Fraud In the Channel: On the Decline?

Although many say that fraudulent activity in the channel has decreased in recent years, two episodes involving high-profile solution providers have brought the issue back to the forefront.

Aspect Computer of Somerset, N.J., has found itself on the wrong side of the law. The systems builder, which reported sales of $71.2 million in 2004, is accused of laundering drug money. Earlier this summer, Drug Enforcement Administration (DEA) agents arrested Aspect founder Jonathan Chu and charged him with allegedly laundering at least $2.4 million in from a Colombian cocaine cartel through his systems-builder business.

Chu, 43, has denied any wrongdoing and was released on bail worth $5 million. He reportedly was ordered to give up his passports and to remain in New Jersey. According to various news reports, however, Chu is accused of routinely shuttling hundreds of thousands of dollars in cash through accounts for Aspect, as well as two other businesses he owns.

The DEA says the investigation into Chu is continuing. Meanwhile, in addition to criminal charges, prosecutors have filed a notice to seize Chu's businesses and property as well as the $2.4 million he is accused of laundering. Aspect, which saw its sales fall more than 26 percent in 2004, has made no official announcement regarding Chu. Calls to Aspect were not returned, and Chu was unavailable for comment at press time.

Aspect marks the second VAR500 solution provider to run afoul of the law in the last year. The CyberNet Group, a Grand Rapids, Mich.-based VAR that claimed more than $300 million in annual sales, collapsed last November after federal authorities raided the company in a sweeping fraud investigation [see "Dead on Arrival"]. The company's CEO, Barton Watson, committed suicide a week later, and CyberNet's finances were shown to be the result of phony tax statements and millions of dollars of fraudulently obtained loans.

Several distributors have said they've seen a decrease in fraudulent business lately in the channel.

"Fraud has definitely gone down over the last few years as many vendors and distributors have done a better job policing the business," says Tech Data chairman and CEO Steve Raymund. "There's a lot less quarter-stuffing and other misbehavior these days."

As a result, several distributors have increased their credit services.

"VARs are becoming more savvy about their businesses," says Mike Zava, senior vice president of credit and customer services at Tech Data. "Plus, there are fewer loose cannons out there and a lot less bad debt."