Credit Fraud: The Big Heist

"That was a pretty interesting one," Art Wicks, director of loss prevention at Tech Data, succinctly described the scam that eventually included more than a half-dozen companies over several years. "The bad guys have gone to school on us. As we distribute information throughout our industry, we know they've changed their game," Wicks said.

The scheme netted the suspects more than $8 million in product over four years, according to the Department of Justice. However, distribution executives and Gary Bares, founder and director of trade credit risk management firm Verifraud, believe the actual figure, when accounting for losses from all satellite bustouts linked to the core group, could total three to four times that amount.

The case eventually served as the impetus for increased communication and prevention processes now in place at many channel companies, executives said. But it was a lesson hard learned.

At one time, Impaq Micro was a very good channel customer, according to court documents. From 1992 until 2004, the Norcross, Ga.-based company had been a steady buyer from the channel. But once it was sold to a group of associates later known to have participated in previous bustouts, the trouble began.

One of the stipulations in the deal to sell Impaq Micro was that the previous owners could not notify certain vendors about the change in ownership. Soon after the sale, Impaq Micro looked to increase credit lines from numerous suppliers and obtained a large amount of equipment on credit. The merchandise was shipped to a warehouse in California and then sold for cash and cashiers checks. Impaq Micro never paid the bills and left at least 20 distributors and resellers with losses ranging from $5,000 to nearly $300,000 each.

It was those staggering amounts that caused the channel to pursue prosecution. It can be hard to make an arrest in a bustout because the schemes are often misclassified as bad debt or difficult to prove intent. But in this case, the size of the bustout and evidence collected led to a fullscale investigation, arrests and convictions.

In July 2006, Reza Bahram Tabatabai, then 51, was found guilty by a United States District Court of conspiracy, seven counts of interstate transportation of fraudulently obtained property, six counts of mail fraud, eight counts of wire fraud, conspiracy to commit money laundering and 33 counts of money laundering. Sentencing is pending because Tabatabai is appealing the case, Bares said.

Three other defendants, Edmont Masjedi, Touraj Benshian and Mohammad Majidi, also pled guilty to fraud and money laundering charges and two other defendants, Massoud Sabet and Masoud Rahmani, are believed to have fled to Iran, according to the Department of Justice.

In hindsight, the scam should have been easy to spot. The original credit applications sent to multiple distributors listed three companies as references that, upon further investigation, contained the same names, addresses and other information from different credit applications Bares said.

"When you trace references, they all go back to a small handful of individuals. Sometimes they share the same address with another company running a fraud. That's how we find the connection," he said.

Seeing that connection is not easy, Bares said. Distributors can see thousands of credit applications a month, which are in turn read by different credit analysts. For any one person to notice the same address or name from another application is highly unlikely, Bares said.

After the fact, Bares talked to the original owner of one of the companies involved, Surfside, who sold the business to Tabatabai and company. The original owner said his high sales had only been $400,000, but within a month the company claimed to do $3 million in sales according to credit agencies, Bares said.

"They were a 10-year-old company with no sign of management change. You can see how these [distributors] are sitting ducks," he said.

At the time, distributors and solution providers rarely communicated with each other when a customer defrauded on a large purchase. Now that communication has improved, credit checks are more thorough and distributors believe a bustout of that magnitude will be hard to replicate.

When it comes to analyzing a credit application, running a DunBradstreet report just isn't enough, Bares said.

Verifraud analyzed 700 frauds and found that nearly 60 percent of the companies were incorporated, 55 percent had bank balances of at least five figures and 60 percent were operating from normal commercial locations. In addition, nearly 70 percent of the incorporated frauds had been registered for more than a year and 60 percent of the bank accounts were at least a year old.

"It is amazing what you can do from very small office and an incorporation that you can get online," Bares said.