Protect Your Business from Corporate Fraud: Examples and Explanations

Posted by Michael E. Lyons | Sep 03, 2019 | 0 Comments

At Patriots Law Group, we represent clients in every type of business matter, from formation to dissolution, contract disputes to debt collection. We take pride in helping veterans, retirees, and small business owners who serve the military community navigate the legal challenges of business ownership. Something we are often asked about is the concept of fraud. Business fraud, also known as corporate fraud, costs the IRS millions of dollars each year – but more importantly, it can cost small businesses and employees their livelihood.

According to ACFE, the Association of Certified Fraud Examiners, fraud costs small businesses with less than 100 employees an average of $154,000.

What is business fraud?

Fraud is “deliberately deceiving someone else with the intent of causing damage.” In most situations, this damage is financial rather than physical. Fraud can occur in virtually any industry – credit card fraud, tax evasion, and healthcare fraud are just a few examples. Business fraud, on the other hand, is defined by the FBI as, “dishonest and illegal activities perpetrated by individuals or companies in order to provide an advantageous financial outcome to those persons or establishments.” In simpler terms, business fraud puts dirty money in a person's or business's pockets through illegal means.

What are the different types of business fraud?

In practice, business fraud can take on many different personas:

Fraudulent goods or services. This category covers many of the most common forms of business fraud, which can affect a business and its customers alike.

  • Non-delivery or non-payment. A business sells items online that are never delivered, places a large vendor order with a money order that is only deemed fraudulent after the goods have been received. Likewise, a customer could place an order with a check or credit card, only to bounce the check or cancel the charge after receiving the products.
  • Return fraud. Many e-commerce and brick-and-mortar businesses that sell physical products can suffer from return fraud. A customer steals items to return without a receipt, or buys an item, uses it once, and returns it damaged or in unsellable condition. This costs the business money, and can usually be prevented with stricter return policies.
  • Money fraud. At this point, most businesses know not to accept bills over a certain amount if there's something suspicious about the situation. Money fraud is one of the most frustrating cases of fraud, because employees or business owners may be double-duped by scammers—if someone purchases a few small items with a fake $100 bill, the business may have given out real money as change. Now, they're stuck with a fake $100 AND they've lost additional money and goods to the scammer.

Employee fraud.

  • Payroll fraud and “ghost employees.” When one person controls payroll and hiring at the same time, it can be easy to skip steps in payment processes and pocket the excess funds. Businesses can even create “ghost employees” – fake employees that are in the business's system, but their paycheck goes directly into someone else's bank account. Similarly, some businesses commit fraud by paying their employees in cash—“under the table”—to skip out on employment taxes.
  • Embezzlement and skimming. These types of fraud cases are some of the most common. An employee embezzles funds (also known as larceny) by using business funds illegally for their own personal use. For example, an employee could charge an expensive restaurant meal to the company credit card, and write it off as a meal with clients. On the other hand, skimming occurs when an employee processes a receipt, pockets the money, and doesn't record the transaction in the company's books.
  • Kickbacks and payoffs. This dishonest business practice occurs when one person or company “pays off” another to receive goods, services, or a deal. Think of them in terms of “please” and “thank you”: someone might receive a payoff as a company's way of saying “please do business with me,” or a kickback to say “thank you for setting up this scheme.”
  • Internal theft. Employee theft of office supplies or products (“shortage”) may start small, but it can add up over time. This is another common form of fraud that can cost businesses a huge portion of inventory or sales.
  • Worker's compensation fraud. In some cases, a worker may claim injury or illness as a result of work conditions to cash in on worker's compensation. In fraudulent cases, the employee could claim worker's comp for something that happened offsite—or worse, be making the whole thing up.

Identity theft. Identity theft is a huge concern for small businesses. Businesses use Employee Identification Numbers – kind of like a person's Social Security Number – to process their taxes and business operations under U.S. law. If a fraudster gets ahold of a business's EIN, bank information, and credit card info, they can use that data to open fraudulent credit cards, obtain illegal lines of credit, or otherwise ruin a company's finances.

Tax evasion. Like individuals, businesses can illegally skip out on paying taxes by submitting falsified records. This practice, known as tax evasion or tax fraud, costs the United States millions of dollars in missed revenue – and costs small businesses even more in fines and fees – each year. Some businesses alter their tax returns by claiming personal expenses as business expenses, reporting a lower corporate income than what they actually made, or neglecting to withhold employee income taxes.

If you have discovered fraudulent behavior from your workplace, your employees, or your business partners, it is critical to know your rights and protect yourself. Business litigation, when handled incorrectly, can be expensive and exhausting, especially for small businesses that stand to lose the most in a lengthy court case. You deserve a qualified business attorney to represent you.

At Patriots Law Group, our experienced team of attorneys is committed to defending small businesses and protecting the interests of military members, veterans, and their families. Call today to see how we can help.

DISCLAIMER:  The information above is for general informational purposes only.  No attorney-client relationship is intended or created by this information.  Each individual situation is different and therefore a formal in-person consultation is necessary before any specific advice may be relied upon as appropriate and accurate for a given situation. Please call Patriots Law Group at 301-952-9000 to set up a consultation if you wish to obtain specific legal advice you may rely upon. We serve clients anywhere in the world, with in-person consultations available at our Suitland, MD office — right next to Andrews Air Force Base — for clients in Maryland, Virginia, and Washington, D.C.

About the Author

Michael E. Lyons

“As a veteran, I bring my core values of service, integrity, and excellence to every client, every case, every time.” Background: Michael E. Lyons (“Mike”) handles cases in Maryland and Washington D.C. fr...


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