Burton Report on Business Crime
IN THIS ISSUE
- Business Cash Crunch -Don’t Fall For Ponzi Schemes
- Quote of the Month
- “Rocks in a box” reborn in iPad clay substitute scam
It has been two years since we broached the subject of Ponzi schemes in the February 2010 Issue and we were prompted by the latest Business Fraud Prevention Newsletter for January 2012 to revisit the topic. Although the focus of the Newsletter article is on individuals who suffer losses through unwittingly investing in a Ponzi scheme, the exact same issues, concerns, red flags, etc apply to a small business.
[A Ponzi scheme simply explained is a fraudulent investment whereby the perpetrator/author uses the money received from one investor to pay "dividends" to another investor to give the appearance that the investment is for real and is making a profit. It is a sort of shell game to move funds around and the reality is that none of the invested funds are actually placed in a genuine fund but are lining the pockets of the fraudster]
The key to making sound, ethical and legal investments to boost a small business experiencing financial difficulties is the proper analysis, background checking and simple due diligence with respect to how the investment presents itself.
In 2010 we highlighted the risk of falling for an attractive print advertisement that screams great returns on an investment but that is just one of many ways Ponzi schemes get our attention (internet, newspaper and magazine articles, get-rich-quick investment seminars to name a few). Of all the other methods Ponzi scheme perpetrators use to lure new victims the one that really hurts is the one recommended by a close friend or colleague. This access route to a Ponzi scheme is somewhat sanitized by affinity fraud – people will take risks they would not otherwise contemplate because they trust the personal recommendation when the opportunity comes via a family member, a work colleague, a church or any other institution that brings people together because of a common binding interest. In the mind of the victim the trust in the referrer (the friend) automatically transfers over to the investment – and that is a huge leap of faith (and false logic) that will eventually be shattered when the scheme collapses which happens to them all eventually. The referrer may himself have invested in what he sincerely believes to be a lucrative deal and has no hint of the fraudulent aspects and is therefore quite open in recommending it to another friend.
The Securities & Exchange Commission (USA), the Canadian Securities Administrators and any of the Canadian Provincial securities administrators (such as the British Columbia Securities Commission) as well as the Scambusters article (see below) more than adequately cover the warning signs to avoid Ponzi schemes and they provide good advice on how to do your homework before making that important decision. The principles are the same so regardless of the authority you consult and therefore the advice is equally applicable to the USA and Canada. Bottom line: LOOK before you LEAP!
Detecting fraud in small businesses “The golden yardstick for fraud prevention: STOP and think WHO and WHAT you are dealing with”.
Author of the Burton Report
Detective Vancouver Police Dept (retired)
One of the oldest street scams known to man – “rocks in a box” – used to claim many victims who were interested in buying a brand new television at a huge discount and were shown a real one as a sample but when “arrangements” were made to deliver one to the excited customer a few days later at a discreet location in an alley what the victim paid for was a genuine tv carton containing rocks to match the weight of a store bought set. Of course these were cash transactions and the seller disappeared into the night leaving behind a greedy “mark” who is out of pocket.
Fast forward to the 21st century and the consumer thirst for electronic gadgets such as X-box, Nintendo, computers, etc. Most electronics retailers have had a clear return policy that simply states that a refund will be provided as long as the item is unopened, i.e. still in the factory shrink wrap.
In 2009 an excited Florida teenager’s jaw dropped wide open when he opened his $138 birthday gift that was supposed to be a Nintendo DS only to discover the box contained rocks and crumpled Chinese newspaper! Wal-Mart understandably referred the customer to Nintendo because they relied on the assumption that if the item is shrink-wrapped, that is how is came from the supplier. In the same year a customer buying an expensive MacBook Pro from a Texas Best Buy found his box contained a red paving stone in bubble wrap. For his $2,100 “laptop” he too was referred back to Apple based on the same logic that only the manufacturer shrink wraps stock at the factory.
Skip forward to 2012 and several leading electronics retailers in British Columbia have been stung by a new variation of the rocks in a box scam. In an elaborately planned scam, fraudsters purchasing an iPad2 with cash have substituted modelling clay of the same weight and successfully obtained refunds from the point of purchase. Because the boxes were still shrink-wrapped the stores assumed (wrongly) that the items had not been opened and did not hesitate to process refunds. That same logic caused the returned items to be returned to inventory and some were later resold to new customers who did not find out until they got home that they were stuck with a pad of useless clay!
The individuals who organized this scam deliberately avoided placing themselves personally at risk when returning the clay-filled boxes for a refund by hiring unwitting mules to conduct a “mystery shopper” exercise that merely masqueraded as a method of exchanging clay for cash!
On a personal note I, too, bought an iPad2 from one of the same leading electronics retailers in early January. I now consider myself lucky – I got a real one!
- Fraudsters have exploited customer-friendly return policies that allow refunds where the item is still sealed in its original box – that policy has now been changed and returned items will be opened in front of the customer before a refund is processed. Smaller retailers should follow the same practice as their bigger brethren.
- Since shrink wrap is no longer a guarantee of being “factory sealed” retailers should check the contents of returned items to inspect for damage and rogue contents.
- Retailers should double check all existing inventory to ensure they are not holding boxes with substituted contents
- Customers should be encouraged to check the legitimacy of the contents of items they purchase from electronics retailers – such a policy protects both the store and the customer.
- The English proverb “Don’t judge a book by its cover” comes to mind with respect to this latest fraud trend and businesses have to be sharp to watch for the latest trends, to learn from historical frauds that have exploited weaknesses in sales and refund/return policies. Refund fraud is already a big problem for retailers and this latest addition is an unwelcome burden for those stores trying to cope with shrinkage.
- It is significant that these latest frauds were carried out during Christmas and New Years when retailers are at their busiest and the pressure of business can provide a convenient cover for the scam to be carried out “under the radar”.
- It is unfortunate that the historical incidents in the USA in which a similar modus operandi was used did not trigger a change of policy with respect to refunds/returns as this might have prevented the current spate of substitution frauds.