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Bluntin "Bust-Outs"

This article brought to you in conjunction with World Trade Online

By Mel Mandell

How to avoid shipping goods that'll never be paid for.

Beware of "bust-outs"! That's the ordering and quick disposal of high volumes of merchandise by con artists who have no intention of paying. According to an FBI spokesman, "... the volume of bust-outs has increased in the last 18 months." Todd Sheffer, director of loss prevention for the National Association of Credit Managers (NACM) in Columbia, Maryland, reports a record number of such frauds this past January. Undoubtedly, there were others that embarrassed creditors did not report.

Why the increase? A long-standing reason, says Sheffer, is the low status of credit managers. "In spite of the fact that they protect a major corporate asset, accounts receivable, they remain the low men on the executive-salary totem pole."

Why January? Because, according to Mel Feierstein, "... clever bust-out artists take advantage of the Christmas selling frenzy. Comes January and vendors belatedly demand payment, only to discover, to their dismay, that they've been victimized."

Feierstein, director of customer education at Dun & Bradstreet Inc. in Murray Hill, N.J., urges vendors to be vigilant all year round, not just before the holiday selling season.

Not too surprisingly, vendors of electronics and computers are the current favorite targets of bust-outs, says the FBI.

These goods are in high demand and represent high, compact value. The FBI's spokesman also noted the especially high prevalence of bust- outs in New York City, "... because of the reluctance of law enforcement to pursue, unless significant dollar amounts are involved."

Two types of bust-outs are most common. Worry about new businesses that pay small initial invoices in full and on time. Then, after ordering and taking delivery of uncharacteristically large orders, they suddenly declare Chapter 11--or simply go out of business, vanishing without a trace along with all the goods they received.

The second variety is what Sheffer terms a "bleed-out." The seam artist buys--always via long-term note with only one or two small initial payments--an established company with a good credit rating. He then bleeds the operation dry, appropriating cash, selling assets such as vehicles, and of course disposing of large volumes of merchandise not paid for. By the time the original owners retake their former company after monthly payments cease, little is left Victimized manufacturers and distributors are further harmed because their products, disposed of at deep discount, are marketed at such low prices that legitimate retailers are hurt or at least antagonistic towards their suppliers. Distributors or wholesalers who sell in Mexico sometimes lose big orders because a seam operator has sold desirable goods down there at deep discount for cash. The Mexicans--and Americans, too--don't question the provenance of desirable merchandise offered at bargain prices for cash only. Cross-border bust-outs are rare says the FBI, most likely because most purchases are via letter of credit and other sales on credit are not common.

What is the extent of bust-out fraud? IS difficult to estimate because some bust-outs begin as legitimate businesses that slide into bankruptcy, according to Sheffer. Honest businessmen launch operations that, as they fail, deteriorate into bustouts to enable their increasingly desperate owners to escape with some assets. The best estimate that Sheffer could come up with is $10 billion a year, much lower than some other "expert" estimates.

How can manufacturers, distributors, and importers avoid being taken by bust-out artists? The first line of defense is obvious: know your customer--and the credit references he provides. If a salesman lands a new customer, he or the credit manager or some member of management should accept the first order only after visiting the customer's facility and verifying that there's a real business there.

A visit to the premises should also reveal an important fact: its extent. If subsequently the customer orders amounts of materials or merchandise out of proportion to the size of the facility, alarms should be sounded, warns Feierstein.

To pass the initial inspection, seam artists pull a "category two": They simply buy an existing business, one that's perhaps failing. This means that orders from long-standing customers with recent changes in ownership must be checked carefully.

Naturally, credit references must be checked out. One of the ways in which con artists establish phony credit references is to provide the phone numbers of confederates whose sole function is to offer glowing reports. The validity of such phone numbers must be checked against phone books or with local "Information."

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