Beware The Bust Out

Bustouts work like this: First, an individual or small group legally purchases the names of real companies for a few thousand dollars each. They sit on the companies for a couple of years, then blast out credit applications to a slew of distributors and resellers, seeking to buy IT products. To the creditor, the business looks clean, so it typically provides financing. The company maxes the credit line, takes delivery of easy-to-dump products and disappears without a trace.

Companies throughout the channel, from the biggest distributor to the smallest solution provider, are "sitting ducks" for these bustouts, said Gary Bares, founder and director of Verifraud, a fraud risk management unit of Direct Alliance, a subsidiary of Teletech. Bares is working with several channel companies. "It's unbelievable how easy it is," he said. "Most computer companies have no defense against this type of fraud, and the losses have been staggering."

To Catch A Thief: Watch A Slide Show Of Investigator Gary Bares At Work

And now, as distributors band together to shore up their defenses against scams like these, many in the channel believe the scammers are moving downstream, targeting smaller solution providers that can't afford robust fraud prevention systems.

"For some midsize resellers, it can literally threaten their business," said Bares. "You can get wiped out by a single fraud."

It happened to Lesley Taufer. Taufer, the former owner and CEO of the now- defunct Boulder Corp., a solution provider in Boulder, Colo., was hit two years ago by two credit-card schemes in the same week. Combine that with an $80 million bank fraud from a long-time client during the same period and she was out of business. "I lost everything: my house, my car, my business," said Taufer. "I lost everything. It was like a death."

The scams that helped put Boulder out of business included a $50,000 order for Hewlett-Packard drives that was put on multiple credit cards, a common practice for cash-starved small businesses. Taufer says the scams were done with fraudulent credit cards and the computer equipment was sent to people who accepted the equipment at legitimate addresses and then passed them on to the thieves for a fee. "They were paid by the bad guys to accept the shipments," she said. "It happened so fast that nobody could do anything about it."

Senior management was not even aware of the shipments until after the fact, she said. "By the time it made it to upper management it was too late," she said.

The $80 million bank fraud by the long-time customer was the final straw that took down Boulder Corp. "He is in prison now," said Taufer of the customer. "All of our inventory was frozen as part of his assets that the FBI used to pay the bank back. They were a secured [debtor] and we weren't. We'd been doing business with him for years. We extended credit on a very large, large, large order for us. Our bill was sitting on his desk when he got busted."

How Big Is The Problem?
For the past five years, Bares, a one-time channel credit executive, has fashioned a career out of tracking the rings known for running bustouts. Verifraud has studied more than 700 examples of possible fraud, and Bares' investigations lead him to estimate that bustouts account for up to 25 percent of overall bad debt in the channel.

Bares' research supports a claim that distributors can see about 35 to 50 large-scale bustout attempts a year. Companies without solid antifraud systems are victimized about 75 percent of the time, losing an average of $50,000 to $70,000 per attempt, he said. However, some losses have been known to reach millions for an individual distributor.

For several years, little was done to identify, arrest or prosecute the scammers, he said. In some cases, public companies are loath to categorize bad debt as fraud, Bares said. The executives in charge of credit either aren't looking hard enough, or are in denial. As long as bad debt stays within historical trends, nobody blinks an eye.

But distributors have started to wake up to the problem. Clearwater, Fla.-based distributor Tech Data estimates about 20 percent of its bad debt was fraud before it began to take action.

"It's below the surface. You have to dig a little deeper," said Art Wicks, director of loss prevention at Tech Data. "The days of using a single credit report for a new customer is not necessarily prudent. It takes more time and more due diligence."

Last year, Bares said he warned distributors of a big impending bustout scam. But his warnings went unheeded and the losses were in the millions. "We had watched the perpetrators behind this bustout run several other frauds dating back to 2000," said Bares. "We knew exactly what was coming when they became involved with a Montreal company with several locations."

Bares stopped the fraud attempt for his clients and tipped off several other distributors that he has relationships with. One of these distributors came back a couple of months later and confirmed that the bustout had been carried out and that they were talking with other distributors, one of which was out $2.9 million and another out seven figures as well.

"This is not an isolated incident," said Bares.

Distributors are learning that they have to be especially wary, said Tech Data's Wicks. "It's like a virus, it mutates," he said. "You get hit and it comes back a little bit different."

Next: Who's At Risk