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Business Fraud Prevention

Protect Your Business

You're busy enough running your business without taking time to think about fraud. Unfortunately, fraud increasingly threatens U.S. businesses.

Small businesses are often vulnerable to fraud, especially when they fail to maintain adequate financial and cash controls or properly supervise employees who run their financial operation. Complaints to the Better Business Bureau about scams targeting small firms have more than doubled since 1990. Common frauds include employee dishonesty, embezzlement, shoplifting, check and credit card fraud, vendor scams and Internet fraud.

The Union Bank wants to help you manage the risk to your business by learning to identify your company's vulnerabilities and establish consistent procedures designed to limit the risk. Don't allow yourself to become another fraud statistic - take action today to protect your company's assets.


Ask your accountant or legal adviser to help you identify weaknesses in your business operations. No two businesses have the same risks, but some problems are common. For example, newspaper stories appear frequently about employees who diverted company funds for personal use. Examine your hiring, record-keeping and auditing procedures to eliminate any tempting loopholes.

Look for weaknesses in your approach to these issues:

  • Business Practices - Do you set a good example? An employer who dips into petty cash, fudges on an expense account, uses company funds for personal items or sets other poor examples may cause employees to rationalize dishonest actions by thinking, If it's OK for the boss, it's OK for me. An adequate accounting system with internal controls is the best way to prevent and detect fraud. Have an accountant set up your system and have it tested annually by an auditor. Controls and procedures must be audited from time to time to prevent breakdowns.
  • New Hires - Weak hiring practices put many businesses at risk. Do you check references for accuracy? Are submitted employment histories truthful? Do you conduct thorough background checks on all new employees?
  • Current Employees - Some studies indicate that employee-perpetrated theft affects nearly 90% of businesses. U.S. employers lose more than $400 billion annually to misuse of assets, corruption, false statements, false overtime, petty theft and pilferage, use of company property for personal benefit, payroll abuses and other frauds. Many of these abuses are never detected. Often, when a perpetrator is discovered, he or she had been a trusted financial or administrative employee who enjoyed considerable independence - someone the employer had least suspected.


Protect your company - be alert for these common fraud threats:

  • Credit Card Fraud - Criminals may make purchases with stolen cards. Or they may intercept pre-approved credit offers sent to consumers and obtain cards fraudulently by filing change-of-address orders. Unlike consumers, who are liable only for a maximum of $50 in most instances of credit card fraud, businesses often bear 100% of the losses caused by these crimes.
  • Internet Orders - A rapidly increasing number of merchants have been scammed by crooks who place fraudulent Internet orders using stolen credit card information.
  • False Checks and IDs - Technology has made it increasingly easy for individual criminals or gangs to create realistic counterfeit checks as well as false identification that can be used to defraud businesses and banks.
  • Office Supplies - Con artists may telephone or visit your business and attempt to sell poor-quality, overpriced supplies that may never be delivered. Don't buy from new suppliers without verifying their existence and reliability.
  • Yellow Pages Scams - The Better Business Bureau reports that as much as $550 million each year is lost to con artists who use the familiar but never trademarked "Walking Fingers" Yellow Pages logo to make phony directory invoices look legitimate. Businesses that intend to buy a Yellow Pages listing may end up with an ad in a small directory that is distributed to a limited audience.
  • Web Site "Cramming" - Con artists may charge a small business for web-site design services or features that the business never ordered.
  • Fund-Raising Scams - Unscrupulous telemarketers may solicit charitable contributions to public-safety or other civic causes, or try to convince small businesses to advertise in phony publications.

How to Protect Your Business

Small business owners can take steps to limit or eliminate their exposure to fraud. Here are some suggestions:

  • Believe that fraud can happen to any business - your business.
  • Develop a business code of conduct that explicitly addresses fraud, conflicts of interest and illegal acts. Tell employees and vendors that unethical behavior will not be tolerated.
  • If you behave ethically, most employees will follow your example. Be an active participant in your company's control process.
  • Ask employees to identify fraud risks and suggest ways to protect against those risks.
  • Make sure that computer passwords are used properly to limit access to computer files.
  • Make sure that different employees place and approve purchases.
  • Have disbursements properly approved. Implement good check security practices such as two signatures on all checks.
  • For information on how to recognize bogus telephone directory bills, contact the Yellow Pages Publishers Association.
  • Review complaints from customers, suppliers and staff members.
  • Perform accounting reconciliation at least once a month - and investigate all variances.
  • Develop a documented system of internal fraud control procedures and ensure that external audits are performed regularly.
  • Have bank statements mailed to your home or a post office box rather than to your office. Review cancelled checks, deposit activity, paying special attention to large or unusual transactions.
  • Consider using fraud-proof checks with chemical sensitivity designed to prevent photocopying.
  • Ask your Union Bank representative about fraud protection products and services such as online STOP Pay.
  • Conduct thorough background checks on new employees.
  • Obtain fidelity bonds on employees trusted with company funds, including bookkeepers, controllers and purchasing agents.
  • Establish specific job descriptions for employees and ensure that those duties are fulfilled.
  • Make sure that internal controls are actively monitored and are known to all employees.
  • Segregate accounting responsibilities so that no single individual controls all facets of a financial function.
  • Limit access to valuable physical assets including inventory, especially readily marketable items. Lock up your check stock paper.
  • Insist that all employees take allotted vacation time. Many white-collar criminals avoid leaving work for extended periods of time to prevent discovery of their crimes.

