Beware The Bust Out

Why Aren't These Guys In Jail?
It's difficult and expensive to prove a company unlawfully and purposely tried to defraud a creditor, as opposed to just being bad at business. In some cases, the cost of building a case and seeking prosecution is more expensive than writing it off. Law enforcement officials file their reports but unless the amount stolen is above a certain threshold, Bares said he is told a full-scale investigation is not warranted.

"If a law enforcement agency has the option of a slam-dunk drug case and this, they're not going to answer your calls," said Bares. "That's why the perpetrators have been successful for so long."

One federal law enforcement official with whom Bares has worked closely on several cases recently told him, "We're sick of being the collection department for corporate America."

Only once has Sparco.com seen a scammer prosecuted, Perez said. It was for an $18,000 order that was large enough to attract the attention of the FBI and the Internet fraud unit of his local police department.

"We didn't recover the product, but they went to jail," he said. "It's a new type of crime. Local police departments don't usually handle it because it's not big enough to proceed. If you get a big order, you can get a couple of agencies involved and get it prosecuted."

What Can Be Done?
Unfortunately, there are no shortcuts or easy answers to combating fraud like bustouts in the channel. Scammers are buying companies now with the intention of using them four years down the road to run yet another bustout, according to Bares.

In the past couple of years, distributors have increased measures to shore up their credit defenses, joining organizations like the National Association of Credit Managers and talking among themselves to share suspect applications.

Some distribution executives were reluctant to share their latest prevention strategies, saying it's best to keep some things secret. "These crooks are always one step ahead of you. Anything you publish, they're going to read," said Joe Chaudoin, director of credit and financial services at D&H Distributing, Harrisburg, Pa.

Every once in a while, though, the crooks get sloppy and make themselves easy to spot, said Chaudoin. D&H once got a large purchase order on behalf of Temple University that turned out to be phony. "The only reason we caught it was because they spelled 'Temple' wrong," he said.

Yet, you can't rely on the scammers to be sloppy, Chaudoin said, which is why D&H is active with several fraud prevention groups and credit agencies.

Case in point: One D&H solution provider recently got taken for $500,000 with a credit card scam.

"Our VARs need to be very concerned about the different scams out there when it comes to credit cards and diverting shipments," Chaudoin said. "It's a very difficult problem. They're all doing it a lot smarter. We've caught most of it, but we can't get cocky."

STEVEN BURKE contributed to this story.