paper’. Some said they would ‘find out who ordered the paper’. In fairness, most delegates said they would throw them in the bin. Always, however, there were one or two delegates from the dozen or so attending the course who said ‘I would pay it.’ Even after it was explained to these people that they had not ordered the paper and that the supplier was not their usual supplier, the course delegates could not see how the scam worked, given that the supplier would undoubtedly supply the paper exactly as stipulated on the document. It works quite simply by selling the paper at around ten times its true value. An example of the type of document that someone operating the paper scam might send is shown in Figure 4.1. The original scam document would not feature the small boxed numbers; these are intended to highlight some of the more interesting features of the way that the scam works. (1) The name – the name will always sound impressive and/or familiar. ‘National’ and ‘International’ feature quite frequently. The name may also be a slight variation on

37

THE PAPER SCAM

INTERNATIONAL

1

ONE OF BRITAINS FAVOURITE MAIL ORDER PAPER SUPPLIERS

3

PAPER SUPPLIES

In the interests of economy we do not operate a telephone service. Postal enquiries welcome

2

4

PROFORMA SALES INVOICE

INTERNATIONAL HOUSE • 500 HIGH STREET • ANYTOWN • ESSEX • EX1 1AB Invoice To:

Deliver To:

MMM Consultancy Group Edgbaston House 3 Duchess Place Edgbaston Birmingham W Midlands B16 8NH

MMM Consultancy Group Edgbaston House 3 Duchess Place Edgbaston Birmingham W Midlands B16 8NH 5

DATE

PROFORMA INVOICE NO

22/11/99

MMM427041

YOUR ACC NO.

MMM4

GOODS DISCOUNT DATE RESERVED BY GROUP DESPATCHED

OPTION

Wholesale

6 DESCRIPTION

Pack (Ream) Premium Quality Paper A4 (297 mm x 210 mm)

QTY RESERVED

UNIT

LIST PRICE

YOUR COST

AMOUNT

10

Each

31.95

24.99

249.90

7

8

TOTAL VALUE AT LIST PRICE

YOU SAVED THIS AMOUNT

SUB TOTAL

319.50

69.60

249.90

CARRIAGE

9

VAT

FREE

43.73

PAID

0.00

11 PLEASE NOTE: This pre-payment invoice represents an invitation to purchase the above described goods; it is a request not a demand for payment. No goods will be despatched until payment is received. 12

Figure 4.1

An example of the type of document used in paper scams

10

PLEASE PAY THIS AMOUNT

293.63

38

PURCHASING SCAMS

(2)

(3)

(4)

(5)

(6)

(7)

(8)

that of one of the leading (legitimate) paper or stationery suppliers, which is clearly designed to lead to confusion. Proforma sales invoice – purchasing professionals will tend to know what a proforma invoice is, particularly if they are involved in import and export. The nonprofessional buyers at whom the scam is targeted may well not know that proforma invoices are not a demand for payment but simply an informing/advisory document usually intended to smooth the shipping process. The scam merchants tell the buyer that this is a proforma invoice because sending out an invoice would be clearly illegal because it would fraudulently suggest that goods and/or services had been provided and were due to be paid for. The proforma invoice on the other hand merely invites the buyer to request goods or services. ‘One of Britain’s favourite mail order paper suppliers’ – this sort of claim is also probably not dishonest, depending on the definition of ‘favourite’. In terms of number of businesses that receive mail shots of this sort, there is probably no mailorder paper supplier that targets as widely as the scam merchant. If one perceives the word ‘favourite’ to imply ‘popular’ or ‘liked’ then this would not be true, particularly of those companies whose staff responded to this type of mailshot. ‘In the interests of economy . . .’ – this phrase ‘In the interests of economy we do not operate a telephone service. Postal enquiries welcome’ really does appear on some scam ‘invoices’. The reason for this is that the scam merchant knows that in many of the target companies, clerical staff will be looking for an order to match up to the ‘invoice’ and will want to know who ‘ordered’ the paper (in reality, nobody did of course!). A simple telephone call would clarify this, so the scam merchant cuts off the possibility. Few harassed clerks would be likely to take the trouble to write, so the chances of getting payment are improved. Discount group – everybody likes a bargain. Thus, the appearance of a generous discount (wholesale prices!) maximizes the chance that the deal will be finalized as soon as possible. Account number – this is not a random number. If your company name is ‘ABC’ then the account number will be ‘ABC09’ or something similar. If your company name is ‘Lakes’, the account number will be ‘Lakes09’ or some slight variant. This gives the impression either that you have some ongoing dealings with this supplier or that someone has quoted one of your order numbers. Such an impression is totally misplaced. Premium quality paper – until recently, garage forecourts used to describe the petrol on offer as ‘premium’ or ‘super’ unleaded. Can you remember which of these was best? I always found it confusing that superlatives were applied to both grades. The scam merchant is attempting to confuse with this description of ‘premium quality’ paper. Is this the best that you can get, or just slightly better than the worst? ‘Ordinary’ would probably be a fairer description but it does not have the same ring to it somehow. List price – when I asked delegates on the training course what they thought the price of paper was, most admitted that they had no idea. The price of paper is volatile, but at the time it was typically a few pounds (say £3–4) per ream. The list price of £31.95 if it related to the quantity of 10 reams ‘reserved’ would therefore appear to be reasonable. In fact, it applies to the ‘each’ ream and is therefore outrageously high.

THE PAPER SCAM

39

(9) Your cost – it is our old friend the discount again. Because no one can resist a bargain, the scam merchant provides the bait of this ‘special deal’ under which the cost is £24.99 instead of £31.95. (10) Amount – the user is unlikely to start checking the arithmetic of units of issue, but they will in all probability check that it is the discounted price that is being applied. Ten times £24.99 is clearly £249.90 – hence one satisfied customer (because they’ve lost sight of the fact that each ream should really only cost £3 not £24.99). The other interesting feature of this amount is that it is marginally less than £250. Many companies use £250 as a threshold below which very junior staff are allowed to authorize invoices. The total amount of this invoice is designed to maximize the number of junior, inexperienced, naive people who will allow it to be paid. (11) Carriage – not wishing the customer to be deterred by a £10–15 carriage fee, the scam merchant offers free delivery. Together with a discounted price, who could resist such an offer? (12) ‘Please note . . .’ – at this point all becomes clear. Anyone reading the whole of this document will have explained to them that no one has actually ordered anything and that the scam merchant is inviting you to send him money, in return for which he or she will send you some paper. (Although they obviously do not openly confess to the poor value of the paper.) This footnote is designed to keep the scam merchant well on the ‘legal’ side of the ‘legal/illegal borderline’. They rely on the fact that most people do not read the small print on financial documents sent to them – if they did, the scam would never work. If no response is made to the initial ‘invoice’ (in reality a proforma invoice as discussed above) the normal response is an ‘urgent reminder’ or similar ‘statement’. This is intended to prompt into action those buyers who are holding on to the original document because they do not know what to do with it or to activate those companies that routinely pay against statements rather than invoices. One example of such a reminder restated the ‘One of Britain’s favourite mail order supplier’ claim and added ‘as seen in the national press’. Once again, the scam merchant has not been dishonest as such, because stories about these scams regularly appear in the national, local and trade press. At least one company making this particular claim also featured heavily in press reports because members of the political party then in opposition demanded action when asking questions in the House of Commons. The party then in opposition is now in government, but there is no sign of political willingness to exercise control over companies perpetrating the paper scam. In the small print of the reminder, the scam merchant may well repeat ‘this is not a demand for payment’ (to try to help keep themselves legal) and add the line to the effect ‘please pay the above proforma sales invoice to secure future supplies. Failure to do so may lead to your purchase price guarantee option expiring.’ Explaining that the ‘option’ gives the victim the chance to buy even more paper at around eight times the going rate is clearly not in the scam merchant’s interests. These proforma invoices are frequently sent out in huge mailshot waves in the summer (typically August) and in the run up to Christmas (December) and often reach their peak during weeks that include a public holiday. The reason for this is that during these periods, regular staff (who might recognize the scam) are often absent on leave and

40

PURCHASING SCAMS

stand-ins from other departments or agencies are brought in to process invoices. Thus, the chances of success for the scam merchant are maximized. Also, because the ‘invoices’ are issued in waves, a large number are paid before the stories about them hit the press and, in the intervening six months or so, people forget and are therefore unprepared when the next wave hits. These scam merchants may not be very nice people, but they are pretty shrewd marketeers.

It’s for you – the phone variant of the paper scam The paper scam is not always perpetrated via mail shots. An alternative mechanism is telephone sales. Typically, a secretary or clerk with responsibility for ordering paper will receive a phone call along the following lines: ‘Hello, this is Head Office Paper Supplies, I am just ringing up to let you know that the price of paper is going up next month, so if you want to order some at the old price, you’ll have to do it now.’ In most organizations, paper is ordered frequently because storage of large volumes is likely to present problems. Therefore, in all probability, the buyer is likely to need some before ‘next month’. A few things may well not be immediately apparent to the buyer during this conversation. ‘Head Office Paper Supplies’ (or something similar) may well be the name of the company supplying the paper and not (as the buyer might assume) the head office of the company from which they normally buy paper. By implying that they are your usual supplier, the scam merchant hopes that issues such as prices, quantities and brands will not be raised in the conversation – if challenged the salesperson may say ‘we’ve supplied you in the past, but not for a while’ (which may be true!), or, ‘the price is the same as last time’ (which also may be true!). Also, ‘the price of paper is going up next month’ may (or may not) relate to the price of paper from this particular supplier and may not apply to every other supplier (the price volatility of paper as a commodity adds plausibility to this claim). It may well of course be a simple lie. If pressed for details of price, the salesperson will quote a figure, but no unit of issue or an ambiguous unit of issue such as ‘a box’. On a number of occasions, the naive buyer will place an order over the phone at ‘this month’s prices’, thinking that they have received a bargain. Inevitably, the price that they pay for the paper is several times the current typical rate. Variants on ‘the price is going up next month’ line include ‘liquidation of stock’ or ‘cancelled order’ or any other story that might make the victim think that they were getting a bargain. Sometimes, the scam merchant will drop the name of a senior executive at the target company into the conversation just to add an extra bit of credibility. The buyer may well be asked to fax confirmation of the transaction. Although the telephone conversation itself is enough to commit the buying organization to a legally binding contract (and the scam merchant may have recordings or ‘witnesses’ to verify exactly what was said), written confirmation is very useful to them in the event of any subsequent dispute. These telephone salespeople may operate from ‘boiler rooms’ crammed with people simultaneously pulling similar scams on a host of victims. They get details of their targets from various sources including standard telephone directories. They also maintain and share ‘sucker lists’ of previous victims. These ‘sucker lists’ are particularly valuable to the scam merchant, as they know that the people listed on them are particularly vulnerable to being ‘double-scammed’.

THE PAPER SCAM

41

A real-life case study The telephone version of the paper scam was (almost) perpetuated on my own organization one August when only the part-time secretary was in the office. Under considerable duress, she agreed to purchase five boxes of paper. The term ‘box’ lends itself to different interpretations with regard to paper, because typically five reams of paper are purchased separately wrapped inside an outer carton. Based on the prices quoted, our part-time secretary had assumed that ‘a box’ was a carton containing five reams. The scam merchants’ definition of a box was the inner box containing one ream. The scam merchant issued paperwork relating to the transaction, which included various features to their advantage. For example, they said ‘Return subject to 40% handling charge’ – this would deter some buyers who began to detect something wrong. They also referred to ‘40 cartons multiple shipments’. Thus, this was not an order for five units but for eight separate deliveries, each of five units, and each of which was five times the normal price. (This practice of repeatedly targeting a victim that has fallen for a scam is not uncommon and is sometimes referred to as ‘re-loading’. They will keep sending invoices for as long as you keep paying them and they may well pass on your organization’s name to another scam operator or add another commodity to the supplies that they ship to you). It was only when they issued their next piece of correspondence, however, that our secretary began to suspect that something was amiss. They sent her a £10 voucher for a major high-street store. Many junior staff would gleefully take such a voucher and spend it. If they subsequently realized that the paper purchase they had entered into was a ripoff, would they then go and tell their boss, or would they have a quiet word with their friend in accounts to get the payment rushed through? If they go for option two, the chances of the scam merchant getting all eight shipments through the system are much improved. A variant of this ploy is sometimes referred to as the gift horse scam. A gift is sent to a buyer without them having ordered anything. Overpriced goods are then delivered followed promptly by an invoice. If the buyer has accepted the gift and is subsequently challenged by their employer, how much credibility do they have when they protest that they did not order anything? The chances are that the employer will believe that their employee has blundered into ordering something that must be paid for. Our secretary did not spend the £10 voucher and she did tell her boss what she had done. Since what she had done amounted to entering into a legally binding contract for grossly overpriced goods, her boss was left in a difficult position. The letter I sent to the scam merchant (after various phone calls and ‘reminders’) was broadly along the following lines: We are in receipt of your correspondence in relation to your ‘invoice’ number 1234 for £237.50. We had thought that we had made it perfectly clear that we regard your earlier correspondence on this matter to be bogus. Since a legal contract cannot be entered into under duress or misrepresentation, we feel under no obligation to pay you any sum whatsoever. Nonetheless, since we are in receipt of some paper from your organization, we offer you the following alternatives:

42

PURCHASING SCAMS

(1) We will pay you £47.50 in full and final payment. (2) You can collect and remove the paper at no charge to either party (NB we consider, for the reasons given above, that no contract exists; even if it did, your 40 per cent ‘handling charge’ is an unreasonable contract term). (3) We can test the legal view on which party is correct in its interpretation of the validity of this transaction. If you choose option 3, we would seek the views not only of our legal advisors, but also of Cambridge Constabulary, West Midlands Police, the appropriate trading standards organizations and Birmingham Chamber of Commerce. Yours sincerely T Kitching Consultancy Director Some of the points made in the letter are more valid than others. A legally binding contract may not be entered into under duress or misrepresentation, although the scam merchant would no doubt claim that neither took place. Our offer of £47.50 represented a fair price for the amount of paper delivered but our part-time secretary had inadvertently agreed a much higher sum. The 40 per cent handling charge is undoubtedly unreasonable. It does not cost £100 or so to arrange for a few boxes of paper to be picked up. If he ever managed to claim this from people however, it would represent around half the scam merchant’s profits on the original deal. The reason that Cambridgeshire Constabulary is mentioned is that the scam merchant was operating from their area. West Midlands Police are our local force, but the scam merchant would know that in all probability neither would be interested, as it is unlikely that a crime was being committed and, if it was, it could be difficult to achieve a successful prosecution. Each of the various police forces in the UK has its own criteria for accepting cases. One of these criteria may well be whether the victim showed due diligence in dealing with the situation. There is often a ‘points system’ for allocating the work involved in scams that cross force boundaries. Several forces have no commercial crime (or fraud) section at all. Anyone with a cynical attitude may surmise that this is because commercial crime is not (currently) a government priority and resources are focused on drugs, violent crime, burglary and auto crime because improvement in these areas is more likely to be a vote winner. An alternative (equally cynical) view would be that fraud investigations are costly and cutting them is an inviting way of helping to balance the budget. Some of those forces that have a commercial crime unit focus on particular types of fraud, for example ‘long firm fraud’. The scam merchants will know which forces have got a substantial resource to fight commercial crime and are likely to select their operating base accordingly. The criteria that the Metropolitan Police use for deciding whether their fraud squad should become involved include: ● ●

Is it a serious complex fraud? Does it involve advanced fees, banking, commodities, computer hacking, computer virus, discounting or factoring, foreign land or time share, franchise, fraudulent charities, fraudulent trading, investment, long firm, multiple share applications, pension funds, public sector corruption, shipping and trade?

THE PAPER SCAM

● ● ●

43

Does the loss exceed £750 000? Is one or more of the suspects is a solicitor or financial-sector professional acting in a professional capacity or is the matter politically sensitive? Is one or more of the suspects already being investigated by the Fraud Squad?

Taking this list into account, therefore, the chances of the fraud squad getting very excited if you are the victim of a paper scam are fairly remote. The trading standards organizations may or may not be interested. Their main brief is to protect the ‘consumer’ and this rarely extends to business concerns. The Chamber of Commerce would in all probability be interested in receiving the details of the scam, but are fairly powerless to act against it other than to issue a warning to their other members. After I sent the above letter, I received a phone call from the ‘credit controller’ of the scam merchant (I have a strong suspicion that the ‘credit controller’ and the managing director and the sales manager were all the same person). During the phone call, he tried to convince me that the price was fair because this was ‘special’ paper that could go in fax machines, printers and copiers (wow!). In fact, this sort of phone call to recalcitrant customers is quite normal and tends to follow a predictable line of bullying (if you don’t pay, we’ll take you to court), negotiating (what if we gave you a 20 per cent discount?) and charging for returns (for example, the 40 per cent ‘handling charge’). I had covered all these possibilities in my letter but it still took twenty minutes before he gave up. Eventually, he got the message that I would quite relish the idea of debating the issues in court if necessary and at that point he agreed to remove the paper at no cost. The final twist to the story is that the paper was removed by a highly regarded, legitimate paper distributor. The scam merchant was obviously simply relaying orders to them and had no stock or distribution system of their own.

Other office consumables Paper is undoubtedly the most common of the commodities to be used in this type of scam and there are some fairly obvious reasons for this: ● ● ●

Its price can be volatile, therefore office staff are uncertain about what the correct price is and may be keen to buy before the next increase. It is perceived as a low-value purchase and its procurement is therefore often devolved down to low-level staff. The scam merchant can take advantage of unfamiliar/confusing units of issue.

