What does long and short firm fraud involve?
Long and short firm fraud happens when criminals set up an apparently legitimate business intending to defraud its suppliersand customers. Long firm fraud happens after the business has developed a good reputation and credit history. Short firm fraud, often internet-related, happens when the business has only been in operation for a few months.
Long firm fraud
This type of fraud starts with the criminals placing numerous small orders with wholesalers and paying them promptly. Having established a good credit history and won the trust of their suppliers, the fraudsters then place several larger orders with their suppliers. But once they receive the goods, they promptly disappear and sell the goods elsewhere.
Short firm fraud
Also known as phoenix fraud, this is similar to long firm fraud but it takes place over a much shorter timescale. Usually, the business doesn’t try to establish any form of credit history or credibility, apart from perhaps filing false accounts at Companies House if it is a limited company.
The fraudulent business has no day-to-day trading activity. Instead, the fraudsters use credit to obtain goods that are delivered to third-party addresses, often on multioccupancy trading estates. Again, the goods are sold for cash and the criminals then disappear.
Fraudsters are happy to deal in anything with a market value - goods or services. They prefer goods that are not traceable, turn over quickly and are easily disposable. For example: electrical goods, computers, toys, toiletries, wines, spirits, fancy goods and confectionery.
How do long and short firm frauds affect me?
The most immediate impact of these frauds is serious financial loss. As a victim, your organisation may also suffer from:
- Low staff morale
- Adverse publicity
- Disruption caused by a major investigation
- Further fraud under a different guise.
What should I do?
There a several measures you can take to protect your organisation from long firm and short firm fraud. For example:
- Stop and evaluate before accepting a much larger order from a business you have only been dealing with for a relatively short time
- Check the trading history of any business you are dealing with
- Ask the business for trade references. If necessary, check the authenticity of the referees. Sometimes, criminals form companies to fraudulently provide references for each other
- Take steps to verify the identity of the office holders
- Visit potential new customers for a thorough onsite inspection of the business premises
- If it is a limited company, find out if it has filed accounts; check whether the accounts are credible given the trading period; and ensure they have been prepared by a genuine reporting accountant
- Obtain consent to check the credit histories of the people running the business
- Check for evidence that they live where they say they live
- Check publicly available data bases on the Insolvency Service and Companies House websites to see if the individuals are bankrupt or otherwise disqualified from acting as directors of a limited company
- Check who owns the domain names of any website the business uses
- Be wary if the only ways of contacting a business are through webmail-based email addresses and mobile telephone numbers
- Ensure that goods are delivered to identifiable individuals and addresses, and do not allow goods to be cross-loaded to unidentifiable vehicles waiting at the delivery location.
- Visit credit reference agencies such as Callcredit, Equifax and Experian.