Skimmer fraud is a global epidemic – are you stepping up to the plate and helping your borrowers?
Skimmer fraud costs businesses billions of dollars annually in the United States, according to a report released in February by the Association of Chartered Certified Accountants USA (ACCA) and Pace University.
The average loss per skimmer scam was around $50,000 in 2011 — up from some $30,000 in 2010. Unfortunately, this trend isn’t showing any signs of stopping.
Skimmer scams can damage a business’s reputation, compromise its ability to service debt and generate financial losses. Even though it’s most common among restaurants and retailers, skimmer fraud is a risk for any business that takes electronic payments.
What is “Skimmer Fraud”?
“Skimmers” are electronic devices that are used to read and store electronic data. They can be installed directly on ATMs, gas station pumps and point-of-sale terminals to extract data from magnetic stripes on payment cards. Some schemes even use small cameras to simultaneously record personal identification numbers (PINs).
After skimming the electronic data, thieves will usually clone payment cards. The phony cards might be used to purchase high-end goods that can sell quite easily on the black market or online marketplaces.
U.S. is Vulnerable to These Threats
Skimmer fraud has become a global epidemic, which is often perpetrated by Eastern European crime rings. Unfortunately, the United States is especially vulnerable to these threats. Why? For one thing, it has more ATMs than any other nation, and U.S. credit cards don’t contain global chips, which makes them easier to skim and clone.
Restaurants in the United States also typically swipe customers’ cards away from the table, which creates an opportunity for dishonest restaurant staff to skim a patron’s electronic data using handheld devices. In other countries, however, payment cards are swiped at the table, never leaving diners’ sight.
While skimmers have been around for years, today’s devices are smaller, they have more memory and they incorporate advanced encryption methods that can make them harder to detect. Some skimmers even use wireless technology. In January, 13 people were indicted for operating a skimmer fraud ring. They stole upwards of $2 million using Bluetooth-enabled skimmers at gas stations.
How to Prevent or Mitigate Skimmer Scams
There are several ways you can protect your borrowers from skimmer scams. Here are just a few:
- Inspect card readers for tampering and using skimmer detection cards.
- Install surveillance cameras to record activity at ATMs, gas stations and ticket kiosks.
- Prohibit cashiers from leaving their registers or terminals.
- Require employees to swipe payment cards in customers’ plain view.
- Equip point-of-sale terminals with anti-skimming devices.
U.S. retailers are also validating transactions using ZIP codes, driver’s licenses or PINs. What does the future hold? Look for biometric data — such as fingerprints or irises — to authenticate transactions.
Keep Abreast of Skimmer Fraud
If you want more information on the ACCA’s report, look for “skimmer fraud” on the association’s website (http://www.accaglobal.com). In addition, work our forensic accounting team. We can provide additional information on prevention and detection.
Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can help you reduce the risk of lending or assist your clients with our business advisory, audit, fraud detection and prevention, and tax services.
For more information about our business advisory, audit, and other accounting services contact us here, or call us at 716-847-2651.
Don’t Let Your Borrowers’ Small Business Fall Victim to Fraud
Author: Michael A. Boeheim, CIA, CFE, Director
In the 2012 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE), the most striking finding is the worldwide consistency of fraud patterns. Indeed, the report suggests that fraud is universal.
In some 1,388 fraud cases, from over 94 countries, like-minded perpetrators resorted to similar scams. Amazingly, the findings were consistent with previous editions of the report.
1. Make sure borrowers have anti-fraud Controls
The ACFE study pointed out that small businesses suffered the largest median losses. That, of course, brings up the point: Are small borrowers aware of the existence of fraud? It’s possible that they aren’t. Most small businesses have fewer resources to spend on needed antifraud controls — such as training programs, formal internal control systems, and external and internal audits — than large businesses do.
Small firms can also take longer to bounce back from large financial losses. A $1 million theft, for example, is easier for a Fortune 500 company to absorb than it is for a manufacturer with less than 100 employees. Unabated fraud can quickly damage reputations and even put some companies out of business.
2. Install an ethics and compliance program
It’s critical that your borrowers implement an ethics and compliance program to educate workers about fraud and how to deter would-be fraudsters. If you want to stop fraudulent behavior, setting up an employee tip hotline is perhaps the best way to discover fraud.