Similar scams are also perpetrated by salespeople pushing other office consumables. For example, I was recently contacted by a lady who said that she had rung to thank me for helping her company recently with a survey. When I said that I did not recall helping with the survey, she said that I definitely had and that they wanted to thank me by sending me some glasses. These had supposedly originated from a customer with whom they had just won a large order – ‘would I like whisky glasses or brandy glasses?’ The salesperson seemed quite taken aback when I said I did not want any glasses, but persisted with her script which included the sale of printer cartridges: ‘Can I just send you one with your glasses – they are only 1-9-5.’ By this she meant £195 although

44

PURCHASING SCAMS

perhaps she hoped people would imagine she meant £1.95. The cost of similar printer cartridges is usually £30–40. The use of the free gift to encourage buyers to place an order is a variant of the ‘puppy dog’ sales technique. This works on the principle that if you’ve taken a puppy dog home to your family, you are unlikely to remove it once they have grown attached to it. Legitimate (or semi-legitimate at least) salespeople use the same technique when they loan photocopiers or drinks dispensers to organizations. The staff become accustomed to these machines and do not want them to be removed. The scam merchants encourage a lack of integrity in the buyer. The buyer gets their ‘free’ gift and their employer gets the bill. The fact that the bill is out of all proportion to the value of goods supplied is of no great interest to some buyers – they are not paying. Those buyers that realize that their employers are being ripped off will feel disinclined to blow the whistle for fear of questions about the free gift they accepted. In some instances, scam merchants may even blackmail the victim into ordering more supplies by using the threat that they will expose the acceptance of the gift to the victim’s boss. Toner cartridges are frequently used in this sort of scam because they are a relatively expensive office consumable and few people would realize what they cost. They have the added advantage to the scam merchant of being supplied in very expensive brand name versions and much cheaper copycat models. Guess which you get if you order from the scam merchant. Scam merchants pushing cheap toner cartridges (but not at cheap prices) may well precede the sales call with a market research call to establish what sort of photocopier and printers you have in your office. The toners that are used by your machine will be the ones on ‘special offer’ when the sales pitch starts.

General commodities Other consumables are also used by scam merchants to extract disproportionately large sums of money in return for low-value items. Cleaning materials is one example. I have seen documentation relating to cleaning material delivered on 30 December (when most staff, particularly office staff, are on holiday). The delivery driver obtains a signature acknowledging receipt of the material and an invoice is raised (also dated 30 December), which also quotes the name of the recipient. What is the person in the accounts department to do when they receive the invoice? Goods have been received and accepted (the name of the person that signed for them will appear on the invoice). Cleaning materials are used by a wide range of people so they could have been ordered – but who by? It may be tempting to pay the invoice whilst sorting out who ordered the (very expensive) cleaning materials – this is exactly what the scam merchant (who provided very low-quality cleaning materials) is hoping for. Alternatively, some scam merchants operate by getting the name of the usual buyer on to the paperwork in addition to the person signing for the goods on receipt. A short prior phone call – ‘can you tell me the name of the person that orders cleaning materials?’ – will enable the addition of a credible name to the invoice. In those organizations that don’t check with the buyer, these invoices can get paid. When scam merchants arrange unordered, overpriced deliveries, they often rely on recipients opening the package before reconciling the paperwork and then assuming (wrongly) that because the goods have been opened, they must be paid for.

THE PAPER SCAM

45

Specialist items Other items that are purchased only very occasionally are difficult for the nonprofessional buyer to value and are therefore sometimes used in scams. Fire extinguishers are one common example and to promote these the scam merchant can invent or exaggerate regulatory requirements for the extinguishers to be replaced, renewed or upgraded. Similar claims are sometimes used to push high-priced cleaning materials, for example, ‘our products comply with health and safety regulations – the products you now use may not.’

You can’t beat a brand name Some people recommend that one way to avoid the paper scam (and its variants, particularly office consumables) is to always specify brand-name products. I do not fully concur with this view and indeed recommend that purchasing good practice requires that brand names should not be specified and that instead purchases should be made against performance standards. If you insist on a brand name and find yourself dealing with a scam merchant, be prepared for the offer of ‘XXXX-compatible’ products (where XXXX is the relevant brand name). Even if the product supplied is ‘compatible’, it is unlikely to be equivalent to its more famous cousin.

How to avoid the paper scam and its variants ● ●

● ● ● ●

●

● ● ● ●

As a general rule, don’t pay for anything unless you know that you have ordered it, it has been provided to your satisfaction and you are obliged to pay. Scam merchants will often try to target staff who are unfamiliar with purchasing practices; you should therefore train staff who are not empowered to order to redirect telephone marketing calls to a commodity specialist who will understand what is being offered and what the company’s needs are. Be suspicious if items are apparently being sold for much less than usual. Be especially suspicious if salespeople press for immediate payment. Make sure that the staff dealing with invoices know the difference between an invoice and a proforma invoice. Use a purchase order system. Whether or not these are all paper orders (increasingly they will be electronic), implement a system by which payments can only be made if a valid purchase order has been raised. Each order should be uniquely numbered and traceable back to its originator. Use designated staff for the purchase of specific commodities. This will build their market knowledge and prevent ‘amateur’ buyers committing the organization to unwise purchases. Set up a call-off contract for frequently ordered items such as stationery, and make everyone aware that all supplies should be obtained from the contracted supplier. Prohibit the use of telephone ordering except for known, established, trusted sources of supply. Do not make snap purchasing decisions when pressed by a telephone salesperson. Ask for a catalogue or other sales literature from persistent telesales staff.

46

PURCHASING SCAMS

●

If you are unsure if your fire extinguishers are adequate/suitable, speak to your local fire service.

CHAPTER FIVE

THE NIGERIA SCAM It is not really a scam By my definitions, the Nigeria scam does not really qualify as a purchasing scam because (a) it is not particularly related to purchasing, and (b) it is well on the ‘fraud’ side of the scam/fraud dividing line. However, it must be included within this book for the following reasons: ● ● ● ● ●

It is usually referred to as a scam. It is by far the most common of the questionable practices reported to the authorities by businesses. It is often targeted at owner/managers of small businesses (who are also usually responsible for purchasing). It is likely to cost anyone who gets involved in it far more money than any of the other scams described in this book. It could cost the victim their life!

The world’s most widespread scam Nigeria is a source of various scams targeted at businesses around the world. Russia, South East Asia, the Middle East, Australia and New Zealand are all targeted in addition to the UK and US. The Financial Crimes Division of the US Secret Service is reported to receive around 100 telephone calls and 300–500 pieces of correspondence per day regarding variants of the Nigeria scam. Postal authorities in the UK and America seized four million scam letters before delivery in a single year, yet it is estimated that at least 500 000 such letters a year get through to their targets in the UK alone (this figure excludes faxes and e-mails). In Hong Kong, it is estimated such letters make up 95 per cent of all the mail received from Nigeria. It has been said that if you have not received a letter from some unknown Nigerian politician or government official offering you the business deal of a lifetime then you should complain that you’ve been the victim of discrimination. Estimates put the total amount of money collected by the crooks operating the Nigeria scam as several billion dollars per year over the last decade or so. According to some reports, it is Nigeria’s third largest industry.

The European connection Some of the letters are posted from Holland where there is a community of Nigerian origin. Holland also sometimes features later on in the scam as a venue for meetings. The banks that the victims are required to pay their money into are often also Dutch, although Japan and the US are also popular for this purpose. London is also a frequently used location for meetings, many of which involve the handing over of money (from you to them, obviously).

48

PURCHASING SCAMS

How does it work? The scam merchants send out a letter intended to delude the victim into thinking that they have been specially singled out to take part in a very lucrative, though highly questionable, transaction. The most common approach by the fraudsters is to send a letter purporting to have engineered a scheme to extract a large amount of money (typically $20–30 million) through over-invoicing on a large international contract. In order to get their hands on the money, the crooks claim that they need to pass it through the victim’s bank account. In return for providing the service, the victim is led to believe that they will get 10 or 20 per cent of the spoils. A typical letter is reproduced in Figure 5.1. We received two copies of this letter within three months, identical in every detail except for the fact that they were sent by different people. The letters are usually badly typed, often in block capitals, usually contain spelling mistakes and frequently call on God’s blessing for the enterprise. The spelling mistakes are probably introduced deliberately to give the impression that the sender of the letter is not as clever as the recipient. The line about confidentiality is always there, obviously so the target does not tell their friends who might be more clued up and explain to them how the scam works. The operators of the scam frequently address the letter to ‘the president’ or ‘the CEO’ if they have not bothered to research your company in detail. You are usually invited to make contact by phone (newer variants discussed below may quote an e-mail address) – they do not tell you that these phones are inside phone boxes, but they do often suggest ringing within very limited hours. Anyone responding to a letter like this is obviously a crook as well as a fool. However, there are some people who, lured by the prospect of 10 or 20 per cent of $20 or 30 million (the proceeds are always in dollars) will get involved. The ‘fact’ that the money is always resting aimlessly in some long-forgotten bank account and is often apparently extracted from a previous corrupt government may encourage the recipient to think that they are taking part in a ‘victimless’ crime, if indeed they admit to themselves at all that what they are doing is part of a criminal act. At this point, the ‘5 per cent set aside to offset any expenses’ comes into play. Sometimes the figure is 10 per cent, but it will always be less than the victim expects to make on the deal. This is money up front that supposedly needs to be provided by the victim to oil the wheels of the process, and obtaining these ‘advanced fees’ is the real objective of the fraudsters. The victim is reassured of the authenticity of the scheme by being supplied with forged documents apparently bearing official Nigerian government letterheads and seals. Forged letters of credit, payment schedules and bank drafts will also be supplied as the scam progresses. Once confidence is established, something may appear to go wrong with the deal and the victim is pressured into providing increasing sums of money to cover up-front bribes for officials, payments to ‘barristers’, ‘audit fees’ or unforeseen taxes or charges such as ‘transfer tax’, ‘performance bonds’, ‘non-resident contractor certificate’, ‘verification form’ or simply ‘advance fees’. This process can continue for months with the victim prepared to invest more and more in the search for the elusive gigantic payoff. The victims get trapped in a spiral of despair, chasing the elusive pay day whilst becoming

THE NIGERIA SCAM

49

STRICTLY CONFIDENTIAL LAGOS, NIGERIA DEAR SIR REQUEST FOR URGENT BUSINESS RELATIONSHIP FIRST, I MUST SOLICIT YOUR STRICTEST CONFIDENCE IN THIS TRANSACTION. THIS BY VIRTUE OF ITS NATURE AS BEING UTTERLY CONFIDENTIAL AND TOP SECRET. WE ARE TOP OFFICIALS OF THE NIGERIAL NATIONAL PETROLEUM CORPORATION (NNPC) AND MEMBERS OF AN AD HOC COMMITTEE SET UP BY THE FEDERAL GOVERNMENT OF NIGERIA TO REVIEW CONTRACT AWARDED BY THE PAST MILITARY ADMINISTRATION. THE MEMBERS OF THE COMMITTEE ARE BASICALLY INTERESTED IN THE IMPORTATION OF GOODS INTO THE COUNTRY WITH A FUND WHICH IS PRESENTLY FLOATING IN THE CENTRAL BANK OF NIGERIA. THIS FUND RESULTED FROM GROSSLY OVER-INVOICED CONTRACTS WHICH WERE EXECUTED FOR THE NNPC DURING THE LAST ADMINISTRATION. IT WAS ALLEGED THAT TOP GOVERNMENT OFFICIALS SET UP COMPANIES AND AWARDED THEMSELVES THE CONTRACTS. AS A RESULTS, THE PRESENT ADMINISTRATION SET UP THIS COMMITTEE TO IDENTIFY, SCRUTINIZE AND RECOMMEND FOR PAYMENT ALL VALID CONTRACTS THAT HAVE BEEN FULLY EXECUTED. IN THE COURSE OF OUR DUTY, WE IDENTIFIED A LOT OF MISAPPROPRIATED AND INFLATED FUNDS WHICH ARE PRESENTLY TRAPPED IN THE CENTRAL BANK OF NIGERIA READY FOR PAYMENT. THE COMPANIES WHO EXECUTED THEIR CONTRACT HAVE BEEN DULY PAID. I HAVE THEREFORE BEEN DELEGATED AS A MATTER OF TRUST BY MY COLLEAGUES IN THE PANEL TO LOOK FOR AN OVERSEAS PARTNER INTO WHOSE ACCOUNT WE COULD TRANSFER THE SUM OF US$18,000,000 (EIGHTEEN MILLION US DOLLARS). AS A MATTER OF FACT WE HAVE SUCCESSED IN TRANSFERRING PART OF THIS OVER INVOICED FUNDS PRECISELY US$5,MILLION (FIVE MILLION US DOLLARS) INTO A FOREIGN ACCOUNT IN LEBANON. BUT THE PROCIDED OF THE ACCOUNT IN LEBANON IS UP TO COME MISCHIEF AND HAS REFUSED TO COMPLY WITH OUR EARLIER AGREEMENT INSISTING THAT THE TOTAL AMOUNT BE PAID INTO HIS ACCOUNT BEFORE DISBURSEMENTS WILL TAKE PLACE. WE HAVE LOST CONFIDENCE AND TRUST IN OUR LEBANESE ‘FRIEND’, BECAUSE IF FOR A MERGE $5,000,000 WE ARE NOT COMPENSATED, IS IT WHEN THE BALANCE OF US$13,000,000 IS TRANSFERRED THAT WE WILL BE SURE OF OUR FULL SHARE OF THE DEAL. WE THEREFORE SEEK YOUR ASSISTANCE SO THAT THE REMAINING AMOUNT OF US$13,000,000 CAN BE SPEEDILY PROCESSED AND FULLY REMITTED INTO YOUR ACCOUNT. WE HAVE AGREED THAT YOU RETAIN 20% OF THE MONEY, 5% WOULD BE SET ASIDE TO OFFSET ANY EXPENSES THAT MAY OCCUR, WHILE WE WOULD KEEP THE REMAINING 75%. IT IS FROM THIS 75% THAT WE WISH TO COMMENCE THE IMPORTATION BUSINESS. TO CONFIDE IN YOU, SIR, ALL LOGISTICS ARE IN PLACE AND ALL MODALITIES HAVE BEEN WORKED OUT WITH SOME TOP OFFICIALS OF THE MINISTRY OF FINANCE AND CENTRAL BANK OF NIGERIA TO FACILITATE THE SMOOTH REMITTANCE OF THE AMOUNT INTO YOUR ACCOUNT WITHIN TEN TO TWELVE DAYS OF RECEIVING THE FOLLOWING INFORMATION ON TEL/ FAX:XXX-X-XXXXXXXX 1) BANKERS NAME, ADDRESS, BANK ACCOUNT NUMBER, TELEPHONE FAX AND TELEX NUMBERS. 2) YOUR COMPANIES NAME, ADDRESS, COMPANY’S DETAILS AND ACTIVITIES, TELEPHONE AND FAX NUMBERS THIS INFORMATION WILL ENABLE US MAKE APPLICATIONS AN LODGE CLAIMS TO THE CONCERNED GOVERNMENT MINISTRIES AND AGENCIES IN FAVOUR OF YOUR COMPANY. PLEASE ACKNOWLEDGE THE RECEIPT OF THIS LETTER USING THE ABOVE TEL/FAX NUMBERS. I WILL BRING YOU INTO THE COMPLETE PICTURE OF THIS PENDING PROJECT WHEN I HAVE HEARD FROM YOU. BEST REGARD.

Figure 5.1

A typical Nigerian scam letter

50

PURCHASING SCAMS

increasingly aware of the growing amount of money that they have already paid out. The fraudsters rely on a drip-feed approach to extracting money as the most efficient way of maximizing their take. For the victims, complaining to the authorities is not easy because, as we know, the victim is also a crook. Initial payments are typically around $5000 but subsequent payments may be up to $200 000. The victims may well get themselves into debt to make these payments and are therefore drawn into handing over ever-increasing sums in a desperate attempt to reach ‘pay day’. The largest figure I have seen reported as being lost by a single individual is $6 million. The very worst thing that the victim can do at this stage is to respond to the fraudster’s invitation to travel to Nigeria or one of its surrounding countries for a meeting to resolve the problem or receive reassurance. Victims are told that a visa will not be necessary to enter the country, which is true, because the fraudsters are likely to bribe airport officials to cooperate. The victim is then an illegal immigrant in an African country held by a group of international criminals. Violence and threats may then be used to pressure the victim into arranging further financial transfers from his business or family. The idea of a visit to Nigeria is often planted early in the transaction. For example, the original letter may state ‘it is pertinent to note at this point that if this business is successfully completed (that is, when the money gets into your account), we shall also have face to face meeting for closer deliberation in as much as we may likely resign Government Service for private business.’

Can we trust you? As part of their ploy to encourage the victim to visit Africa and also to put the victim ‘on the back foot’, the scam merchants often refer to people that they have dealt with in the past that have let them down (you can’t trust anyone these days can you?). For example, one letter stated ‘two years ago a similar transaction was carried out with one P**** Miller, the president of C**** International Trading Corporation at number ***, East **th Street, 28th floor, New York’ (the asterisks are my insertion to disguise the name just in case they were quoting a real person or company). ‘After that agreement between both partners in which he was to take 30 per cent, the money was duly transferred into his account only to be disappointed on our arrival in New York as we were reliably informed that Mr P**** Miller was no longer at that address while his telephone and telex number had been reallocated to somebody else. This is how we lost $27.5m to Mr. P**** Miller.’ Now the fascinating thing is that when I examined a pile of Nigeria scam letters, I found that Mr P**** Miller had let down Dr John Ego of the Ministry of Petroleum within weeks of disappointing Mr John Ego of The Ministry of Aviation. The strange similarity in the names of the injured parties in Nigeria and of the supposed crook in New York was made even more curious when I found examples of Mr Miller being quoted by three separate people (supposedly) from the National Petroleum Corporation and one from the National Economic Planning Commission. According to these letters, Mr Miller has been disappointing Nigerian crooks for several years. Mr Miller is not always said to be responsible for these imaginary double deals however; another man in Italy is frequently cited as having cheated the letter writers.

THE NIGERIA SCAM

51

Bogus connections The most commonly quoted organization claimed as the employer of the Nigerian fraudsters is the Nigeria National Petroleum Corporation (presumably because the victim will expect oil companies to have large sums of money which they would not notice if they went missing). Other organizations quoted in the letters include: ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Federal Government Contract Review Panel; Nigeria Contract Review Committee; Petroleum (Special) Trust Fund; Department of Petroleum and Mineral Resources; Contract Award and Monitoring Committee; Federal Ministry of Agriculture and Natural Resources; Presidential Task Force for Debt Settlement to Foreign Contractors (I especially like that one!); Special Committee for the Budget and Planning of the Ministry of Petroleum; Federal Ministry of Finance; Federal Ministry of Transport; Federal Ministry of Works and Housing; Federal Government Failed Contract Review Panel; Nigeria Contract Award Committee; Federal Ministry of Aviation; Nigeria Board of Customs and Excise; Murtala Mohammed International Airport, and Central Bank of Nigeria.

Some also claim that surplus funds have arisen from money provided by the International Monetary Fund, or the World Bank. Other attempts at establishing credibility include lines such as: ● ● ● ● ● ●

‘I got your address from our Chamber of Commerce and Industry’; ‘We got your address from your embassy here in Nigeria’; ‘I am making this contact with you on behalf of my colleagues after an acceptable recommendation from an International Business Agency’; ‘I got your name through the World Trade Encyclopaedia’; ‘Based on information gathered from the Ministry of Trade and Industries’; and ‘We are making contact with you based on the reliable information we gathered from our legal/political contact highlighting your company’s profiles’ [sic].