Ask questions. If something seems odd or out of place, investigate. Often, there's a reasonable explanation. If not, keep asking questions until the cause is identified.

Fight Credit Card Fraud

Regularly train new and existing employees to spot credit card fraud - once is not enough. Each credit card has different security features and those features are frequently changed or enhanced. New employees need to know what to look for, and existing employees can become complacent. Train them to:

  • Hold on to the card until the transaction is completed.
  • Check presented cards for signs of alteration or counterfeiting.
  • Compare the account numbers-embossed numbers on the front and back of the card and on the sales slip should match.
  • Verify signatures - the signature on the back of the card and on the sales receipt should MATCH.

Employees should also be trained to watch the behavior of customers. Suspicious behaviors that may signal attempted credit card fraud include:

  • Making random purchases without regard to size, value or price.
  • Multiple purchases of identical items.
  • Purchasing large items and refusing delivery at a later time.
  • Attempts to rush through transactions just prior to closing.
  • A lack of interest in warranties for expensive items, or acceptance of such offers without apparent consideration.
  • Presenting a credit card from a pocket rather than a wallet.
  • Claiming to have left photo identification at home or in the car.
  • Using credit cards at an unusually young age.
  • Taking excessive time to sign the sales receipt or quickly signing the receipt away from your vision - the customer may be attempting to present a forged signature.
  • Remember: if you are suspicious, ask for a photo ID.

If you take credit card orders by Internet, phone or mail make sure that you:

  • Transmit using technology that protects information from being intercepted or disclosed during transmission. In addition, secure your Web site and any data-capturing methods against unauthorized efforts to acquire account or other information.
  • Validate each order carefully. Get all necessary information including a full address and phone number. Be wary of unusual orders. Purchases that are larger than average transactions, especially those specifying next-day delivery, should be examined with extra caution.

Fight Check Fraud

  • Review checks to ensure that the handwriting or print styles are consistent and that there are no signs of erasure or alteration.
  • Compare the signatures on items and the appearance of the presenter with the signature and photograph on identification.

Prevent Purchasing Fraud

  • Educate your employees - Make your workers aware of the most common types of scams against small businesses. Distribute pamphlets, posters and other literature about small business fraud from police or consumer affairs agencies.
  • Know your rights - If you receive bills for goods and services you didn't order, don't pay. The law allows you to treat unordered goods and services as gifts. First double-check to make sure that an honest mistake hasn't been made.
  • Review phone bills as soon as they arrive - Be on the lookout for charges for services you haven't ordered or authorized. If you find an error on your bill, follow the instructions on your statement for filing a dispute.
  • Don't buy over the phone - Unless you have a previously established relationship with a supplier of business or office supplies, never conduct purchases over the phone. Scammers sometimes obtain the names of business employees and claim during a phone conversation that these employees have placed orders on behalf of the business. Instruct employees to verify the order with the employee named by the caller.
  • Assign purchasing to designated staff - Authorized employees should be skeptical of "cold" or unsolicited calls and should feel comfortable saying "no" to high-pressure sales tactics.
  • Document all purchases.
  • Teach employees how to respond to telemarketers - Advise employees who are not authorized to order goods and services to say, "I'm not authorized to place orders. If you want to offer or sell us something, you must speak to ______________."
  • Buy from people you know and trust - Office supplies and advertising are necessities, but you should order them from reputable vendors.
  • Check out an organization with the attorney general or Better Business Bureau in your state and the organization's home state before you send money for products or services. Keep in mind that there may be no record of complaints if an organization is new or has changed its name.
  • Ensure that employees and vendors are aware of your policies regarding conflicts of interest, gifts and entertaining.
  • Verify invoices - Employ procedures to verify any and all incoming invoices prior to payment. Compile a list of regular suppliers with names, addresses and phone numbers and make the list available to employees responsible for the payment of your invoices.
  • Ask for written verification of offers - If you're interested in a caller's offer regarding goods or services, request that the offer be made in writing and forwarded to you. Be wary if the caller refuses to provide a written offer or provide references upon request.
  • Establish and follow a standard purchasing procedure. One of the simplest ways to prevent fraud is to ensure that all bills and invoices are channeled through one department. Establish a company policy that invoices will not be paid until they are matched with goods or services actually ordered and received.

What To Do If Your Business is a Victim

  • If you are victimized by a credit card scam, inform your credit card processing company immediately.
  • If you believe a con artist is targeting you, contact your state attorney general's office or local Better Business Bureau.