The ABCs of How To Avoid Being Scammed
By Kevin Bousquet, CFE
Investigate, Investigate, Investigate
After twelve years of working in the investigative industry, I am still amazed at the number of clients who have come to us for help after being victimized financially. In most cases the matter results from a failure to do their homework or make some basic inquiries before transacting a deal.
I am going to discuss with you some of the basic situations we run into on a regular basis and offer some basic advice. This is not to put the scare in you in order to generate business for our agency. It's just to let you know why we suggest that you allow us to look at things for you from the beginning instead of at the end, when it may be too late to recover your investment.
As far as fraud, white collar crime, and general commercial crime are concerned, you should be aware that most police departments that have specialized units in this area are highly backlogged. With robbery, drugs, and assault offences on the increase, your investigation is not going to be on the top of the list with any law enforcement agency.
In Canada it has become so bad that in most cases, we will simply bypass laying a complaint (or an occurrence) with the police. Instead we bind and tab up the investigation and lay the charges ourselves, privately through a Justice of the Peace.
The other aspect that most business professionals don't realize is that you can't use a criminal process to resolve a civil process. This means that you can't threaten to criminally charge someone for not returning your money. To do so is called extortion. It's a criminal offence right across North America and Europe--the law is virtually the same when it comes to extortion.
Punishment or Collection
In most cases you're going to have to make a decision. Do you want to criminally charge the person in the criminal court? Or do you want to try and collect your money in the civil court? You can ultimately do both but you have to be very careful not to break the law.
If you choose the criminal charge, you had better be prepared to wait and hope the judge will give you a restitution order as well. This process can be frustrating, and the outcome, in terms of the actual sentence handed out, is often disappointing to the victim.
If you go civil, then you're going to have to hire a lawyer to try and collect your money (unless the amount falls within the mandate of the Small Claims Court).
In this situation you're hoping that the individual you're suing has enough assets that you'll actually be able to collect if you win your lawsuit.
The end result of a lawsuit is a piece of paper called a Judgment. The court doesn't collect your money for you and they won't do anything to an individual with a Judgment against them who just refuses to pay.
This means your Judgment could be worthless. All the Judgment has given you is the power to do things like garnish bank accounts and seize assets. These remedies are effective only if you can find the assets. See our section on Asset Investigation.
This is why we push the principles of "Investigating before Investing" and "Investigating before Litigating." This means taking a look at things in the beginning to ensure the deal is clean, to prevent suffering in the end.
For the record, I am not talking just about big deals here. This could be as basic an renting out your basement apartment to a tenant you're nervous about, or taking on a new employee or business partner. The matter could be as extensive as conducting background investigations on individuals behind a venture capital deal. It's all the same principle.
General Comments & Advice
Never take anything at face value. You must seek professional, financial and legal advice before transacting any deal. Don't get caught up in pretty web pages and well decorated offices. Most of all, don't rush into the deal. Take your time and do your homework no matter what the pressures of the moment seem to be.
In most States and Provinces the courts will usually use the principles of "let the buyer beware." This most commonly means that the onus is on the buyer (i.e. the person on the receiving end) to do the homework.
If you are starting to get nervous about the entity you are dealing with, it is up to you to spend the time and effort to do your homework. You may very well get to the point of hiring a Private Investigator or a Forensic Accountant to look into the backgrounds of the individuals behind the deal, and most importantly, into their past deals or actions (if applicable).
It doesn't matter what end of the deal you're on. Whether you're an investor or the person seeking investment, you can be easily scammed.
There are endless PIs and Forensic Accountants who like us specialize in due diligence and background investigation. Many traditional investment firms actively retain investigators, or they may have in-house due diligence departments.
Depending on the State or Province in which you reside, you may wish to know if the individuals you deal with have criminal records, have ever been bankrupt, have been defendants in lawsuits, or have had unsatisfied judgments filed against them in the civil courts.
A complete background investigation can cost anywhere from $500 to $1,000 plus disbursements. Individual specific searches can be conducted for under $200 in most cases. Most PI firms specialize in a number of areas, so for instance if you need a background investigation, you must retain a firm that specifically does work of that kind.
In most cases these investigations can be conducted very discreetly and lawfully without the person or company knowing they are being investigated.
It may be necessary for a credit report to be obtained to see if there are outstanding creditors and collectors. To do a credit report you will need some form of consent. All this basic information can be relevant to ensure a safe deal.
Scams To Watch For (If you are seeking investment)
If you use a company or a middleman such a loan broker to try to find you an investor or a venture capitalist, you may be asked to pay a large fee up front before any financing has been obtained. This advance payment may be called a processing fee, finder's fee, or credit application fee.
Prior to being told about the up-front fee, you will be put through an exhaustive array of frustrating paper work which will include credit applications, the business plan, references, co-signers, numerous interviews, etc.
Even though you have been told the fee is completely refundable, you may have trouble collecting your refund through the court system if the middleman has no assets.
You should be aware that there are thousands of fraudulent companies and fraudulent middlemen who make their living scamming for these processing fees. The agreement between you will be so fine that you may find yourself in the cold as a result of some unconditional clause in the contract. There are hundreds of reasons why you could be denied independent financing under the contact.
This processing fee scam has gotten so bad there has been new legislation written in many States and Provinces to protect consumers from it. This type of scam is most commonly found in the mortgage broker and loan broker field. I could write a book on the number of mortgage brokers I have investigated in my career.
If you are using a middleman you must check references. Have them give you the name of 10 to 20 individuals for whom financing has been successfully obtained. Pick up the phone and call these individuals.
If you are nervous about paying the finder's fee, pay the fee to your lawyer in "trust." Your lawyer will disburse the finder's fee only when the financing is in place. Just have your lawyer write the middleman a letter confirming that his fees are being held in trust upon completion of financing. It must be your lawyer, and not the lawyer acting for the middleman.
There are a number of legitimate middlemen out there who work on a "No Find No Fee" basis; to find them you're going to have to call around. A reputable real estate lawyer or securities lawyer should be able to refer you to someone.
We are not stereotyping these middlemen. We're merely suggesting that if you are dealing with an individual or a company whom you don't know, you must check references. You may even wish to perform a litigation search to see if the middleman has ever been a defendant in a lawsuit. This basic search should cost you no more than $100.
Scams To Watch For (If you are an investor)
Needless to say, the investigative and due diligence efforts that have to be made by an investor cannot be summarized in a few paragraphs.
There is an endless number of situations in which investors have been scammed lending money to new ventures that were nothing more than fraudulent paper corporations with no real foundation. The money gets invested into a corporation, the directors abscond with the money, and the company goes bankrupt. The same scam can apply to fraudulent real estate deals.
We would suggest that all investors conduct extensive due diligence and investigative research before extending money to any individual or company. It is important to investigate not only the company you're looking to invest in, but most of all the individuals who are truly behind the company.
Do these individuals have criminal records? Have they been defendants in lawsuits? Is there a history of bankruptcy, in which the individual formed a company that was shortly bankrupted after being financed by investors?
It will be necessary to know where these individuals were before they started their new venture. If they were in a previous business, why did it fail? What is the likelihood of success this time around?
We would again suggest that if you do not know how to do your own due diligence or homework (or you just don't have the time) then you may wish to consider an outside source.
It is best to go to a corporate lawyer (in the city where you reside) who can refer you to a reputable Private Investigator or Forensic Accountant.
Make no mistake about it, your investment success or failure will be determined by how much time you spend doing your own research.
If you have questions regarding due diligence, private investigation, or forensic accounting, please feel free to email us firstname.lastname@example.org speak to your corporate lawyer.