Perhaps the most audacious lines, however, are those such as ‘I honestly assure you that this transaction is 100 per cent risk free’ and ‘let honesty and trust be our watershed throughout this transaction . . .’ – all this from people who claim to be defrauding their employers of tens of millions of dollars!

The Nigeria scam, also known as the 419 scam The Nigeria scam has been operating for many years. It is now so well known in the business community that it is frequently referred to as the ‘419 scam’, named after the

52

PURCHASING SCAMS

section of the Nigerian penal code which outlaws such frauds. Yet still people fall for it and such frauds are estimated to gross hundreds of millions of dollars per year from the US alone. The gullibility of some people is, however, amazing. One of the Nigeria scam letters starts with the following paragraph: I am aware of the large scale scams including advance fee fraud being perpetrated by some unscrupulous Nigerians against innocent unsuspecting foreign businessmen under different guises. These nefarious activities are being initiated through bogus proposals promising to pay potential victims generous and mouthwatering assistance commission at the end of the day. This is a matter of utmost regret that must be condemned in its entirety by the international community. The letter then goes on to propose a scam identical to all the others that were supposedly condemned in the first paragraph. That particular letter was signed by someone with the title ‘Prince’. Usually it is just plain ‘Doctor’; sometimes it is ‘Brigadier General’. The first name often suggests great piety, for example I saw two similar letters, one signed ‘Dr Godspower Chuka’, the other signed ‘Mr Precious Chuka’ – I cannot help wondering if they were related.

The official line The Nigeria scam is the source of frequent complaints to the Nigerian authorities. In 1995, 35 countries protested about the failure to do anything to stop the flood of letters. As a result, the Nigerian High Commission and others have issued frequent press warnings about the scam in an attempt to reduce its impact and deflect criticism. One such press statement issued by the Central Bank of Nigeria in September 1997 (and reissued several times since then), read as follows: 1) Since the early 1990s the Central Bank of Nigeria (CBN) has endeavoured to combat the scourge of Advance Fee Fraud/Scam being perpetrated by fraudsters via letters, telefax, telex, etc both locally and overseas, through publicity campaigns, seminars, press statements and cooperation with law enforcement agencies. To date, the CBN has placed advisory advertisements in over 80 newspapers and magazines in 12 languages in 36 counties, in its effort to forewarn all corporations and individuals who are likely to fall prey to the scam and thereby help stamp out the proliferation of Advance Fee Fraud, aka ‘419’. Furthermore, the Bank replies routinely to all enquiries relating to scam letters, telefax etc, to the effect that the ‘claims’ are bogus and fraudulent and that the claimants are being duped. Appropriate Embassies and High Commissions in Nigeria are also furnished with copies of correspondence emanating from their countries to prevent ruination of their nationals. 2) Unfortunately, the scam has continued unabated, even with increasing sophistication, because of the criminality, avarice and greed of the so-called victims of the scam who are also villains. The bogus ‘business’ proposals/deals which run into millions of US dollars manifest fraudulent intentions ab initio, which should ordinarily put any responsible and law abiding person on inquiry. However, driven by fraudulent tendency, greed and the urge to make quick and easy money at the expense of Nigeria, many of the so-called victims have continued to ignore the warnings of

THE NIGERIA SCAM

53

the Central Bank of Nigeria to the effect that such transactions are bogus and fraudulent. 3) To recapitulate, an advance fee fraud/scam takes various forms. A typical one starts with a letter of solicitation, followed by telefax or telex messages. The letters often offer to transfer huge amounts of money, usually in US dollars, purported to be part proceeds of certain contracts, to the addressee’s bank account, to be shared in some proportion between the writer and the addressee. A favourable response to the letter is followed by excuses why the funds cannot be remitted readily and subsequently by demands for proportionate share of payment of various ‘taxes’ to facilitate the processing and remittance of the funds. The use of fake Government, Central Bank of Nigeria, Nigeria National Petroleum Corporation etc, documents is a common practice. The fraudsters usually request that the transaction be done under the cover of confidentiality. Sometimes, the ‘victims’ are invited to Nigeria where they would be given red-carpet reception and attended by the fraudsters posing as Nigeria Government or Central Bank officials. To consummate the ‘transaction’, the ‘victim’ would be required to pay advance fees for various reasons, e.g. Processing fees, unforeseen taxes, licence fees, registration fees, signing/lawyers fees, National Economic Recovery Fund fees, insurance coverage release fees, etc. Collection of these advance fees is actually the real objective of the scam. A recent variant of the scam, directed primarily at charitable organizations and religious bodies overseas, involves bogus inheritance, under a will. Again, the sole aim is to collect the advance fees described as one form of inheritance tax or other. 4) The Central Bank of Nigeria has taken this initiative of once again warning the business community and individuals because of its concern to maintain the good name of the Bank and its public standing as well as those of its Senior Executives. Often, the name of the bank, members of its top management team, including the Governors (past and present) and the Deputy Governors together with those of highly placed Government officials, have been fraudulently used and abused by the fraudsters with reckless abandon, to lend credibility and respectability to the scam. As on previous occasions, the Central Bank of Nigeria wishes through this medium, to warn all and sundry about the existence and the modus operandi of the international criminal syndicates whose nefarious activities have been a source of embarrassment to the Bank and the Nigerian Government. 5) On numerous occasions, the so-called victims of the ‘419’ scam have brought law suits against the Central Bank of Nigeria, all of which the Bank has defended successfully. In a recent landmark judgement on an advance fee scam law suit brought by Larry Sorth and Mr and Mrs Tei Vs The Central Bank of Nigeria et al, the issues of advance fee fraud, the impostors and Clearing House banks were decided on by Hon. Charles A Sham of the United States of America District Court (Eastern District of Missouri). The case was ruled in favour of the Central Bank of Nigeria. The Judge ruled that the case of the plaintiffs – Messrs. Sorth and Tei was not sustainable, because they neither engaged in any commercial transaction with the defendant, not had contact with genuine Central Bank of Nigeria officials, nor with any official of the Federal Government of Nigeria. The Judge further noted that documents tendered by the plaintiffs as evidence were forgeries, and that they were, from the onset, aware that the transactions were bogus, fraudulent and too good to be true. We hope that this landmark Court decision among many others decided in

54

PURCHASING SCAMS

favour of the Bank would serve as sufficient warning to all those who do not heed our advisory advertisements and who would subsequently like to seek relief from the courts after falling ‘victim’ to advance fee scam transactions. 6) The Central Bank of Nigeria is once again warning all recipients of such fraudulent letters, that there are no contract payments trapped in the Bank. Also, that all documents appertaining to these ‘payments’, ‘claims’ or ‘transfers’, purportedly issued by the Bank, its Senior Executives, or the Government of the Federal Republic of Nigeria are all forgeries, bogus and fraudulent. These documents do not originate from the Bank or the Government. They are not authentic. YOU ARE THEREFORE, WARNED AND ADVISED, IN YOUR OWN INTEREST, TO IGNORE THE ‘GET RICH QUICK’ BUSINESS SOLICITATIONS. The Central Bank of Nigeria implores you to assist in the fight against these criminal syndicates by reporting any solicitation to your local law enforcement agencies or the local International Police Organization (INTERPOL). 7) For the avoidance of doubt, it should be restated that the Central Bank of Nigeria will not accept responsibility for any loss sustained by any person or corporation that fails to heed our warnings. 8) YOU HAVE BEEN WARNED SEVERAL TIMES BEFORE! YOU HAVE BEEN WARNED AGAIN!! .

The government of Nigeria is not always so unequivocal in its condemnation of the scam merchants and tends to blame the greediness of the victims of people ‘purporting to be Nigerians’.

Variants of the 419 scam Usually, the 419 scam operates by offering money that is left over from contracts with foreign suppliers. There are variations on this theme however. For example, ‘I am the principal son of a reknowned [sic] minister. My father has died leaving $25.3m to be invested abroad. I need a reliable business man to come to Nigeria to open a domiciliary account with a bank here.’ The letter’s recipient was promised the familiar split of 70 per cent for the ‘principal son’ and his family, 20 per cent for the recipient and 10 per cent for expenses. Rather strangely, this letter also offers ‘the equivalent of 500 000 barrels of Automobile Gasoline Oil for spotlifting at less than market price’ (‘spotlifting’ means make a one-off purchase as opposed to a long-term contract). I would guess that this is part of the scam and that at some stage you can (in theory) get your hands on the proceeds of this oil for only a small down payment. Other variants include: ●

● ●

letters from people who have discovered $25 million in ‘my father’s closet’ and need help in getting it out of the country because of ‘European and Commonwealth Sanction’; one who claims to be the widow of the former Head of State who was ‘nabbed at the airport with 28 boxes stuffed with hard currency worth millions of dollars’; the bank manager who has discovered an account in the name of a dead foreigner and who needs another foreigner to take all the money out.

There is also the opportunity to act as a ‘front’ for The Ministry of Works and Housing in its efforts to obtain property in the UK.

THE NIGERIA SCAM

55

Possibly my favourite amongst all the 419 letters comes from ‘The Palace of His Royal Highness King Anthony Ibe’ who apparently is aggrieved that foreigners get a higher level of compensation for their land when it is nationalized than he does. He wants the recipient of his letter to purport to be the rightful owner of 4000 hectares of his land in order to achieve a better price. This obviously requires a meeting in Nigeria. Another meeting in Nigeria can be had if you respond to the ‘son of a general’ whose father put $40 million of army wages in a safe deposit box just before being killed: ‘You are required to come to Lagos . . . for a meeting with me to reassure trust and confidence and also to enable me and you to get money over to your country. I have made concrete arrangements at our airport to ensure the success of our mission.’ I have no doubt that special arrangements would be made at the airport. If the deal went wrong, they could also involve concrete.

Who falls for a scam like that? You may think very few people would be foolish enough to fall for the 419 scam, particularly in view of the wide publicity it receives every time a new wave of letters are issued. However, estimates from Britain’s National Criminal Intelligence Service suggest that 1–2 per cent of the letters’ recipients fall for the scam each time and lose on average £30 000–50 000 as a result. The National Criminal Intelligence Unit estimates that the organized criminals behind this scam net £3.5 billion per year from British businesses. Given these numbers and the 1 per cent ‘conversion rate’, it is not surprising that huge numbers of these letters are sent out. A more recent innovation that I have seen (I was the target of it actually) is a faxed version of the 419 scam. This is a fairly unexpected new twist because the fraudster usually keeps costs down by means of using counterfeit stamps on the letters. However, I doubt that the fax bill will ever get paid.

Nigeria e-scams Perhaps unsurprisingly, the first e-mailed versions of the 419 scam letters have also been recently reported. One that I saw was supposedly from a barrister working for a prince (you can’t fail to be impressed can you?) in Zaire (supposedly) who had $139 million that he needed help with. Another recent variant was an e-mail to businessmen in the United Arab Emirates offering $30 million found in the private apartment of a deceased president in the Congo. A more original version comes from a ‘consultant’ to a Tender Board Committee whose ‘sole duty is to recommend the award of contracts to suitable foreign contractors within category A–C’. The message goes on to offer the prospect of a contract valued at $9 million for the supply of PCs. There is also an interesting paragraph: ‘Note that the value of this contract might have been inflated for reasons which I will explain to you later.’ This is a novel way of hooking a victim but no doubt the familiar advance fees would be required.

The black money scam Anyone who doubts that people would be silly enough to allow themselves to become

56

PURCHASING SCAMS

victims of the 419 scam would be incredulous at one of the early variants from West Africa. In this instance, the letter purported to come from the man in charge of customs. Supposedly, his staff had been required to dispose of £3 million in ‘genuine dollar bills’ which had been defaced by former politicians. In order to earn their share of the money, the victim is required to help to ‘chemically reconvert’ the bills prior to them being taken out of the country. Part of the scam would involve the victim visiting West Africa to witness sample blank pieces of paper being ‘Chemically converted’ into ‘genuine dollar bills’. The objective, however, is the familiar ‘advance fee fraud’ and/or kidnap and extortion, depending on how the scam progressed. This scam is sometimes referred to as ‘the black money scam’ after the colour of the ‘dollar bills’ before they have been washed by chemicals. I have seen examples of this ‘black money’. To me they looked just like the worthless pieces of paper that they are, but there must be some people out there that are convinced, otherwise the scam merchants would not keep repeating the technique. Hopefully, this concept is generally seen as so ludicrous that the success rate is much less than the 1–2 per cent quoted for the usual 419 scam. However, it must work from time to time because a variant resurfaced during 1999. This time the defaced notes were allegedly in the hands of South Africa’s ANC who simply needed £30 000 of the victim’s money to pay for the chemicals to restore the notes. Anyone sending the £30 000 is promised 40 per cent of the profit. The ‘black money scam’ also occurs within (and quite possibly originated from) the conventional 419 scam. Part-way through the process of obtaining ‘their share’ of the money, the victim would be shown a pile of black money as proof of the genuineness of the deal. By sleight of hand, one of the sample pieces of black money is converted into a $100 bill using the ‘special chemical’. The next stage would be a further request for money (real money this time) to pay for the chemicals to reconvert the black money into banknotes. The victim then walks away with a suitcase full of black paper, a bottle of useless chemicals and some huge debts. The black money scam gives a whole new meaning to the concept of money laundering.

Sometimes the good guys win The conversion rate for the scam merchants is much higher than their detection rate. The police do, however, have some successes in catching these fraudsters. One example was when police acting on intelligence intercepted some counterfeit documentation being used in a 419 scam. They raided the address to which the package was destined and found evidence relating to a victim and some money (real money), which the fraudster attempted to throw out of the window (I would view that as suspicious behaviour). The money (£10 500) was returned to the victim in Australia. The crook skipped bail but was caught three years later carrying out the same scam on a victim from Portugal. This time he was sentenced to four years’ imprisonment which, according to the police officer involved, ‘is a heavy sentence for fraud’.

THE NIGERIA SCAM

57

How do you become a target of the Nigeria scam? The principal method used by the fraudsters to select victims is simply to work their way through telephone directories. Evidence for this comes from postal authorities that suddenly find themselves inundated with letters from Nigeria (some mailings also come from other countries such as South Africa and Tanzania) addressed to firms whose names start with the same letter of the alphabet. Allegedly, supporters of the Nigerian Olympic Team in Atlanta stripped the hotel rooms of telephone directories and within three months the city was inundated with 419 letters. This approach to victim selection can have somewhat comical results. Both the Serious Fraud Office and the Metropolitan Police are said to be amongst the recipients of variants of these letters. Trade directories are also useful sources of contacts for the operators of the 419 fraud. These directories are allegedly sometimes harvested by students and others working at night as cleaning staff in offices. Other sources of information for these people are invoices, letterheads and so on left insecurely in the office. Random selection of names from a directory cannot be the only method they use, however, as evidenced by a recent instance of an e-mailed 419 letter (this time the money was left over from ‘The West African Peacekeeping Force’). The company that was targeted had only been trading for a month! Favoured targets for the Nigeria scam are small business owners and other professionals such as lawyers, doctors and accountants. This is not only because they are likely to have access to significant funds but also because they believe that their level of business acumen leads them to believe that they cannot be conned. Such people are often reluctant to admit that they have become victims even when all the evidence is crystal clear.

A final warning The people perpetrating the Nigeria scam are in a different league to the people carrying out the other scams described in this book. They are serious criminals who are thought to use the proceeds from the 419 scam to fund other operations such as global drugs smuggling. They are highly professional and very dangerous. One line from one of their letters say ‘we are in control, we knows [sic] what to do and how to do it’ – on this occasion, you should believe them.

How to avoid the Nigeria scam ●

A succinct view of doing business with Nigeria is given in the ‘five rules’ of a group in the US calling itself the ‘419 coalition’: 1 Never pay anything up front for any reason. 2 Never extend credit for any reason. 3 Never do anything until their cheque clears. 4 Never expect any help from the Nigerian Government. 5 Never rely on your Government to bail you out.

●

The most obvious way to avoid the Nigeria scam is to ignore any letters that bear a resemblance to those described above. Never respond by mail, fax or telephone; definitely do not give them any money. To reduce the risk of you or your contacts being targeted, ensure the security of all commercial documents.

58

PURCHASING SCAMS

●

Do not be impressed by official-looking documents from foreign countries.

If you want to do more to try to help stamp out the nuisance of Nigerian scam letters, you are probably wasting your time, but local Chambers of Commerce sometimes appreciate seeing copies so that they can warn their members of the latest variant and they also periodically remind the Nigerian High Commission that these things are going on. You could also pass on any Nigerian scam letters you receive to the police who will collate them and send them to the National Criminal Intelligence Service (what else could they do?). There is probably an office in the International Police Organization (Interpol) that also deals with them and in the US the Secret Service would like you to send them to US Secret Service, Financial Crimes Division, 419 Task Force, 950 H Street, Washington DC 20001-4518, USA.

Other correspondence from Nigeria In addition to the 419 fraud, Nigeria is also the source of some of the more imaginative charity scams. These are described in Chapter 7.

CHAPTER SIX

BOGUS CONSULTANTS I have been a management consultant for over fifteen years. The role has a number of advantages, not least of which is the opportunity to work with the purchasing functions of a wide variety of organizations. There are, however, also a few downsides, one of which is that any redundant manager between jobs can call themselves a consultant and it is difficult for the world at large to spot the difference between a career consultant and an enthusiastic amateur. Some dubious politicians also adopt the title of consultant when what they are selling is access and influence rather than expertise and objectivity. Attempts by professional bodies such as the Institute of Management Consultancy (IMC) and the Management Consultants Association (MCA) to identify the professionals by virtue of their membership of the appropriate professional body are largely unsuccessful because the man in the street (or indeed the MD of a small business) is too busy with other things to find out that these professional bodies exist. The enthusiastic amateur can potentially harm the image of the profession because of their lack of training, experience, support, financial standing and adherence to the profession’s ethical code. Far worse, of course, than the enthusiastic amateur is the professional scamster who uses the job title ‘consultant’ in an attempt to gain the confidence of business managers and to exploit their ignorance. These scam merchants thrive on changes to the business environment (as do real consultants), but instead of providing genuine solutions to business problems they provide only useless information – always after securing payment in advance.

