MLR

Be aware of advance fee schemes

The recession has made obtaining equity capital and loans for businesses more difficult. In response, a certain breed of scam artist is taking advantage of people’s dreams by extorting ill-afforded upfront payments and disappearing afterwards.

fraud

The FBI calls this type of con an advance fee scheme. Many scammers appear to be legitimate businesses and have LinkedIn accounts where they position themselves as experts and actively seek clients.

For example, they may post messages like, “Are you in need of funding for a project?” Or, “I am looking for viable projects to invest in” in groups like Private Equity and Venture Capital or Film Financing.

Some have slick websites with a lot of glossy pictures and text with convoluted, often confusing, information about investment criteria and structure.

A few even have multiple identities. The anonymity of the Internet and the growth of electronic commerce have led to an explosion in the ability of these criminals to find new victims.

The first sign that someone may not be honest is a readiness to take on your project without much information or detail. The first document to be sent your way will likely be a nondisclosure/non-circumvention agreement. In legitimate business deals, these agreements are used to ensure service providers receive their agreed-upon fee or commission.

Con artists have been known to use these agreements to threaten victims with civil suits if they disclose the fraud to law enforcement, the FBI cautions. Do not sign anything until you are satisfied with your due diligence on the company.

Remain in the driver’s seat of any deals involving your company. You should have nondisclosure agreements in place before discussing any proprietary information about your business with third parties.

A scam artist will likely not sign your agreement. Do not send your business plan, private placement memorandum, organizational documents, financial statements or tax returns to anyone until you are satisfied that the opportunity is on the up and up. Some scammers are using company and project information to create clone companies that they then use to scam others.

The telling moment will quickly occur once you express interest in moving forward. The advance fee scheme is usually a variation of a monthly consulting or advisory stipend or upfront closing costs to obtain a loan.

One scammer tried to charge a $5,000 per month fee (open-ended) until equity financing was obtained, and then another 4 to10 percent would be due, one movie production company said. The standard for that particular industry is 5 percent maximum and finders are paid out of the funds invested. Of course, financing is not guaranteed and no doubt the victim would be strung along for months.

Closing costs are just that and should never be paid in advance. While there might be an application fee for a loan, usually these are minimal.

Other variations on advance fee fraud for bogus loans include fees for “insurance” or “processing,” consumer advocate Les Henderson warns. Often, prospective borrowers are so far into the process, the fee seems to be the only thing standing in the way.  So they pay it.

In the case of businesses looking for multi-million dollar loans, the fees can be well over $100,000. Sometimes these criminals will build false credibility by choosing a name similar to a legitimate company. Some borrow real identities. By providing a false letter of intent, these scammers can drag out the process for months, preventing the business from moving on to a real source of funds. That hurts the business, too.

Check secretary of state corporate filings to see if the business is licensed. In the case of lenders, they need a license in your state. A simple Internet search revealed that the advance fee scammer above had a revoked business license due to nonpayment of the annual fee.

Companies without physical addresses are a red flag. Ask for customer references that you can verify independently. Scamadviser.com can check the identity of websites. One purporting to be a Middle-Eastern investor is actually based in Nigeria. Fake UK +4470 phone numbers are a forwarding service used by scammers.

The main rule is not to pay money upfront. However, due diligence in advance of contacting people is a good idea so you are not roped into a situation that looks real but proves false six months down the road.