Such hotlines encourage employees to speak up about unethical behavior. When a good employee witnesses bad behavior from a co-worker, for example, it can affect job satisfaction and productivity. They need to not only know where to go when ethical dilemmas emerge, but also be assured of no retaliation.
3. Monitor collateral accounts
Common assets targeted by fraud scams include cash, inventory and receivables. These are often pledged as loan collateral. So make sure you monitor these accounts carefully for possible fraud risks. Moreover, asset turnover ratios and common-size balance sheets can help you stay on top of high-risk accounts. A significant change in such metrics should sound an alarm.
4. Look for fraudulent behavior at every level
Believe it or not, owners and executives are often the ones who initiate fraudulent behavior. And higher levels of authority equate with higher losses. The median loss for fraud committed by top executives was around $573,000, according to the ACFE study. In comparison, median losses for line workers and managers were $60,000 and $180,000, respectively.
Some of the most common warning signs of a corrupt manager or owner include financial difficulties (27%), living beyond one’s means (36%), excessive control issues (18%), and unusually close association with vendors or a customer (19%). It’s true that the tone set by an organization’s leaders can often filter down through the company.
5. Keep your eyes open … always
Sad to say, but almost half of fraud-stricken companies will never recover all their losses. Bottom line? No business can afford to cast a blind eye on occupational fraud and abuse. If any of your borrowers have weak internal controls or if their management seems a tad shady, contact a CPA for guidance.
If you have any questions about fraud, give us a call at 716.847.2651, or you may contact us here.
Guidance for Asset Based Lenders
Author: Michael Boeheim, CIA, CFE Director
Suppose one of your customers approaches you for a new loan — a loan that your institution will likely refuse. Of course, you won’t turn the customer away unless you have a valid suggestion for how he or she might be able to secure financing. In such cases, a private equity recapitalization might be the best solution.
How it works
A private equity group (or PEG) buys part of a private business. After closing the deal, the existing management team and selling shareholders continue being involved in daily operations. The PEG offers management expertise via a position on the company’s board of directors. To promote sustained growth, the PEG may choose to offer incentive stock options to key managers for reaching certain performance objectives.
The buyout is funded by the PEG with certain levels of debt (such as senior and mezzanine loans), preferred stock and, of course, its own capital contributions. Thus, a recap adds significant debt to the company’s balance sheet.
Even though debt will increase the business’s credit risk, it also provides capital for certain investment opportunities that the firm wouldn’t otherwise have been able to afford. As a result, the additional leverage allows the business to grow faster — and sell for more in the future — than if it had forgone potential investment opportunities.
As a general rule, PEGs seek an investment horizon of anywhere from five to seven years. And when that term ends, managers and shareholders must determine whether they should sell or retain their interests in the company.
For example, consider the hypothetical customer you had to turn away. George is the founder of a pharmaceutical company, and most of his net worth is wrapped up in the business. He asks his CPA, Margaret, about an equity recap. She not only explains how it can help him convert his equity position into cash, but she will also quarterback the transaction.
First, Margaret values the business. Then, she contacts certain potential buyers, formalizes the company’s business plan, projects future earnings and puts together the offering memorandum.
Next, George sells a minority interest in his business to a PEG. The buyout simultaneously allows George to remain active in his company’s operations and to diversify his personal wealth by investing the proceeds in public company stocks and commercial real estate.
The result? The recap alters his company’s capital structure dramatically. The PEG funds George’s payout with a combination of mezzanine financing, conventional debt and equity capital.
Moreover, the recapitalization allows George’s business to pursue a number of investment opportunities for which it formerly lacked financial resources. Fortunately, the business grows substantially before it’s sold some five years later. And both George and the PEG enjoy the substantial returns.
Due diligence is key
Because an equity recap will substantially alter a company’s capital structure, due diligence during the merger or acquisition is key. The owner will want to find out, for example, the rate of return that’s expected by the PEG as well as what roles the shareholders, managers and the PEG will have in the recapitalized entity.
The PEG will also want to understand the company’s current and projected earnings, as well as cash flow over the next five years. And, of course, it will want an idea of the value of the business today. Sound complicated? Don’t worry. An accountant can help you by providing projections and a valuation of the business, as well as determine tax and dilution impacts of proposed recapitalization scenarios.
A smart solution
For many business owners, an equity recap can be a great solution for securing financing.
For any questions on equity recaps or any other asset based lending issue, contact us here or give us a call at 716.847.2651.