BS 5750 consultants A few years ago large businesses, particularly in the manufacturing industry, adopted a new approach towards quality management. This new approach involved an end to the traditional ‘inspection’ mentality towards ensuring product quality and its replacement with a requirement that the systems adopted by the organization and its suppliers should be such that they ensured consistent product (or service) quality. In order to ensure that the systems were appropriate, organizations frequently worked to the framework set out in British Standard BS 5750 (now replaced by the international standard ISO 9000). Some organizations, particularly smaller ones, did not understand BS 5750 very well. However, they did understand that their customers were increasingly demanding it. Under these circumstances, a ‘consultant’ who promised to give them a certificate stating that they met the needs of BS 5750 for only a few hundred pounds was a godsend. However, BS 5750 describes a management system, not simply a certificate. The system must be properly documented and records maintained. In order to work, it has to be tailored to each individual business and in order to be recognized by the outside world it has to be certificated by an independent body with the necessary accreditation.

60

PURCHASING SCAMS

The swarm of ‘scam consultants’ that emerged at the height of BS 5750’s popularity did not take the trouble to explain this. They found gullible, naive companies and guaranteed that they would be issued with a BS 5750 certificate. So they were, but not by an officially accredited, independent certification body. Independent third-party assessors certifying that a company’s quality system meets ISO 9000 (the successor to BS 5750) in the UK are recognized by the United Kingdom Accreditation Service. If the organization offering you an ISO 9000 ‘registration’ is nonaccredited, beware – your customers are very likely to check out who your certification body is and if they are not amongst the accredited ‘club’, your certificate could well be viewed as worthless.

Grant consultants The grant consultancy scam works by offering the promise to small businesses that the consultant will prepare and present their case for grants to European grant-giving bodies. How many of us understand the roles of the various directorates of the European Commission, or the rules of local authorities, enterprise zones and development bodies for giving grants? Most small businesses have no idea what the procedures are for obtaining such grants but they have a vague notion that millions of pounds are up for grabs. When a ‘consultant’ comes along and offers, for a fee of around £300, to help a company to obtain a grant, many such businesses are easily swayed. When the offer comes with a promise that if no grant is obtained, a full refund of the fee will be paid, the chance of the victim succumbing increases. These promises are always verbal, by the way, never written into the contract. After the fee is paid, the scam victim is likely to receive either a list of agencies which pay out grants (the victims are invited to apply for themselves) or nothing. There is actually very little to choose between the alternatives of getting a list or not getting one because the chances of the list being of any use to the victim are remote. The listed agencies have very specific criteria about type of industry (usually manufacturing), purpose of grant (usually job creation) and so on. Often, the list of agencies includes bodies that do not pay grants to individual companies but oversee and coordinate grant giving through other routes such as government organizations. The scam victims are typically small businesses (hairdressers, motor repairers, florists, photographic studios, post offices, floor contractors and so on). The grants offered by bodies such as the European Social Fund, European Regional Development Funds and the Support Programme for Employment Creation, which are typically listed by the scam grant consultant, have no relevance to this type of business. Scam grant consultants, like other scam merchants, are usually very careful to try to maintain their position on the ‘legal’ side of the scam/fraud dividing line. Interestingly, however, there was a recent court case brought by the Trading Standards Section of a local authority as a result of which one of the scam merchants was convicted and sentenced to 18 months’ imprisonment. His ‘consultancy’ operated a classic version of the grant scam and over a six-month period obtained at least £200 000 from around 650 businesses. As I said earlier, these people generally try to operate just on the legal side of the scam/fraud dividing line and this particular scam merchant must have had some hopes

BOGUS CONSULTANTS

61

that his ‘not guilty’ plea would work. As it happens, the ‘brains’ of the organization and one of his salesmen were both tried for conspiracy to defraud. The salesman was found not guilty but his boss was convicted. This raises a question in my mind that I find puzzling: if the salesman was not guilty, who exactly was ‘brains’ conspiring with?

Rating scams Just as very few people understand how grants from the European Commission are allocated, so there is a tiny group of individuals who understand how local authorities calculate the level of business rates that companies must pay. They are actually calculated based on the yearly rent at which a property might reasonably have been let if it had been on the market on 1 April 1993, but revaluations are carried out on all non-domestic property in England and Wales every five years. This sort of area of ignorance is the ideal playground for scam merchants so in recent years there has been a boom in the number of organizations offering their services to obtain business rate reductions on behalf of traders. Because the rating revaluation takes place every five years, these advisory services tend to emerge in cyclical peaks, although they could strike at any time. Proposed changes to the system under which companies will have only a six-month ‘window’ in which to appeal instead of the open-ended arrangement as now, will increase the likelihood of these scam merchants blitzing businesses over a short period. The scam usually starts with a phone call from a salesman obviously working to a script, who claims that their organization has been successful in obtaining rates reductions for a number of businesses similar to the victim’s. Large percentage reductions may be quoted by way of example, but in practice substantial errors in ratings assessments are rare. Typically, for a non-returnable advance fee of around £300 (where have we heard that before?), traders are offered assistance in placing an appeal with the local rating authority. A ‘surveyor’ visits the trader’s premises and, after measuring up, promises that an appeal will be lodged. The real role of the ‘surveyor’ is to get a signature on the contract, part of which will read something like the following paragraph: I authorize you to act on my behalf in the matter of appeal against the rateable value of the above premises for the period April 1995 to April 2000. I understand that no fee is payable for this service except in the event that you lodge an appeal which is subsequently acknowledged by the Valuation Office whereupon I agree to pay an administration charge of £250 + VAT. I further understand that no other payment will become due except in the event of a rebate of rateable value of the above premises whereupon I agree to pay a final one-off payment of 25 per cent + VAT of that rebate. At this point, one of two things will happen. The true scam merchant will lodge an appeal using a standard form and thus fulfil their part of the contract that the trader signed. Thus, whilst the appeal will be pretty useless and highly unlikely to be successful (there is a big difference between having an appeal accepted and having it succeed), the scam merchant could well be, legally speaking, ‘in the right’ and due their fee. It can take months or even years before the Valuation Officer transfers the appeal to a valuation tribunal; the scam merchant will have demanded their money well before then. The

62

PURCHASING SCAMS

trader may recall ‘guarantees’ of rate reductions but these will invariably be verbal and not part of the written contract. With any appeals process, victory is never certain. Alternatively, the ‘consultants’ may not even bother to make an appeal if they can persuade you to part with your money before seeing the acknowledgement from the Valuation Office, but by the time the victim tries to complain, they will in all probability have ceased trading and cannot be traced. The people running these rating ‘consultancies’ are inevitably highly able and convincing persuaders. They are so good at what they do that it is not unknown for salespeople working on their behalf to believe that they are part of a legitimate business. It is also not unknown for these salespeople to be left with a bouncing pay cheque when their employer rapidly winds up the business. In many cases you would be better off being scammed by someone that disappeared before they had lodged an appeal than you would be if you were fleeced by one of the scam merchants that actually did appeal on your behalf. In a recent report from a large Trading Standards Office, it was stated that, despite very many appeals applications being lodged by these people, not a single trader had had their rates reduced. However, several have had their rates increased as a result of the information provided to the rating authorities. The obvious alternative to using a bogus rating consultant is for the company to lodge their own appeal, which is free of charge and involves simply completing a form obtainable from the local Valuation Office. Around 45 per cent of property assessments are appealed. If your appeal is unsuccessful, but you think you have a valid case, you can take it to a tribunal, but at this point it is sometimes wise to involve specialist help. This help, however, should come from a legitimate professional (such as someone recommended by the Royal Institute of Chartered Surveyors) and not from a cold-call salesman. Rating appeals are most likely to succeed if the market valuation of the property has been reduced by a new development nearby or by changes to the fabric of the building.

Energy consultants The deregulation of the energy market has been good news for the consumer, both business and domestic, as the introduction of competition has led to a general fall in prices. The purchase of energy is, however, potentially complicated, with alternative tariffs available and various disconnected rates applicable depending on such factors as interruptability of supply, level of peak demands and seasonality of use. This complexity creates a group of confused customers who are an ideal market for the scam merchants. Some of the major utility companies were not above something of a scam themselves. For example, some customers were offered tariffs for an ‘18-month contract’. The cost per unit of these contracts looked very attractive when compared to the energy costs that businesses had previously incurred, but many customers failed to notice the timing of these 18-month contracts. By starting in the spring, the 18-month contract contained two spring/summer periods but only one autumn/winter. Energy costs are lower in the spring and summer because demand is lower. Thus the average prices offered in the 18-month contract were not as generous as they on first sight appeared and a significant increase in costs was inevitable when the contract was due for renewal. A more typical scam merchant though is the individual or company operating as the ‘energy consultant’. At this point I should probably make it clear that there are a number

BOGUS CONSULTANTS

63

of respectable, legitimate, experienced consultants in this field and the use of such consultants can be very sensible for commodities such as utilities which are high cost and an area of specialist expertise. The respectable, legitimate ones will tend to charge on a fee basis whereas the more questionable practices tend to come from ‘consultants’ who offer to share ‘savings’. To a hard-pressed finance director, someone who comes along with the promise of lower bills and no charges other than a share of the savings must seem too good to be true. Well, they might be. The calculation of savings in purchasing has always been fraught with difficulty. For example, if the price you pay for something goes up by 5 per cent over a year but the prevailing inflation rate is 10 per cent, have you made a saving? What about if you buy a year’s worth of stock in one go to secure a 5 per cent discount – is that still a saving when stockholding, financing and insurance costs and so on are taken into account? The savings claims of these people are much more straightforward – next year’s bills will be less than this year’s and they will get half the difference. They will claim to achieve savings by switching tariffs or suppliers and they may well achieve benefits. But what if they do nothing and your bills go down just because the cost of the utility has gone down or they go down because you have vacated a building? Under these circumstances your ‘energy consultants’ would be due to half the savings and, if you study the contract, you could well find that not only are they due that figure for this year, but for each of the next five years as well. One of the features of the savings sharing agreement drawn up by these ‘consultants’ is likely to be a lengthy cancellation period. So unless you review your contract with them at just the right time, you are likely to be stuck with them for yet another year. One other feature that they might not tell you about is that they may have a ‘commission’ arrangement with one or more of the suppliers. Under such circumstances, the selected supplier may be the one offering the highest level of commission to the consultant rather than the one providing best value for money to the client.

Beyond scams It is worth noting that, in addition to scams, consultancy is sometimes the source of real frauds. The reason for this is the combination of consultancy being a relatively expensive commodity (by charging only a few hundred pounds, the scam merchants described above give themselves away immediately as not being genuine consultants) and being difficult to certify. In other words, the person commissioning the consultancy project is often the same person who monitors the performance of the consultants and verifies that their invoice should be paid. This is clearly a failure in the purchasing principle of separation of duties but it does happen even in the biggest and most respectable organizations. For example, there was a recent incident in a leading bank in which the marketing director supposedly commissioned research projects by consultants. The invoices arrived, were certified by the marketing director and paid. Unfortunately, however, no one had done any research and the invoices came from bogus companies set up by the marketing director’s friends and relatives. This example is well on the ‘fraud’ side of the scam/fraud dividing line and the marketing director was imprisoned. It serves as a useful reminder, though, of the need for separation of duties and also suggests that where large sums of money are involved, a professional purchasing input,

64

PURCHASING SCAMS

particularly at the stages of developing the specification and of selecting the supplier, can be of great benefit.

How to avoid consultancy scams ●

Ask the consultants which professional bodies they are members of and check them out. ● Ask for references from satisfied clients. ● If they are offering quality system (ISO 9000) consultancy, ask if they are an accredited body. ● If you think your business rates are too high, speak to the rates section of your local council. You are entitled to inspect the rating list for properties in your area to see how you compare with your neighbours. If you decide to appeal and need help, consult a reputable independent rating adviser (not a door-to-door salesman or cold-call telesales person). Members of the Royal Institution of Chartered Surveyors (RICS), the Incorporated Society of Valuers and Auctioneers (ISVA) and the Institute of Revenues, Rating and Valuation (IRRV) are regulated by rules of professional conduct. ● If you need information on eligibility for grants, ask your local Chamber of Commerce.

CHAPTER SEVEN

CHARITY SCAMS The scams described so far may strike you as mildly amusing in some cases; even as someone with a strong dislike of scams, I can see that many of them do have a comical aspect. The scams covered in this chapter are not really funny at all. For whilst they may operate in some instances in a similar way to the scams described previously, they have the added dimension of involving charities and as such they either take money directly from worthy causes or vacuum up for the scam merchants money which might otherwise have gone to charity. One of the common features of most of the scams described in this book is that the scam merchant utilizes the greed of the victim. In the case of charity scams, it is the victim’s trust and generosity that is exploited. Some of the scams described in this chapter target charities; most use supposedly charitable causes to extract money from commercial businesses. It would be naive to think that people would not sink to scamming a charity. The very nature of the operating environment of charities and of the low level of control exerted by many companies over the way in which money is donated to charitable causes means that there is scope for the scam merchant to exploit the situation. Below are some of the ways that they do it.

Advanced fee fraud One of the scams directed specifically at charities is a variant of the advance fee fraud that we saw as the 419 frauds in Chapter 5. The mechanism of the scam is as follows. The charity receives a letter, usually from a foreign country, stating that the charity has been left a sum of money in someone’s will. Before the money can be passed on, various local taxes, commissions and charges have to be paid. If the charity pays for all these services, the bequest will soon be on its way – or so it is claimed. Obviously, if the charity pays up, they never hear any more about the bequest, although they may well get further requests for more payments (‘reloading’ as it is known in the scam business) until such time as they realize the bequest is a myth. An example of this style of scam was the British charity that received a letter from a ‘Nigerian law firm’ saying that one of their clients had bequested £150 000. They even enclosed a cheque, but explained that this cheque could only be cashed after the law firm had received £6000 for ‘death duties’. The charity was sensible enough to contact their bank before they sent off any money. The bank told them that the sort code on the cheque was not valid. Small charities are the most likely target for this scam because the bigger ones are more commercially aware and will have come across examples of this sort of practice previously.

Requests for donations This is clearly not really a purchasing scam because nothing is promised in return for

66

PURCHASING SCAMS

your money. Obviously legitimate charities make requests to businesses for donations and if the business chooses to donate and all their stakeholders are comfortable with the nature of the charity supported such redirection of funds is fine. However, some of the requests for funds come from highly questionable ‘charities’. Even in relation to the proportion of such requests that come from organizations that I would immediately assume to be operating a scam, I have seen correspondence from small businesses clearly confused about whether they should donate or not. Some of the more obviously bogus requests come from Nigeria. These requests tell a sob story usually involving war, the slaughter of unarmed rebels and poor underfed babies. Such things do of course exist, but it is highly unlikely that you will help alleviate any of the problems by sending money to the issuers of any of the begging letters that I have seen. These letters play very heavily on the Christian goodness of their targets. Phrases such as ‘a true son of God’, ‘we are beckoning on you [sic] to help us, God and the widows’, ‘We have to do it for God and humanity’, ‘God will never let you go without abundant blessings’, ‘blessed is he who help the poor for he shall receive blessing’, ‘may God almighty bless and reward you abundantly as you assist us’ are sprinkled liberally throughout. Interestingly, whilst most of this type of letter comes from Nigeria, they want you to pay your donation into bank accounts in New York, Japan or ‘any little amount through the Western Union Money Transfer’. The requests often arrive carrying letterheads in the name of the ‘charity’. The footers of the letterheads may well list the Trustees, usually something along the lines of Rev Mrs . . ., Rev Father . . ., Dr Mrs . . ., Mrs Rev . . . . Nigeria is of course not the only source of questionable requests for charitable help. One of the appeals that could come from anywhere is the request for money to buy tickets for the circus. These tickets will be given to underprivileged children and the money from the ticket sale will also be donated to charity. This is great, if it is genuine. Have you ever bought such tickets and then watched as all the underprivileged children trooped into the big top? Or checked with the charity to see how much money they received? If you want to give money to charity, why not just write out a cheque directly to them with their name on it and cut out any possible middle man or woman?

Phoney advertising When the switchboard of a company is asked, ‘who is responsible for charitable donations’ the next step may not necessarily be an outright request for money from the appropriate person. Instead, that individual may be targeted with a telephone sales pitch for advertising space, or alternatively their name may simply be quoted on a proforma invoice for an advertisement. (Go back to Chapter 4 if you’ve forgotten what a proforma invoice is, because it is used in various scams in an attempt to keep the scam merchant just inside the law.) Charities often feature in the sales pitches of phoney advertising salespeople. Scores of printers operate in this area of activity and it has been estimated that they cheat UK companies out of more than £30 million per year. Their style is often to make the transaction seem routine – ‘would you like to renew the advertisement from last year?’ in some

CHARITY SCAMS

67

sort of magazine, yearbook or calendar. The charity angle is introduced to manipulate the victim’s emotions or create embarrassment, so as a result sick children are highly likely to figure. Another favourite is the emergency services (including police benevolent funds) and hospitals. If you express concern at the price, chances are that it will be reduced – these salespeople are very flexible. How much of the money you pay do you think actually gets to the charity and how much is retained by the salesperson or printer? Why not ask? Or even better, ask for some evidence. If you do ask, do not be too surprised if you don’t get a straight answer – they know that you don’t want to hear that most of the money goes to the fundraisers rather than the charity. We received correspondence from a printer concerning a charity’s ‘Summer Fun Book’ (no, I don’t know what a summer fun book is either). The key document was headed ‘P/F Invoice’ but underneath it said ‘please note this is a 14 day invoice’ (they clearly want their money as quickly as possible before anyone gets time to think about it and change their mind). After checking out the situation, I found that a colleague had agreed over the phone to place an advertisement in this publication. The document was therefore not a proforma invoice as indicated but legally speaking an actual invoice demanding payment for a verbal order. Some people might think that I was a bit mean to cancel the order but the proposed purchase really was a very inefficient way of spending the company’s money. If the objective of the expenditure was to advertise our services, the advertisement was pretty ineffective because it did not carry any mention of what we do. If the intention was to give money to the charity, we had introduced the inefficiency of having to pay for and distribute a ‘fun book’, even if the printer were to take only a fair reward for their efforts. The small-print terms and conditions on the back of the invoice suggest that the supplier might have been one of those that try to take more than a fair reward for their efforts. The last of these conditions said ‘the advertiser understands that the order is being placed with the publisher who is contracted to the charity or organization specified overleaf to publish the publication specified overleaf.’ This is a very important point to note – your contract is with the publisher, not the charity. They may well have a contract with the charity but their contract may say that the charity gets £1/advert, or 5 per cent, or a flat fee of £50/month – you don’t know. Another condition states ‘The publisher reserves the right in the unlikely event of the failure of any publication for whatever reason, to place the advertiser’s advertisement in another publication. In this event, the publisher is not liable for any compensation or refund of monies paid to the advertiser.’ So having chosen to place your advertisement in the publication (apparently) of one charity, you may find yourself supporting an entirely different (possibly opposite) cause. If you think that is unfair and unreasonable, how about the paragraphs relating to correspondence between the advertiser and the publisher. ‘Any notices sent by the publisher to the advertiser in writing shall be sent by first class post and the advertiser shall be deemed to have received the said notices on the next working day following the date of postage’, compared with ‘The advertiser may cancel this contract within seven days of receipt of this confirmation of order by writing to the publisher. Such written notification of cancellation must be sent either by recorded delivery or registered post.’ I did check out the named charity. They are genuine and they do receive a few hundred pounds from the printer. They even sent me a diary. It was poorly produced and the print was coming off the garish blue plastic cover. It carried around 150 advertisements from locations as diverse as Aberdeen, Devon and Ireland. The advertisers

68

PURCHASING SCAMS

were recruitment agencies, psychologists, livestock hauliers, motor repairers, stamp dealers, sandwich shops, tree surgeons and even schools amongst others. These people will not win significant extra business from this advertising and as a means of charitable giving it is woefully inefficient. There is a saying in business that 50 per cent of all advertising is wasted; the problem arises in knowing which 50 per cent. I am pretty certain that I have found some of it. I also checked out the printing company that would have received the money. They were recently established, had an issued share capital of £1 and filed only abbreviated accounts at Companies House. These accounts showed a deficiency well in excess of the company’s assets. Any purchasing professional would steer well clear of a supplier with this sort of financial standing. Yet the people paying for the ‘charity’ advertising send off their money in advance with no real understanding of exactly what they are buying, little or no knowledge of the activities of the charity that they are supporting and no guarantee that they will get anything at all for their money. The demise of the sort of printing company that produces these publications followed shortly afterwards by the emergence of a ‘phoenix’ business acting in the same way would not be a surprise.

Is it a big deal? The value of the charity scam industry is difficult to quantify but the total level of charitable donations in the US alone is some $140 billion each year. Estimates put the level of fraudulent fundraising at over $1 billion of this, although much of this relates to consumer scams rather than business scams.

Who can help? The Charity Commission has powers of investigation where misconduct and wrongful use of charity money is suspected. They can investigate any registered charity in England and Wales and take action to put matters right if abuse or mismanagement is identified. Obviously, this is of little help if you are the victim of a scam merchant who only claims to represent a registered charity, although the Charity Commission can confirm if such a charity actually exists. The Commission investigates all complaints but gives priority to the most serious cases. Thus, minor complaints will not be investigated fully if the cost of any investigation far outweighs any loss to the charity. Scam merchants operating in this area of activity will tend to try and take small amounts of money from large numbers of organizations.

How to avoid charity scams ●

●

If you want to buy products or services from companies that promise that part of their turnover or profit will be donated to charity, ask yourself whether the purchase still represents value for money and whether the proportion going to charity is sufficient to/should influence your choice of supplier. Have a policy in relation to charitable giving. This should cover the level of funds available, who is empowered to make decisions and how the beneficiaries are to be

CHARITY SCAMS

● ●

● ● ● ● ●

●

●

●

● ●

69

selected (for example, specific aims and objectives, geographic area of activity and so on). If a charity spends more than say, 10–15 per cent of its turnover on fundraising, ask yourself if there is not a better way to support the cause to which you are sympathetic. If you are going to place an advertisement in a charitable publication, ask the same sort of questions that you would about any other paid advertisement, for example, how many copies will be printed? Who receives copies? Does the publication cost anything? And most important – will this publication be distributed to the level and types of people that your company’s advertising is targeted at? If making a cheque donation, only make cheques payable to the charity itself. Always ask for a receipt for any financial donation to charity. If you are asked to buy tickets for a charitable event, ask what proportion of the ticket price the charity will receive. Ask if the organization being supported is a registered charity and check that a registration number is shown on their literature (some charities do not have to register). If you are in any doubt as to the status of a charity soliciting donations, check with the Charity Commission (UK) or the Philanthropic Advisory Service of the Better Business Bureau (US). If you are dealing with a company that claims to donate a proportion of their sales or profits to charity, ensure that they are legitimate, sound, reputable and reliable. Ask what proportion of the money that they get will actually reach the charity and ask yourself if this is reasonable. Don’t be fooled by the name game. Any scam merchant operating in this area is likely to give themselves an impressive sounding name and/or one similar to a well-known organization. Take particular care in the run-up to Christmas time. The scam merchants know that people are even more ready to give to charity in the season of goodwill to all men. Also, businesses that have had a profitable year may be more amenable to requests for money at this time. Do not imagine for a moment that there are not people out there who would exploit natural disasters such as earthquakes, floods and famines to scam money out of you. Be wary of any supplier that seems over-anxious to be paid more quickly than normal commercial practice. Even if they are not scam merchants, they could be suffering financial difficulties and are likely to be an unreliable source.

CHAPTER EIGHT

BORDERLINE SCAMS All the scams described so far are the work of rogues (or in some instances crooks). The examples in this chapter all fit my definition of a scam but some of the perpetrators may well not recognize what they do as scams. They may think of it as creative marketing or innovative service delivery. They may well think that they are legitimate business people. You can make your own decision on whether these practices qualify as scams or not.

Junk faxes When you arrive at your office each morning and find in the fax machine several faxes trying to sell you computers or cars or airline tickets, you may regard these as junk faxes (similar to the junk mail that we all receive at home – how many credit cards do they think I want?). Personally, I have always taken a fairly relaxed view of marketeers promoting a genuine product or service through this or any other medium. The junk faxes that I really object to (because I consider them to be a scam) are the ‘faxback’ ones, where in order to get what is on offer you have to request its delivery via a premium-rate fax transmission. The people pushing junk faxes often vehemently protest that theirs is a legitimate business providing a value for money product/service. What they do is fax out to companies (thousands at a time) offers for factsheets on such topics as diets, building societies likely to provide windfalls for their members, cheap flights, tickets for TV shows, ‘wonder pills’ and any other topic that they think the secretary or junior clerk dealing with faxes might be interested in. If the recipient of the fax responds, they get a factsheet in return via a premium phone line charged at £1/minute. This fact is always (well usually anyway) admitted to (in small print) in order to keep the promoters within the law and the telecommunications regulations. These faxes take typically nine minutes to transmit; thus the factsheet potentially costs the employer of the recipient £9. Even if the factsheets are useful (many people would consider them to be rubbish and/or information in the public domain readily obtainable from other sources), there remains the moral problem that the person deriving any benefit from them is the secretary/clerk whereas the person paying for them is the employer/shareholder. An example of one of the offerings is a ridiculously named diet – ‘a version of the world famous cabbage soup diet’. The promoters of this useful business tool claim ‘over 170 000 people have asked us for this diet so far’. At £9 per time, that would provide a yield of over £1.5 million (although to be fair, the scheme operators only get a proportion of this, the rest going to the telephone operating company). This would be sufficient to pay an expert team of nutritionists for several months to research the subject matter and still yield an obscene level of profit. And how exactly is that purchase meant to benefit the company that is paying for it? One of the other ploys that these people use to get the premium-rate fax lines buzzing is the opinion poll. These latch on to issues of the day then invite hundreds of thousands

BORDERLINE SCAMS

71

of fax users to vote on such issues as ‘Is the royal family an asset to our country’. We are promised that the votes will be passed on to Tony Blair, William Hague, the Queen’s Private Secretary, the Speaker of the House of Lords and the Lord Chancellor. I hope these people are quicker at consigning rubbish from the junk faxers to the bin than the naive people that actually respond to them. Another fax from a ‘research’ company wanted your opinion on ‘sex in the office’ inviting you to tick a box to indicate: (a) I’d never sleep around, in the office or anywhere else for that matter; (b) Who’d find out? And it’d be fun anyway; (c) I’ve been caught out already, and so on. By now presumably it is clear that this piece of research is somewhat flawed in its sampling method. As a business though, the research company is probably on sound lines since they not only take £1/minute from anyone that faxes the form back but also from people using their ‘interactive voice response system’ to which calls ‘can last 2 minutes or more’. Another frequently encountered way of attracting a response is the competition. These competitions offer a weekend in Paris, a cruise or something equally desirable as a prize (they offered a Furby toy when these were in short supply just before Christmas a few years ago). In order to win the prize, the person with access to a fax machine has to answer a ridiculously simple question (for example, what is the capital of France, (a) Paris, (b) London, (c) Helsinki?, or who is Cherie Blair married to, (a) Tony Blair, (b) William Blair, (c) Ken Blair?) and fax off their response to the premium-rate number. As an added twist, it has been known for the organizers of these competitions to limit the number of entries to eight per person. At an average cost of £4.50, this means the unfortunate employer paying £36.00 every time one of their staff is tempted by one of these competitions. The competition entry form may carry words along the lines ‘only the full page fax can be accepted as an entry.’ The reason for this is that the length of a fax transmission depends on the amount of ‘blackness’ on the page. It is therefore no surprise that the competition faxes have lots of words, bold text and pictures to make sure that they take a long time to be transmitted. Another recent variant was ‘Send us this fax and we’ll send you a £100 holiday voucher.’ The fax had a helpful picture of the sun, palm trees and a deck chair, obviously intended to have the dual effect of inspiring the respondents and increasing the duration of the fax (at £1/minute). I am fairly certain that anyone returning this fax will get a voucher entitling them to a discount on holidays, but the holidays will have to be booked through a particular agent whose commission will inevitably exceed the value of the voucher. The holidaymaker would probably be better off booking elsewhere. Their employers would definitely be better off if their staff did not abuse the fax facility in this way. Junk faxes have been a problem to business for a long time, reaching their peak when the people sending them out started using automatic dialling machines which rang thousands of random numbers and sent faxes to all those that responded with a fax tone. Legislation was introduced to curtail this practice, not because it allowed a parasitic industry to thrive at the expense of legitimate businesses, but because some of the faxes were sent to private individuals. The fax pushers then had to rely on lists of fax numbers that they had built up or purchased in order to keep flooding businesses with their offerings. However, the legislation passed in May 1999 gives business a way out of receiving any more of these things. The Telecommunications (Data Protection and Privacy) (Direct Marketing) Regulations

72

PURCHASING SCAMS

enact the EU Directive on Telecomms Data Protection. This legislation includes ‘a general prohibition on the use of automated calling systems without human intervention for direct marketing purpose except where the caller subscriber has previously given consent’ and ‘where companies use publicly available information such as subscriber information contained in directories, they will still be able to send unsolicited communication, but individual and corporate subscribers can opt out of receiving such faxes.’ One response by some junk faxers to this legislation was to give their victims and potential victims a chance to ‘opt out’ of their lists. In order to do this they invited recipients to send them their details . . . via a premium-rate fax number. It is now against the law in the UK to send unsolicited faxes to individuals, including sole traders. It is also unlawful to send them to businesses that have registered with the Fax Preference Service. These regulations are enforced by the Data Protection Registrar. HOW TO AVOID WASTING MONEY ON JUNK FAXES One of the key ways to avoid wasting your money on these things, as with other things, is to scrutinize your invoices. How many people fail to scrutinize telephone bills? Get itemized bills and check for premium-rate calls. If these have not been made in line with company policy (you have got a policy haven’t you?), find out who is responsible and take the appropriate action (which in the first instance is probably awareness training). Based on recent faxes we have received, anyone using these ‘services’ really has no excuse since the words ‘you must have the permission of the phone bill payer if entering by fax’ have started to appear in the (very) small print. Registration with the Fax Preference Service (0845 070 0702) is free and should stop unwanted faxes. Companies ignoring the Telecommunications (Data Protection and Privacy) Regulations 1998 legislation face fines of up to £5000. If you continue to have problems with unsolicited faxes, in the UK you can advise OFTEL, the regulator for the telecommunications industry. You can also complain to ICSTIS, the Independent Committee for the Supervision of Standards of Telephone Information Services, a voluntary body set up by the telephone industry to provide self-regulation and encourage operators and service providers of premium-rate services (PRS) to operate within agreed codes of practice. In theory, telecommunications operators should withdraw services from companies using premium lines (fax or phone) if their offering is misleading, potentially illegal or exploitative. The telecommunications operators are in the invidious position of using their billing systems to collect the money for these faxes (and phone calls, see below) and retaining a significant share of the cost of the call. THE AMERICAN SOLUTION TO JUNK FAXES The problem of junk faxes should be less prevalent in the United States. The reason for this is that within their laws is US Code Title 47, Section 227(b)(1)(C) which states ‘it shall be unlawful for any person within the United States to use any telephone facsimile machine, computer, or other device to send an unsolicited advertisement to a telephone facsimile machine.’ Interestingly, ‘a telephone facsimile machine’ is defined (Section 227(a)(2)(B)) as ‘Equipment which has the capacity to transcribe text or images (or both) from an electronic signal received over a regular telephone line onto paper’. Based on this definition, junk faxes are out, advertising on the Internet begins to look a bit questionable and e-mails used for promotional purposes could also be illegal.

BORDERLINE SCAMS

73

Premium-rate phone lines In order to achieve financial success, the broadcasters of junk faxes rely on the fact that their victims have to pay premium rates for the telephone line time that they occupy. These premium rates are shared between the creator of the junk fax and the telephone company providing the service. The same device of premium-rate phone lines can be used to make money from voice traffic. There are legitimate premium phone lines offering information and entertainment services such as sports scores, weather forecasts, stock market data and so on, but there are others which offer far less or cost much more than expected – and these by my definition are scams. In the UK, this sort of phone scam is often targeted at the individual consumer, frequently inviting the lucky winner (victim) to call for details of the prize that they have won (where have we heard this idea before?). The potential prizes are usually listed and will typically include a luxury car (BMWs are the favourite), video cassette recorders, TVs, stereos, video cameras and mobile phones. To find out which you have won, it is necessary to ring a premium phone line for nine minutes or so at £1 per minute. Or alternatively, you could read the small print, which explains that the overwhelming majority of prizes are mobile phones, each of which is subject to a year-long airtime contract for which you must pay £17/month. The people who don’t read the small print or naively think that they are going to win a real prize will add £9 to their phone bill or, more likely, their employer’s phone bill if they ring whilst at work. What a pity that they do not ask themselves the simple questions ‘why?’ and ‘how?’: Why should a company that I have never heard of want to give me something for nothing? How can they afford to do it? According to the ICSTIS code of practice, promotional material relating to premium-rate calls must make the cost per minute clear, which it usually does if you read the small print. They also say that any competition which may cost more than £5 must enable the caller to confirm that they wish to continue after each £2.50. This may be a less difficult decision for some people if they are using the company phone. The Control of Misleading Advertisements Regulations 1988 requires that promotional material must not be misleading. For example, the advertisement must not misrepresent the value of prizes, the chances of winning them or the cost of entering the scheme. Hence all this information is given in the small print but clearly a proportion of recipients don’t bother to read it or don’t understand it. In the US, businesses have been sent e-mailed ‘invoices’ for goods that they have no recollection of ordering, warning that their credit cards are about to be debited. Typically, these would be along the following lines ‘I am writing to you to give you a final 24 hours to settle your outstanding account. If I do not receive settlement in full, I will commence legal proceedings without further delay. If you would like to discuss this matter to avoid court action, call ***** **** on **** **** ****.’ These ‘invoices’ helpfully carry telephone numbers for queries but they do not make clear the fact that these numbers relate to premium-rate lines overseas. These premium-rate lines may be sex lines and when the caller hears the message, they often assume that they have mis-dialled and dial again, thus doubling the scam merchants’ yield. Alternatively, they may be answered by someone speaking broken English, pretending not to understand you, but in reality doing all they can to extend the length of the call. These premium phone lines are often based outside the US but in countries with

74

PURCHASING SCAMS

dialling codes that create a number of similar length to a national number. The victims thus don’t even realize that they are making an international call, certainly not one at premium rates. American businesses also sometimes suffer inflated phone bills through a process known as ‘cramming’. This technique ‘crams’ extra charges on your phone bill for services such as paging, voicemail and so on. These additional charges are ‘authorized’ by unguarded comments in telephone conversations or by returning apparently unrelated coupons. Because the amounts involved are small and because they are included within a legitimate telephone bill, they can go unnoticed for some time. Website hosting services can also be charged to phone bills, often long after the ‘trial period’ that the customer thought they were agreeing to is over.

Misleading personalized advertising It is now several years since the people that send us all printed marketing material discovered the value of personalization: ‘ Yes, you Mr Smith of 22 Acacia Avenue could be the winner of our £100 000 prize’ is the sort of thing most of us get through our personal mailboxes on a fairly regular basis. Marketing mail sent to our businesses is less frequently personalized to such an extent (what would you do with £100 000 Mr Smith?). Recently, however, there has emerged a new variant which I believe is designed to deceive the recipient and therefore could be viewed as a scam (although its perpetrators may well not regard it even as sharp practice). The wheeze works like this. An envelope arrives in the post containing a piece of paper that looks like it is torn from a magazine; attached to the paper is a post-it note with a hand written note along the lines “Tony, try this, it’s really good’ or ‘Tony, try this it works’. These are signed by ‘J’ or ‘T’ or ‘John’. The paper makes its way through the company’s internal mail system and ends up in the target’s in-tray where the chances are the recipient will know a ‘J’ or a ‘T’ or a ‘John’ and will assume that this is a piece of internal correspondence. If the recipient respects the views of ‘J’, ‘T’, or ‘John’ he or she may then complete the order form at the end of what is apparently a magazine article and thereby purchase a year’s subscription to a newsletter or magazine or a book. Curiously, whichever one of these you respond to, it will always cost you $297 (the users of this technique were initially invariably American). ‘J’, ‘T’ or ‘John’ always helpfully apparently marks the address to send your money to and adds a big tick in the margin so that you can’t miss it. This technique has recently been copied by some UK companies, including one advertising reports on ‘Marketing Secrets’. Who would guess that one of these ‘marketing secrets’ is to stick a post-it note on your mailshots saying ‘ Tony, this is really good – try it, J’?

Overpriced warranties and other whole-life costing issues In the UK, there is a government department called the Office of Fair Trading. Now what would you imagine they concern themselves with? If your answer was ‘fair trading’, in my view you would be wrong. The reason for this curious anomaly is that the Office of Fair Trading concerns itself with consumers and seems to take the view that businesses (even small businesses) don’t need its protection from suppliers that do not trade fairly.

BORDERLINE SCAMS

75

One occasion when it seemed to stray from its ‘consumer’ remit was when it investigated the market for photocopiers and, in fairness, this led to major improvements in what had previously been a minefield for the unwary buyer of office equipment. Another investigation that they carried out concerned warranties on domestic appliances, and I have come across businesses that thought they were doing the right thing by taking out an extended warranty on domestic appliances used on their business premises. The reason buyers get it wrong with both photocopiers and extended warranties is that they fail to appreciate whole-life costing issues associated with the purchase. Instead, they focus on eye-catching ‘headline’ cost which the unscrupulous salesperson (and I am not saying that they are all like that) can manipulate to their advantage. PHOTOCOPIERS If we take photocopiers as an example, the Office of Fair Trading referred to the ‘misplaced ingenuity’ of some dealers and leasing companies. Practices have included cost per copy charges based on an average expected usage which result in a fixed charge being levied if the usage is at or below the anticipated usage level but additional charges if the volume is higher than projected. Thus, the user will pay the agreed cost per copy only if they exactly hit the projected usage each charging period. Photocopier contracts are invariably let on the basis of the supplier’s terms and conditions (software is another industry where this practice is the norm). Supplier’s terms and conditions will inevitably be written to suit the supplier whereas the buyer’s terms and conditions may well have a spin that suits the purchaser. Photocopier contracts have often featured clauses that seriously disadvantage the buyer. For example, annual price increases of several per cent above the inflation rate (as measured by the retail price index – RPI) are often imposed over several years. If the price was reasonable at the outset, it must be inflated by the end of the contract. I often see buyers agreeing to ‘RPI+’ contracts for all sorts of goods and services. How can this make sense? I do not understand why prices for business purchases should be linked to RPI at all, given that this measures price changes in a ‘shopping basket’ of goods and services for domestic use, the make-up of which bears no relation to any business need. Also, what kind of supplier is planning to increase their costs over each of the next few years? Should you not be working with suppliers who have a continuous improvement approach which should take costs out of the supply chain year on year? The duration of photocopier contracts (particularly lease contracts) has also frequently been a problem for buyers. If someone takes out a long lease (say seven or nine years) for a photocopier that is effectively worn out after five years, there is a problem. The buyer is usually offered the choice of paying off the remaining period of the lease and getting nothing in return or taking out a new lease (of seven or nine years). Why did they take out such a long lease in the first place? Well it makes the monthly payments less and the buyer has never heard of whole-life costing. Also the cost per copy can be appealingly low at the outset of long-lease agreements, but this does not last long when annual price escalation clauses are applied. EXTENDED WARRANTIES A few years ago, if you bought a new car it would come with a 12-month or 10 000-mile warranty – whichever came first. You were on your own after that. As the result of improvements in quality management, car manufacturers now tend to offer warranties of

76

PURCHASING SCAMS

three years or five years, often with no limit on mileage. They can afford to do this because they know the level of failure of each component over each year of its life. If instead of buying a car, you buy a new washing machine or TV or fridge/freezer, the chances are that you will still only get a one or two-year warranty. Have the components that go into these items not improved in reliability in the same way that car components have? Of course they have and the retailers who sell them by the thousand know precisely by how much they have improved and how reliable the appliances now are. But they don’t give you a longer warranty, they offer to sell you one. Electrical retailers have been increasingly keen to sell extended warranties in recent years. It is reported that for some major companies such warranties now contribute 30–50 per cent of profits, despite being a much smaller proportion of turnover (although at least five million extended warranties are sold in the UK each year). A number of concerns have been raised by the Office of Fair Trading, the Consumers’ Association and others about the way the prices of extended warranties tend not to be prominently displayed. Instead, they are advocated by sales staff at the point of sale, thus giving the buyer little chance to contemplate their value or to compare with possible alternatives. Extended warranties sold by electrical retailers are usually underwritten by an insurance company. Sometimes this is a general insurance company, in other instances the retailer may own a subsidiary company (perhaps registered overseas) which insures their risk. Whoever takes the risk is obviously better informed about the probability of failure than the buyer. The retailer earns a commission on the warranties that they sell; this is where their big profits come from. At major electrical retailers, the take-up rates for extended warranties as a proportion of items sold ranges from around 25 per cent for most items to 50 per cent for washing machines. The consumer has recognized that the loads on the rotating parts of washing machines make them more susceptible to failures. The retailer also recognizes this so warranties for these items will be more expensive as a percentage of the item’s retail price. If you manage to resist the sales talk at the retailer’s premises trying to persuade you to take out an extended warranty, the industry may have another attempt at you if you return the ‘customer registration’ form included with your purchase. This gives the manufacturer the opportunity to mailshot you with their own offering of an extended warranty. Well what did you think those customer registration cards were for? You may well get two mailings, one just after the sale and one just before the expiry of the manufacturer’s warranty. If you are in the UK and you desperately want to buy an extended warranty, you may like to bear in mind that at the time of writing insurance premium tax would add 17.5 per cent to the cost of the warranty if you buy it from a shop when you buy the goods, but only 5 per cent if you buy it subsequently from a third party. You may be wondering where the topic of whole-life costing comes into the purchase of extended warranties. Someone who does not think too hard about the matter may see an extended warranty costing, say, £150 to cover an appliance worth £300 for five years as a reasonable cost of £30/year. In actual fact, the item may have a manufacturer’s warranty of two years anyway, so they are only buying three year’s cover not five. Additionally, Sale of Goods legislation could make the manufacturer liable to repair defects beyond this time if they could be shown that there was a defect present at the time of purchase. Also, the money for the warranty is paid at the time of purchase, which is at least two years prior to it providing protection if the manufacturer offers a two-year warranty. This should be taken into account in any calculation of the warranty’s value.

BORDERLINE SCAMS

77

Finally, what is the £300 item worth after two years? The answer is probably a maximum of around £150, which means that you are paying £150 to protect an asset worth £150. Except that it really costs you more than that because you paid two years in advance. In case you fear that I have strayed off the subject of business-to-business scams into the realm of consumer protection, I should point out that I have had clients who thought that they were doing the best thing by buying extended warranties when their businesses bought domestic appliances. The most unfortunate example of this was a charity that provides accommodation for people with learning difficulties. Despite the fact that the appliances were being used in a ‘home’ setting, as soon as a claim was made on the warranty, the supplier pointed to the small print that said the cover related to domestic use only and said that since they regarded the charity as a business, they would not carry out repairs. Needless to say, they did not return the cost of the warranty either. If you do take out an extended warranty (and you may have guessed, I don’t think that this is generally a good idea), you should be clear about the level of cover, the conditions and limitations, the protection offered against consequential damages, the need for ‘approved’ maintenance routines and the mechanism for claiming (do you have to return the item or is it fixed on site?). You will also need to be confident that the warranty provider will still be in business for the full life of the warranty and you must be disciplined and organized enough to retain on file all the relevant purchase and maintenance paperwork. OTHER EQUIPMENT Techniques to confuse customers about the total cost of purchases are also used for other items of equipment. For example, security systems may well come with a complex contract covering lease arrangements and maintenance which produce a higher than expected total cost. Items such as fax machines may be subject to annual charges under annual ‘maintenance agreements’ but require no routine maintenance. These are simply extended warranties by another name and are particularly inappropriate for equipment which is undergoing rapid technological advances and falling in price. OVERPRICED CONSUMABLES (MORE WHOLE-LIFE COSTING ISSUES) Have you ever noticed how the razor blade industry works? What happens is that the latest razor, the one with the extra blade, or new special coating, or angled tilt facility is sold to you quite cheaply. With your new razor, you will get one or two blades (although the display packaging always makes it look like there will be more). When you have used these and go back to the shop for replacements, you find that these are significantly more expensive than any you have ever bought before. Thus, the total cost of shaving over (say) the next year will be considerably more than it would have been had this new razor never been invented. This practice of making more profit on the consumables than the original equipment is not unusual, but some of the more outrageous examples occur in purchases for business rather than consumer items. Probably the most ubiquitous example is the water cooler. These are provided free or at little charge, often after a free trial period which gives the staff a chance to get used to the convenience of having them around. After the free trial, you start paying for the water containers (the only ones that will fit that particular machine). If you have a water cooler in your office or factory, ask yourself the following questions: how much am I paying for

78

PURCHASING SCAMS

water over the course of a year? When this water cooler was installed, did we get competitive prices from other suppliers? If we got competitive prices, did we carry out a proper ‘whole-life cost’ comparison or did we just look at the prices of the cooler? If you are happy with your answers, fine. If not, maybe you should review the marketplace. One of the benefits (from the point of view of a user/budget holder) of a low up-front charge for equipment followed by high consumables cost is that the expenditure is all ‘revenue’ rather than ‘capital’ and therefore does not have to go through all the authorization procedures expected of a capital purchase. This is an advantage for the user/budget holder, because they get their equipment, but is it really in the interests of their employer? (Remember that the whole-life costs are likely to be significantly higher.) This sort of deal was used extensively in the health service where suppliers of laboratory test equipment would provide the equipment at little or no cost, but the consumables necessary to carry out the tests were available only at high cost. For many years, this sort of practice was frowned upon by government, who saw it as a way of getting around their spending controls (the term ‘unconventional financing’ was used). Nowadays, the idea of the private sector providing capital goods and then charging public sector bodies for their use over a period is in fashion. I hope that someone is working out the whole-life costing implications of this, especially since the government can borrow money to finance capital projects/purchases far cheaper than any private sector organization.

Vanity publishing A lot of scams seem to be related to publishing (I am sure that this is not unrelated to the facts that not many people understand the processes involved, it has a vocabulary all of its own and people in the industry work within close-knit communities). I have already discussed bogus directories and questionable charity publications. Another one that crops up from time to time is the vanity publication. ‘Dear Business Executive’ starts the letter (although they will normally have researched the name) ‘we would like to include details of your business achievements in the next edition of Who’s Who in Business Today’. This might be ‘who’s who in steelmaking or embroidery or construction’ or whatever you are involved in. They will want your biographical details; they will also want your money to subscribe to the book and/or for producing your listing. Again, this is one of those areas of business which could be seen as legitimate and not a scam but that depends on whether the purchaser knows exactly what they expect for their money and whether they get what they expect.

Rentals Another area of expenditure which probably does not quite justify the tag of a ‘scam’, but often strays well into the extreme edges of ‘sharp practice’, is rentals. This can be the rental of almost anything because whenever a business rents things it is less likely to be aware of the way costs are building up than the organization doing that is doing the renting. An obvious example of this is cars, where short-term rentals can be offered as an alternative to longer hires if the preferred vehicle is not available. Given that the shortterm rates will be higher than the long-term ones, there is an incentive for the hire company to perpetuate the non-availability of the preferred vehicle. We have seen

BORDERLINE SCAMS

79

examples of companies spending huge amounts on short-term rentals that extended for over 12 months. Gas cylinders are also hired by many companies but most of their users don’t realize that they are hired. When they are empty or no longer used, somebody needs to ensure their return or else the company is paying money for nothing. We undertook a project for a college that rented a large number of cylinders but did not use them at all between July and October when the college was closed. We asked the hirer to take them away and return them at the appropriate times, but it was easier for them simply not to charge for the period when they were not being used (which they had previously been charging for over many years), thus saving the college around 20 per cent of the annual cost.

How to avoid borderline scams ●

●

●

● ● ● ●

To avoid people responding to junk faxes you can spell out company policy and train them in what to look out for. To check the effectiveness of the policy, check your fax and phone bills for premium-rate numbers. If you are sure that you will never need to call a legitimate premium-rate number, block them on your switchboard. To avoid being swayed by misleading personalized advertising, check with colleagues who appear to be recommending journals or publications via a post-it note. Be especially wary of American marketing publications. If you think that an advertisement was misleading, you can complain to the Advertising Standards Authority. The ASA also regulate competitions under the British Code of Sales Promotion. Contact the Office of Telecommunications (OFTEL) if a scam involves a telephone call. Contact the Independent Committee for the Supervision of Standards of Telephone Information Service if it involves a premium-rate phone call. Avoid extended warranties unless you have carried out careful analysis to demonstrate that they provide a worthwhile level of risk management in return for their cost. Understand the basis on which you are charged for goods or services. Avoid escalation clauses, time and materials contracts and ‘cost plus’ arrangements.

CHAPTER NINE

THE INTERNET – THE NEW FRONTIER FOR SCAM MERCHANTS Is it a big problem? Estimates of the likely impact of the Internet on business life vary. One frequently quoted ‘statistic’ is the prediction (from the Forrester independent technology research firm) that business-to-business purchasing on the Internet will grow from $43 billion to $1.3 trillion over a five-year period. Another is that, whilst it took broadcast radio 38 years for the number of users to reach 50 million, television 22 years and PCs 16, it has taken only 5 years for the number of Internet users to hit the same figure. My view is that estimates such as these usually have two things in common: (1) they are wrong; and (2) they underestimate the impact that e-commerce is going to have on our lives and particularly on the way that we do business. E-commerce offers the prospect of far more choice, easier access to sellers, lower prices and lower administrative costs and particularly the prospect of time compression throughout the supply chain. The introduction of the Internet has been likened to the introduction of electricity. It will have a huge impact on social, political and economic aspects of our lives that we have not yet begun to comprehend. We are living through a second industrial revolution driven by e-commerce, the trade route of the new millennium, but this revolution will be much more dramatic than the last, particularly in the speed with which changes are introduced. As a consultant, I welcome change. We thrive on it. We try to create it if we can and, at the very least, we will charge you for keeping an eye on it. Who else would you guess would welcome the turmoil, confusion and opportunities that the Internet revolution brings? Yes, it’s the scam merchants again. They and their more serious brethren, the cyberfraudsters, are among the quickest to embrace any new technological development. The Internet should be a remarkably positive development, shrinking distances, eliminating borders and speeding processes. The prospects for improved purchasing are particularly exciting; the Internet is becoming a global marketplace enabling buyers to acquire goods and services around the world via re-engineered efficient supply chains. The flip side of this rosy picture is that the scam merchants of the world have increasingly easy access to their targets. The business community tends to vacillate between woeful ignorance and extreme exaggeration when it considers the threats posed by cybercrime, not least because there are no meaningful statistics for guidance. As a result, many companies have delayed their entry into the world of e-commerce for fear of the unknown dangers and worries over security. In both the US and Europe, it has been estimated that 50 per cent of credit card fraud is carried out on Internet purchases, despite the fact that these currently account for only

THE INTERNET

81

around 2 per cent of transactions. To some people, the Internet is the home of hackers, pornographers and con-artists. Whilst all this is true to an extent and the Internet does have a dark side, trade (and particularly business-to-business trade) will inevitably grow on this medium, so we have to learn how to deal with it.

Only joking? Part of the way we deal with it must be to retain our sense of scepticism about deals that seem too good to be true. Hoaxers find the Internet irresistible. One of the most common e-mails is the ‘virus warning’ about non-existent viruses. The willingness of some people to turn their scepticism meter down to zero as soon as they get in front of a computer is demonstrated by the document circulated widely in the US by Internet users which was supposedly an address to students written by the author Kurt Vonnegut. In fact, it was a column penned by a Chicago journalist and tagged as Vonnegut by some anonymous net user. If these people go to the trouble of fooling millions of others just for the fun of it, imagine how keen some of them will be when they discover how to make money from their mischief. These people may be teenagers in Colombia or Moscow; if the scams work for them, how long will it be before all their friends join in? Hackers are typically between 15 and 35 years of age, they are extremely clever and their reasons for hacking range from a wish to commit criminal damage to the inability to resist a challenge. Sometimes the motive for their acts of mischief and destruction can be difficult to fathom although the acquisition of ‘bragging rights’ that they claim in their discussions within on-line chat groups is undoubtedly often a factor. Increasingly, however, they can be expected to turn their attention to information in other people’s computer systems that they can use to their advantage. According to a US report, there are over 20 million people around the world with ‘the skills to launch a cyber-attack’. Many of these will take up the hobby of hacking into other people’s computers with destructive software (sometimes called ‘malware’). A proportion of them will inevitably take up scamming.

Old scams brought up to date As we have seen in earlier chapters, the Internet can simply be used as a delivery mechanism for traditional scams. The scams aren’t new, just the medium. For example, you may get an e-mailed 419 letter from Nigeria, or you’ll be given the chance to complete your firm’s entry into a business directory via an on-line form. Without doubt, over time all sorts of other interesting opportunities will find their way to your electronic mailbox. The volume and speed of communications available from the Internet makes it an irresistible delivery mechanism for the scam merchant. Even the most able and fastest talking telemarketeer would be struggling to make more than, say, 150 sales calls in a day. Using the power of the Internet, they can reach tens or perhaps hundreds of thousands of people around the world with the same message. E-mail has the further advantage of being asynchronous – this means the scam merchant’s victim does not even need to be available at the time of the ‘call’ for contact to be made. ‘Consumer’ scams, including pyramid selling, chain letters and especially share pushing, also use the World Wide Web as a medium. ‘Share ramping’ (or ‘pump and dump’ as it is sometimes called), where share prices in lightly traded stocks are boosted

82

PURCHASING SCAMS

by false rumours before being sold by the crooks is ideally suited to the Internet. According to the US Federal Trade Commission, the most common e-mail scams are: ● ● ● ●

●

● ● ● ●

● ● ●

‘business opportunity scams’, which offer high income for little effort and are generally variants of pyramid selling; ‘money-making by sending bulk e-mails’, which like its predecessor ‘addressing envelopes’ relies on the hopeless dream that someone will pay you to do it; ‘chain letters’ – like their paper versions, these e-mails are illegal; ‘work at home schemes’ – these are usually labour-intensive craft-assembly tasks which are rejected on quality grounds before any payment is made, although the victim may well have paid for materials; ‘health and diet scams’, which offer scientific breakthroughs to miracle results via secret formulas developed by medical experts; naturally these come at a price, and obviously they do not work; ‘easy money’ via tip sheets to get rich quick; ‘get something free’, or perhaps not really free because you have to pay a membership fee and recruit some new members; ‘investment opportunities’ – offered as high-return, low-risk these are in reality more likely to be pump and dump investments with a limited market; ‘cable descrambler kits’, which enable you to access cable television without paying the subscription fees. Sometimes these actually work, but their use is illegal because the user is obtaining services for which they have not paid; ‘guaranteed loans’, which are usually just a list of lending institutions provided for a fee; ‘credit repair scams’, which unashamedly prey on the vulnerable by promising to clean up a bad credit record; ‘vacation prize promotions’, which necessitate paying to join a travel club and/or buying expensive add-ons to turn them into a real holiday, the total cost of which inevitably exceeds the value of the ‘prize’.

I think that you would need to be pretty gullible to fall for some of these, but evidence that there are people around prepared to believe the most unlikely stories comes from examples of the health scams that have recently appeared on the Internet. These include: ● ● ● ●

a slimming soap from Japan said to ‘wash away fat in seconds’; an American herbal remedy which helped patients to become free of cancer within 10–14 days; a toffee-like hair-restorer claimed to be ‘the only one that actually works’; books which claim to contain the cures for all cancers and all diseases including HIV and AIDS.

As I said earlier, some people seem to turn their scepticism meter down to zero once they get in front of a computer screen.

Spam, spam, spam When sent in massive quantities, junk e-mail or bulk e-mail is referred to as ‘spam’. The term apparently arose from the sketch in Monty Python’s Flying Circus in which ‘spam,

THE INTERNET

83

spam, spam’ was repeated by a group of singing Vikings with increasing volume until it got really annoying. Some legitimate businesses may adopt this practice as a means of contacting potential customers, but informal estimates suggest that around half of unsolicited commercial e-mails contain fraudulent or deceptive messages, hence the maxim ‘if it’s spam, it’s a scam’ may well be worth remembering. Spammers use specially designed software to send hundreds of thousands of e-mails at the click of a mouse. Lists of e-mail addresses can be purchased from brokers who ‘harvest’ addresses from news groups, chat rooms and so on. Spam can usually be spotted because it does not contain the recipient’s address on the ‘to’ line. Instead, you get a blind copy (BC) of the mailing. Dealing with spam has been a problem for e-mail users in the US for some time and numerous websites have sprung up advising people offended or irritated by spam what to do about it. One response that is not recommended is to reply to the spammer with ‘this does not work’ or a similar message. This just tells the spammer that the e-mail address targeted is valid and active. The same result is achieved if you send the ‘remove from list’ instruction on the spam message. Responding to spam by ‘mail-bombing’ the sender with multiple return e-mails insisting on your deletion from their list has been advocated but is not really a good idea. First, it just clogs up the Internet (which is a major reason for objecting to spam in the first place). Second, it will probably not hit its target since spammers are likely to use a forged path in their ‘from’ headers.

Theme and variation Variants to traditional themes are also being created. For example, instead of buying an entry in a useless fax directory, you are now increasingly likely to be offered the chance to buy space in a useless e-mail directory. You can also buy web-hosting services from a whole range of businesses, most of which are totally respectable but some of which will scam you. If you don’t know the value of the service that you are buying, there is a serious risk that you will buy a website containing limited information and lacking important features. Additionally, the rogues will typically not bother registering your site with any of the search engines so nobody can find your site anyway. We received a faxed invitation to set up a website (some years after we had already done so). The invitation said that the design would be free because it would be carried out by students. There would, however, be the requirement that anyone taking up the offer would be obliged to pay for hosting of the website. The cost of this was not specified in the initial contact document. You could also get scammed by the propagators (bulk mailers) of spam. Typically, this works by them e-mailing you with an offer to send your advertising message to a couple of hundred thousand people for a couple of hundred dollars. In all probability, they will do what they said they would but they don’t tell you about the negative response that spam creates. Knowing the likely response, they may well use a forged return address in the header. Thus some completely innocent party may receive a flood of complaints about e-mails that they never sent. However, as promised, a couple of hundred thousand recipients will have had your advertising message – some will have made longdistance phone calls to retrieve it. When they complain to your Internet service provider (ISP), you may find that your account is disabled. California is a major exporter of Internet scams due to the large number of individuals who understand the necessary technology. The US is therefore at the forefront of

84

PURCHASING SCAMS

policing Internet fraud and issues ‘desist and restraint’ orders on sites deemed not to be acting in the public interest.

Whose site is it anyway? On the subject of site creation, it is worth noting that some fraudsters can set up websites that look very similar to those of genuine companies but with their name spelt slightly differently. If you don’t pay sufficient attention, this can result in you dealing with an imposter. Practical jokers have adopted this tactic (known as ‘copycat forgery’) to set up sites designed to embarrass politicians and other public personalities (including George W. Bush, Hillary Clinton and Sylvester Stallone) by conveying message counters to the victim’s image. Businesses are also targeted. For example, top store Harrods was less than pleased with someone using a site carrying its name that gave advice on the best places to find and use cocaine; a ‘Land Rover’ site contained details of the ‘top ten reasons my Land Rover Discovery sucks’, including impressive graphics showing a vehicle losing its exhaust, bumper and front axle as it travelled across the page; LloydsTSB found a disgruntled credit card holder warning of the bank’s ‘policy of customer intimidation’ and Manchester United’s name was used as a gateway to a pornographic site. Other entrepreneurs have recognized the value of a catchy or relevant website name and have turned ‘cybersquatting’ into a valuable business by registering potentially useful names and then selling them on at a profit. The most extreme example of this was ‘business.com’ which sold for £4.6 million. The most ambitious was probably the person who tried to sell ‘billgates.co.uk’ for £2 million. Probably potentially the most amusing was the man who allegedly, according to the national press, made a profit by selling www.inlandrevenue.org.uk to the taxman (whose official site is www.inlandrevenue. gov.uk). The Inland Revenue did fail, however, to spot www.inlandrevenue.co.uk which when I last looked was occupied by an enterprising accountancy firm offering tax advice. Some cybersquatters have fallen foul of laws protecting trademarks and as a result Marks and Spencer, J Sainsbury, Virgin and British Telecommunications have all won High Court actions to retrieve the use of their names. Generally, unless they infringe registered trademarks, cybersquatters are only breaking the law if they fraudulently pass themselves off as another company or person. Ownership of a domain name does not always rest where you might expect it to. Quite often, the name is registered as being owned by the web designers, ISPs (Internet Service Providers) or web-hosting companies rather than by the company whose information appears on the site. This arises because, in addition to declaring themselves as the ‘technical contact’ for the site, these companies sometimes register themselves as the ‘administrative contact’ which the domain registrars recognize as the domain name owners. You should be wary of reading too much into website addresses. A website with an address ending in ‘.co.uk’ need not be run from a UK base.

The ghost supplier scam The new supply chain model created by the introduction of e-commerce offers the prospect of lower prices and faster service, so if you are browsing the web and find an

THE INTERNET

85

interesting site offering for sale a computer system, a memory card or a peripheral, or you see something you like offered in a newsgroup, you might be tempted to send off your money to buy it. If your cheque gets cashed, but nothing arrives, what do you do? Enquiries may reveal several other people have bought the same item at the same time, but if you have been conned, you are unlikely to ever find out exactly where your money went. A survey in Europe (relating to consumer purchasing on the net) suggested that 8 per cent of online purchases never arrive. Traditional good purchasing practice of not paying in advance and only dealing with known, reputable, trusted suppliers is enough to avoid this situation ever arising. There is evidence that some of these ghost suppliers originate in locations such as Eastern Europe or China – just try getting your money back from there.

A few legal problems I have stated before that one of the advantages that scam merchants in general have is that they understand the legal issues surrounding a purchasing transaction better than the average person who has been given delegated purchasing authority by their employer. When it comes to purchasing on the Internet, the occasional buyer is not on their own in not knowing what is going on from a legal point of view. For example, if you are in Europe and buy a computer from the US over the Internet, whose laws apply when there is a problem? Is it one of the 15 legal systems that exist in Europe or does it depend on the state in which the retailer is based? The answer to this question is not as straightforward as you might imagine because of the lack of precedents on which a lawyer or anyone else could base their judgement. The legal situation is made more complicated by the fact that it may not be clear where in the world the supplier is based. The law applying to the contract may be that of the country of the supplier, the buyer or a third country. There are those in the EU who propose that the Brussels and Rome conventions should be amended such that buyers would have an automatic right to sue in their home state even if they have agreed to a website’s terms and conditions which may fall under another jurisdiction’s law. Whilst this would be a great boon to the fight against scams, many lawyers are arguing fiercely against the principle and one can see that such rules may well sometimes unfairly work against legitimate suppliers. It would also present the serious danger that Europe’s legal system would become clogged with dissatisfied e-consumers bringing civil actions. Even assuming we know whose laws apply, law enforcement agencies are at a disadvantage, because they are playing ‘catch-up’ as the crooks invent new scams and frauds. At the time of writing, there was only one specialist crime unit in the UK dedicated to investigating computer crime (the Metropolitan Police’s Computer Crime Unit). Major future investment in other similar units is unlikely given the fact that local crimes (such as burglary, assault and so on) are perceived as more important (and more likely to be solved) than cybercrimes originating in Russia or Brazil. The cost of dealing with local crimes compared to that of dealing with cybercrimes will also favour resources being focused on the traditional areas. Successful prosecution of cybercriminals is difficult even without all the various international complications, because the transient nature of computer records makes collecting, assessing and preserving evidence problematic. Companies are therefore on the front line of the battle against cybercriminals and cyberscams and have to establish their own defence mechanisms. Traditionally, companies are

86

PURCHASING SCAMS

often reluctant to admit that their systems have been breached by hackers and the like, therefore cybercrime statistics are mere guesses, and justifying the resources to fight the perpetrators is difficult. The development of e-commerce is so rapid that businesses cannot wait for the legal aspects to catch up. The International Chamber of Commerce has established a cybercrime unit that is creating a database of techniques used by criminals in cyberspace. The unit, which will work alongside other divisions devoted to fraud and counterfeiting, is also intended to act as an interface between private businesses and law-enforcement bodies including Interpol. In general, however, companies should not focus on the policing of the whole Internet but instead they should concentrate their efforts on making sure that their own little bit of it is secure. Various countries and groups of countries are looking at new legislation to control trade on the Internet. However, there are a number of areas where differing views exist. For example, should the law that applies be that of the country of origin or the country of destination? Should the laws be the same for ‘consumers’ as for businesses? In the case of unsolicited e-mails, should recipients be allowed to opt out of receiving them or should the senders only be allowed to send them to people who have positively opted in? In the US, there is the added complication of the First Amendment to the Constitution, which guarantees the right to free speech. Possibly for this reason, the US Government is adopting a hands-off approach to legislation on e-commerce whereas the European approach sees governments trying to exercise more control. The legal control of the Internet will not be easily achieved (if at all) – to gain control of cyberspace will require the trading off of liberty for security. Potentially, safety could only be achieved via a caller-identification-type system that could render everyone traceable and thereby potentially vulnerable. This diversity of approach amongst different countries offers opportunities to the scam merchants since they are most likely to site themselves in countries with weak systems of protection for consumers and businesses. Even if the various countries do decide to act in a harmonized fashion, agreement on international conventions always takes several years to achieve ratification by their national parliaments. By this time the technology and the scam merchants will have moved on, so it is likely to be round one to the bad guys. In the UK, the E-commerce Bill reaffirms the status of digital signatures. In practice, English law has always been a little unusual in not requiring signatures for all contracts (only for certain areas such as property, although there are some 40 000 references to signatures in English law relating to diverse things such as marriage licences and tax returns). Consequently, electronic transactions were probably enforceable before the E-commerce Bill, provided both parties could be shown to understand the nature of the agreement. We have seen with many scams the desire of the scam merchant to establish that they stated the nature of the transaction before the victim committed himself or herself. The reason for this is to establish a clear legally binding agreement, which would favour the scam merchant in the event of any subsequent dispute. Even where things may appear clear, there is every possibility that in the event of any dispute lawyers would argue about how to apply eighteenth-century law to transactions which had been carried out using twenty-first-century technology. If we add to this the fact that we are reacting to an international problem with national responses (which vary), confusion is likely to reign for some time.

THE INTERNET

87

One thing that could help clarify the situation is if the purchaser remembered to specify on their order where and how disputes would be resolved (as part of whose terms and conditions apply). In practice how many bother?

Keeping records Record keeping is a key plank in purchasing good practice. The legal status of records in various formats within e-commerce is debatable, but in any dispute you will be in a better position with records than without them. The records could comprise pages from the supplier’s website, their offer, the small print (read it as well as filing it!) and e-mail correspondence/clarification/confirmation.

What about payment? The normal payment medium for transactions over the Internet will initially be the card (unless the transaction is one of a series and normal business credit terms apply). For consumers, this will generally be a credit card, giving them protection under the Consumer Credit Act, which makes the credit card issuer jointly liable with the supplier for any failures to supply. The card issuers often try to argue that this does not apply to cross-border transactions, but the Office of Fair Trading regards this view as being without foundation. Business purchasers do not get the same protection and will generally use corporate purchasing cards, which are a type of charge card. Pre-payment smart cards are also being trialled but are not yet in widespread use. The ‘merchant’ (seller) can undertake various checks on the validity of the transaction, including address checks, order size pattern, order frequency, blacklisting and so on to manage their risk of fraud. How many buyers carry out a financial check on the supplier? In fairness, the merchant is highly likely to suffer from Internet fraud because people use stolen or false credit card details to obtain goods and the banks making the payments recover the costs from the merchant when the legitimate cardholder complains about these items on their statement. Computer programs exist to help fraudsters create false (but mathematically valid) credit card numbers and newsgroups exchange information on stolen credit cards. The fraudsters, who hide behind a free non-ISP e-mail address, are practically impossible to trace.

Security One of the major concerns for early adopters of e-commerce has been the issue of security. Solutions are constantly evolving, although it is probably fair to say that a commercial transaction over the Internet has always been likely to be more secure than handing your credit card over to a waiter or placing an order over the phone. Major institutions such as the banks, the Post Office and others offer cryptography services and these are likely to become universally adopted. The features that business buyers need in order to be satisfied that Internet purchasing is secure are: ● ●

confidentiality, to ensure that electronic messages cannot be read by third parties; authentication, so both parties to the transaction can be satisfied about each other’s identity;

88

PURCHASING SCAMS

● ●

integrity, which means knowing if data within a communication has been changed; and non-repudiation, a mechanism for providing proof that the transaction took place.

This security will come from relevant technology such as secured sockets layer (SSL) which allows website owners to control access to particular servers, directories or files, thus allowing sensitive information to be shared between browser and server yet remain inaccessible to third parties. Public key infrastructure (PKI) refers to the techniques, practices and processes that provide encryption and digital signature services. These include: ● ● ●

scrambling of information (encryption) to render it unintelligible to anyone not in possession of the secret key or password to decrypt the information; electronic signatures which link a user’s identity with the message, thus verifying the integrity of the data sent; and digital certificates which reside on the Internet server and act as electronic passports to prove the identity of individuals and the genuineness of websites. These equivalents to electronic passports are issued by certification bodies such as banks and trade associations who verify the genuineness of sites via stringent checks on domain name ownership, creditworthiness and business standing.

Developments in PKI are likely to be rapid as global standards evolve. Firewalls, which protect networks from unauthorized access, are available in three main formats: ● ● ●

‘packet filters’, which examine data and accept or refuse connections based on predetermined rules; ‘stateful inspection firewalls’, which, in layman’s terms, look inside the ‘packets’ of data for any abnormalities; and ‘application gateways’, which examine data at an application level and can block particular commands (for example, they may allow copying of files whilst preventing a remote user from adding to them).

Application gateways can also control what goes out from a network as well as what comes into it. Thus, this technology can be used to limit authorized personnel to procure only up to their pre-set limit and only with selected suppliers. This offers the very interesting prospect that purchasing professionals will be able rigidly to apply corporate purchasing policy through the use of appropriate filters and thereby cut out unauthorized ‘maverick’ purchasing, which is the entry route for many scams.

Futurology Looking into the future in relation to computer and internet technology is a brave (foolhardy really) thing to do in print. One prediction that may be worth noting, though, is the possibility that in the future you may not be cheated only by people, but by machines or software as well. For example, you could download a screensaver over the net which then breaks into your system, spying, stealing passwords, checking authorization controls, arranging payments or whatever else might be useful to its creator. The other feature of Internet scams, which may change the nature of future scams

THE INTERNET

89

altogether, is that traditional scams usually work best on small- to medium-sized companies with emerging systems. For the Internet scammer, however, it could be that the best targets are those organizations with the biggest systems and the greatest number of terminals connected to the outside world. With the increasing reliance of business on e-mail and network computing, it is becoming ever more likely that the only safe computer is the one that’s turned off. The ERP systems favoured by big businesses will develop e-commerce modules with ‘identity trust’ safeguards built in, but until this technology is fully developed, the scam merchants will be looking for opportunities. The move towards purchasing on the Internet will not be driven by its potential to block scam merchants or even the chance it offers to identify new better-value suppliers. The aspect of purchasing that will drive most organizations towards Internet purchasing will be the prospect of reducing the internal administrative costs of placing and processing an order. Most businesses have no idea what this costs them but the traditionally used figure of £40/order probably represents about half the true total cost in most companies. One other major change to purchasing that will arise as a result of the Internet and may radically impact on the scope for scam merchants to operate is the emergence of the Internet-based purchasing agent. These agents (or ‘trading exchanges’) will shop around on the net, finding the best supplier and striking the best deal. As well as potentially enabling small- and medium-sized enterprises to pool the purchasing leverage and mimic the economies of scale and buying power of global conglomerates, the existence of such agents will take most routine purchasing activities and decision making outside the smaller business and into potentially more expert hands. The use of such agents can be relatively cheap, implemented very quickly and charged for on a ‘per transaction’ basis. If provided on a ‘hosted’ basis (in other words, on a remote computer belonging to someone else), the small business has a reduced capital need and increased predictability of costs. One vision is that these agents could take the catalogues of a range of suppliers and make them available to a number of businesses via a single point of contact. From an administrative point of view, this is clearly a neat way of dealing with routine, mundane purchases for maintenance, repair and operations items that often account for the majority of a business’s purchasing transactions and a disproportionately high level of administration. Purchasing purists (or traditionalists) will bemoan the potential loss of control of the ‘supplier relationship’, but this could be retained to a degree if they tailored their own catalogue of available items by controlling the suppliers and their product range. The expectation is that small companies will rely to a greater extent on the agents and that large businesses will create their own catalogues using their own contract arrangements with preferred suppliers. In some industries, leading companies are banding together to create a shared service provider of purchasing information and access. The degree to which the purchasing organization manages the catalogue will become a key strategic purchasing issue. E-procurement is not a ‘one size fits all’ proposition and a number of different models will emerge. The use of these agents could effectively create a portal site between the supplier and purchaser so that each company has to deal with only one partner. The purchaser can view whichever supplier’s catalogue they wish just by linking in to one portal. Assuming the portal operator doesn’t sign scam merchants up as partners (unlikely) and that all the purchaser’s transactions go through the portal (probably even more unlikely), this offers the prospect of the scam merchant being locked out of the purchasing process.

90

PURCHASING SCAMS

Barriers currently exist to the adoption of either of these approaches, primarily the initial unwillingness of small business to adopt e-commerce. Other technical barriers (such as bandwidth provision) are being overcome but cultural, language, tax and legal requirements will remain to prevent truly global outsourcing. The benefits of this technology are so overwhelming and the web-based platform so ubiquitous that the rapid uptake of e-procurement is inevitable. The big remaining question is the extent to which these services will be hosted by third parties as opposed to being provided by in-house units (many of which are also likely to offer their services outside). One of the major drivers to change to an e-commerce solution for purchasing is the potential for reduction in internal administrative costs associated with the purchasing process. Unfortunately, most businesses have no concept of how large these costs are and are therefore likely to be slow to seize the benefits. An issue of major importance to note when a business starts to use Internet-based purchasing agents is that the purchasing function should be involved in deciding the scope and scale of the agent’s involvement and the decisions should not be left solely to the IT department. Bear in mind, however, that for some purchasing people, deciding to use an agent is a little like turkeys voting for Christmas.

Beyond scams Several of the activities described in the chapter above comfortably go beyond my definition of a scam into the area of clearly fraudulent activity. Other obviously criminal acts are also perpetrated via the Internet, for example: ● ● ●

entry into other people’s systems to destroy or change data; sale of counterfeit goods, especially pirated software; and extortion by threat of sabotage (several major financial institutions have allegedly paid large sums of money when faced with this sort of threat).

‘Denial of service’ attacks can also take place when malevolent people bombard your site with traffic so as to block legitimate communications (this may not be a criminal act but it is undoubtedly a very serious nuisance; it also gives a whole new meaning to ‘DOS’ in a computer context). ‘Distributed denial of service attacks’ (DDOS), sometimes known as ‘smurfing’, occur when the bombarding of the victim’s website by millions of fake visitors is achieved via software that implants a virus on to hundreds of computers that are later activated to launch the barrage of data. Even if these data messages (which are encrypted) are traced back to their source, this is still one step away from the attacker. University sites are often used as the launch pad for this sort of attack because they have large bandwidth connections, a large number of servers and a small budget for security. The software needed to carry out these attacks is freely available on the Internet. The following tips are intended to reduce the risk of scams, but hopefully some of them will also help to protect you from potentially even more serious threats.

How to avoid Internet scams ● ●

Buy from suppliers that you know and trust. (There are a lot of cowboys out there.) If you must buy from a source with which you are unfamiliar, check them out first. Look for symbols on the site(s) you are using to establish whether they use security

THE INTERNET

● ●

● ● ● ● ● ● ● ●

●

●

● ● ● ●

91

technology to protect your commercial data. Examples are the site ‘padlock’ and a secure (https) site address. Ensure that you read and understand the terms and conditions that will apply to the transaction, particularly those relating to warranties and returns. Don’t ever buy anything that you learn about from ‘spam’. (It has been estimated that the chances of receiving anything at all in return for your money are around 45 per cent, the chances of getting what you thought you were getting at a reasonable price are around 5 per cent.) Put up solid firewalls between the Internet and the strictly internal parts of your system. Use password protection and change passwords regularly. Be wary about installing any software of unknown origin. Always use a purchasing card (this usually controls the maximum amount that you can lose). Verify that the organization with which you are dealing actually physically exists by checking phone numbers and so on. Retain copies of documentation (the legal status of e-mails is still not clear but records will always help in any dispute). Don’t be enticed by an attractive looking website – it is relatively easy and cheap to set up a website, and it may not be there after taking people’s money for a few weeks. Beware of CAPITAL LETTERS and EXCLAMATION MARKS!!!!!!!!!!! This may just be poor advertising style but it does often seem to crop up with GUARANTEED VALUE that is not all that it seems. Don’t trust vague references. ‘Thousands of satisfied customers’, or ‘as seen on TV’ can be claimed but not checked. How about asking for the names of some real satisfied customers? Watch out for claims that ‘this is not a scam’. Would a scam merchant admit the fact if it were? Some scam merchants quote specific laws which ‘prove’ their legality. This sort of sales pitch is not needed by legitimate businesses. Review your card statements carefully to ensure that the details are not being abused. Watch out for people that know a surprising number of things about you that you haven’t told them. Maintain suitably robust back-up systems in case the actions of a scam merchant or other malevolent force interferes with your website or network. Bear in mind that the Internet is not just a useful tool for scam merchants, it is also an effective medium for rapidly reporting their activities to the authorities and publicizing them to other businesses.

CHAPTER TEN

CHECKLIST FOR SCAM AVOIDANCE It has been said that there are only three basic jokes in the English language and that all other jokes are variants or combinations of these three. Similarly, scams can be reduced to three basic types: ● ● ●

pretending to sell or provide something whilst taking money (for nothing) up front; supplying goods or services of lower quality or quantity than the buyer thought that they were paying for; and persuading people to buy something they did not want/need to buy.

Countering these three simple concepts is complicated by the ingenuity that the scam merchants use to dress up their offerings as something that they are not. The following list therefore has more than three points, indeed more than three sections and it still probably is not comprehensive.

Organization of purchasing ● ● ● ● ● ● ● ● ● ●

Make sure everyone understands their delegated purchasing responsibilities. Have a purchasing professional involved in the design and delivery of your purchasing strategy. Train operational-level purchasers in the steps they must take to carry out their tasks properly. Train staff who do not have delegated purchasing powers to say ‘I am not authorized to place orders, you must speak to . . .’. Have a clear purchasing policy including a code of ethics covering gifts and hospitality. Ensure that clear separation of duties exists between the various stages of the purchasing process. Establish call-off contracts for commodities with a high value or volume of expenditure and require users to make use of them. Set an example from the top of the organization that purchasing policies must be complied with. Develop a channel through which staff can report suspected scams or frauds. Develop the time-management skills of your staff so that they have time to read unfamiliar documents.

Ordering ●

Never place an order over the phone unless you have no doubt that you are dealing with a reputable firm. For phoned orders record the supplier’s name, address, phone number, contact name and quoted prices.

CHECKLIST FOR SCAM AVOIDANCE

93

Dealing with telephone salespeople ● ● ● ● ●

Be wary of salespeople who adopt an aggressive style. Don’t agree to buy anything just because they intimidate, harass or threaten you. If they will not answer your reasonable questions about their company or product/service, do not buy. Be suspicious of anything being offered at much less than its usual price. Be especially suspicious if immediate payment is a condition of the transaction. Ask for details of what is being offered in writing.

Dealing with documentation ● ● ● ● ●

Scrutinize ‘invoices’ to ensure that they are not, in fact, solicitations. Don’t complete and return forms unless you are certain whether or not they are order forms. Read the small print of any purchasing-related document with which you are not entirely familiar. Don’t order an entry in a directory unless you are confident that your customers are likely to use that directory to find you. Keep appropriate records of all purchasing transactions.

Overseas transactions ● ●

Be wary of correspondence from counties with which you normally do not deal. Do not respond in any way to ‘419’ letters from Nigeria.

Buying advertising/publication listing ● ● ● ● ● ●

Only deal with publishers you know and trust. Obtain verifiable circulation figures. Examine sample copies of previous editions. Maintain a list of publications in which you advertise in order that you can check claims that ‘this is a renewal’. Check the nature of the entry being offered. Is a one-line entry any use to you even if the directory is legitimate? Do not be less vigilant about the value of the advertising just because the publisher claims a connection with a charitable cause.

High-pressure sales techniques ● ● ● ●

Beware of salespeople who will not take no for an answer and have a ready response to every hesitation, enquiry or objection. Don’t be pressured into an immediate decision. If what is on offer is a good deal today, it probably will be in a week’s time. Beware of special offers. If you are told that you are one of only a few people eligible for an offer, ask yourself why. Question the soundness of any business that is unable to provide you with written information on their product or service. Excuses such as ‘there is not time for that’,

94

PURCHASING SCAMS

●

‘it’s a new product and we haven’t got any literature yet’ should be treated with suspicion. One reason scam merchants don’t like to issue written statements is that false statements over the phone are difficult to prove whereas written false statements could take them over the scam/fraud dividing line. Carry out careful analysis of costs and benefits before purchasing an extended warranty.

Dealing with consultants ● ● ● ●

Be wary of ‘payment by results’; ensure that you understand how the results will be measured. Don’t pay in advance. Seek references from satisfied clients. Check to see if they are members of appropriate professional bodies.

Checking out suppliers ● ● ● ●

Check with the appropriate trade association if you are unsure about the genuineness of potential suppliers. Use a recognized credit reference agency to check the commercial soundness of new suppliers. Buy from suppliers that you know and trust. Be wary of cold calls.

Premium phone lines ● ● ●

Have a company policy in relation to the use of premium phone and fax lines. Scrutinize bills to check compliance with policy. Use ‘call barring’ to premium-rate numbers if necessary.

Buying on the Internet ● ● ● ●

Check the security of any site that you purchase from. Do not purchase anything in response to a spammed e-mail. Build solid firewalls to protect your systems from malevolent intrusion. Change passwords regularly and do not choose anything obvious (like ‘password’ for example).

Payment ● ● ● ● ● ● ●

Ensure that everyone in the payments section of the organization clearly recognizes the difference between an invoice and a proforma invoice. Look at bills you receive before paying them. This includes phone and fax bills. Never pay in advance. Don’t expect something for nothing. Encourage the use of purchasing cards for payment. Review your card statements diligently to make sure that your details are not being abused. Do not pay for anything unless you know that it has been duly ordered, it has been provided to the user’s satisfaction and you are obliged to pay.

CHECKLIST FOR SCAM AVOIDANCE

95

Being charitable ● ● ● ●

● ● ●

Resist pressure to give immediately. A legitimate charity will welcome your donation just as much next week as today. Check that the charity benefiting from your gift or purchase is genuine and well run. Be wary of names that are similar to established, legitimate charities but not quite the same. If you want to purchase from an organization which passes on some of the proceeds to charity ask yourself (or the supplier): what proportion of the purchase price does the charity actually receive? Do I need the goods or services at all (if not, why not simply donate money directly to the charity)? Adopt a sensible corporate policy towards corporate charitable giving which maximizes the value of the money used to both the charity and the donating company. If you are making a direct donation do so by cheque (not cash) made payable to the charity (not an intermediary). Do not reduce your vigilance at Christmas or times of major disasters.

Trust ● ●

●

Recognize trust as a valuable element in business transactions and don’t dispense it indiscriminately. Ask what recourse you have if something goes wrong. A written guarantee is better than a verbal one unless it is from an unsound business in which case it is potentially equally useless. Bear in mind that the most successful scam merchants are the most devious, cunning and plausible; don’t believe everything that people tell you.

Reporting a scam ●

●

● ● ● ●

If you want the authorities to whom you are reporting a scam to be able to respond effectively, you must act quickly; any delay enables the scam merchant to take money from other businesses and quite possibly temporarily wind up their operations and move on. Don’t be unrealistic in your expectations of what the authorities can achieve. Most scams involve small sums of money and negligent (to a degree) victims. Your complaint may not go to the top of the priority list and, if it does, the potential actions available may be limited if the scam merchant has taken steps to prepare a defence against accusations of illegality. To alert your fellow business people to scams, notify your local Chamber of Commerce or Better Business Bureau. If you want to complain about misleading advertising, contact the Advertising Standards Authority. To complain about scams involving a telephone call, notify OFTEL or ICSTIS if it is a premium-rate telephone call. If you think a crime has been committed, tell the police.

The above checklist is designed to help you and your organization avoid being scammed. You can help others by spreading the word when you spot a scam. Tell your colleagues;

96

PURCHASING SCAMS

show them examples of the documents that the scam merchants use. Notify your local Chamber of Commerce or Better Business Bureau (US) or the US Postal Service if appropriate so that they can warn their members of the latest scam variant doing the rounds. Above all, remember the golden rule: ‘If it sounds too good to be true, it probably is.’

INDEX A ‘419 scam’ see Nigeria scam advertising, personalised 74 ASA (Advertising Standards Authority) 79, 95 B Better Business Bureau 29, 95, 96 Philanthropic Advisory Service 69 ‘black money’ scam 56 BS 5750 see ISO 9000 C call-off contracts 16, 45, 92 caveat emptor, and purchasing scams 2 CBBB (Council of Better Business Bureaus) 30 chain letters 4, 82 Chambers of Commerce 43, 95, 96 charge cards, purchasing 17–18, 94 Charity Commission 68, 69 charity scams advanced fee fraud 65 avoiding 68–9, 95 Charity Commission 68, 69 extent 68 Philanthropic Advisory Service, Better Business Bureau 69 phoney advertising 66–8 request for donations 65–6 CIPS (Chartered Institute of Purchasing and Supply), code of ethics 25 cleaning materials 44, 45 consultants energy 62–3 and fraud 63–4 scams avoiding 64, 94 BS 5750 59–60 business rates 61–2

grants 60–1 consumer scams 4–5 contracts, key elements 22–3 call-off 16, 45, 92 corporate culture 6–7, 44 corporate hospitality 6 cost administrative 16 price, comparison 15–16 costing, whole-life 15–16, 77–8 credit cards 80–1, 87 crime, Internet 90 ‘cybersquatting’ 84 D Data Protection Registrar, and junk faxes 72 decentralization, and purchasing 1 directory scams avoiding 34–5, 93 electronic 34, 81, 83 fax 26–8 industry 30, 32, 33 one-off 34 operation 26 questionnaires, sample 31 telephone 28–30 terms and conditions 27–8 ‘dunning’, meaning 32–3 E EDI (electronic data interchange), purchasing 17 encryption techniques, Internet 88 ERP (enterprise resource planning) 21, 89 ethics Chartered Institute of Purchasing and Supply, code 25 purchasing 24–5, 92

98

INDEX

F fax machines, scam 77 Fax Preference Service, and junk faxes 72 faxes junk American solution 72 avoiding 72 competitions 71 Data Protection Registrar 72 Fax Preference Service 72 legislation against 71–2 opinion polls 70–1 premium-rate lines 70–1, 73–4 fire extinguishers 45, 46 firewalls, Internet 88 fraud and consultants 63–4 definition 2 scam, compared 2–3 G ‘get-rich-quick’ scams 82 gifts, and scams 41, 43–4 goods, counterfeit 4 greed, and scams 6, 8–9 I ICSTIS (Independent Committee for the Supervision of Standards of Telephone Information Services) code of practice 73 premium-line scams 72, 79, 95 IMC (Institute of Management Consultancy) 59 International Chamber of Commerce, cybercrime unit 86 Internet and business life 80–1 crime 90 encryption techniques 88 firewalls 88 hackers 81 hoaxes 81 law enforcement 85–6 legal issues 85–7 purchasing 17 purchasing agents 89–90

record keeping 87 security 87–8 virus hoaxes 81 Internet scams avoiding 90–1, 94 chain letters 82 copycat forgeries 84 credit cards 80–1, 87 ‘cybersquatting’ 84 directories 83 examples 82 ‘get-rich-quick’ schemes 82 ghost suppliers 84–5 share pushing 81–2 spam 82–4 web-hosting services 83 invoices, proforma invoices, difference 38, 45, 94 IRRV (Institute of Revenues, Rating and Valuation) 64 ISO 9000, consultants 59–60 ISVA (Incorporated Society of Valuers and Auctioneers) 64 L law Internet 85–7 and purchasing 22–4 ‘long firm fraud’ 5 M MCA (Management Consultants Association) 59 N National Criminal Intelligence Unit (UK) 55, 58 Nigeria scam avoiding 57–8 ‘black money’ scam 56 bogus connections 51 electronic mail version 55, 81 European connection 47 extent 47 features 48, 50 letter, sample 49 Nigerian government attitude 52–4

INDEX

variations on 54–6 victims 55 O office consumables 43–4 Office of Fair Trading, role 4, 74 OFTEL, telephone scams 72, 79, 95 P paper scams avoiding 45–6 case study 41–3 invoices features 36, 38–40 legal disclaimers 39 sample 37 telephone contact 40 Pareto analysis, suppliers 20 payment chasing, scams 33 Philanthropic Advisory Service, Better Business Bureau, charity scams 69 photocopiers, contracts 75 PKI (public key infrastructure) 88 police, and scams 42–3 Ponzi scheme 4 price, cost, comparison 15–16 proforma invoices, invoices, difference 38, 45, 94 purchasing agents, Internet 89–90 call-off contracts 16, 45, 92 charge cards 17–18, 94 contract law 22–4 decentralization 1 EDI 17 ERP 21, 89 ethics 24–5, 92 ‘five rights’ 13–14 importance 10–11 and the Internet 17, 89–90 low-value orders 16–17 operational tasks 12–13 positioning model 14–15 record keeping, value of 87 and salespeople 24 separation of duties 18–19, 63, 92 shopping, compared 1, 11

specifications 24 strategy 11–12, 92 suppliers checks on 21, 94 preferred 20 reduction in 20–1 tactics 12 three-way matching 19–20 VAT 17 purchasing scams avoiding 92 and caveat emptor 2 definition 2 factors favouring 1–2 nature of 2 pyramid selling 4 Q questionnaires, directory scams, sample 31 R razor blades 77 rentals 78–9 RICS (Royal Institution of Chartered Surveyors) 64 S salespeople, purchasing 24 scam merchants, motives 718 scams advance payment 7 avoiding 92–6 business rates reduction 61–2 by employees 6 Chambers of Commerce 43, 95, 96 cleaning materials 44, 45 corporate culture 6–7, 44 corporate hospitality 6 definition 2, 92 energy savings 62–3 fax machines 77 fire extinguishers 45, 46 fraud, compared 2 free gifts 41, 43–4 greed 6, 8–9 office consumables 43–4 payment chasing 33

99

100

INDEX

photocopiers, contracts 75 police action 42–3 razor blades 77 rentals 78–9 security systems 77 toner cartridges 44 trading standards organizations 43 vanity publishing 78 victims 8–9 water coolers 77–8 see also charity scams; consumer scams; directory scams; Internet scams; Nigeria scam; paper scams; purchasing scams; telesales scams security systems 77 share pushing 4 shopping, purchasing, compared 1, 11 spam, Internet scams 82–4 specifications, purchasing 24 T telephones complaints OFTEL 72, 79, 95 premium-rate lines scams 73–4 avoiding 94

telesales scams 5–6, 40 avoiding 93 Theft Act (1968) 3 toner cartridges, scams 44 trading standards organizations, scams 43 U Unsolicited Goods and Services Act (1971) 26, 29 US Postal Service 29 US Secret Service, Financial Crimes Division 58 V vanity publishing 78 VAT, purchasing 17 virus hoaxes 81 W warranties, extended 75–7 water coolers 77–8 Y ‘Yellow Pages’ 28–9 YPPA (Yellow Pages Publishers Association) 30