Attorney General: Protect Your Business Against Fraud: A Guide For Connecticut's Small Business

A Guide for Connecticut Small Businesses

Office of Attorney General Richard Blumenthal

Each year, small businesses are targets of fraudulent or deceptive sales practices. Protect Your Business Against Fraud is a guide designed to help Connecticut's small business employers and employees know in advance about the many varieties of scams that con artists most often attempt in our state and around the country. Hopefully, that knowledge will prevent Connecticut's small business owners from becoming victims of these costly deceptions.

The types of scams and deceptions discussed include:

  1. Business Opportunities
  2. Charity Pitches
  3. Office Supplies
  4. Phony Billing
  5. Prizes & Promotions
  6. Coupon Books Employee Insurance
  7. Vanity Publishing

Protect your business. Often, it's only a matter of identifying suspicious situations and asking the right questions. If you suspect a scam:

  1. Alert employees and warn them about potential contracts.
  2. Provide detailed instructions and directions to staff on how to handle suspicious solicitations.
  3. Alert and pass the word on to local business associates and police agencies; the Attorney General's office, the Department of Consumer Protection or the Better Business Bureau.

If you'd like more information, please write to me at the Office of the Attorney General, 55 Elm Street, Hartford, CT 06106. Thank you very much for you interest.

Richard Blumenthal
Attorney General

Charity Pitches

From requests to support the community's latest fund raising project to requests for sizable charitable contributions, most businesses are regularly asked to donate funds to needy causes. While many requests are legitimate, every year small business people become victims of fraudulent or deceptive charitable solicitation schemes.

Protect Your Business

Before agreeing to make a donation or lend support to a charitable cause, ask the following questions:

  1. Who are they? Obtain the charity's complete name and address, as well as the names of the principal officers. Watch out for sound-alike charities.
  2. Are solicitors volunteers or paid telemarketers?
  3. What is the organization's stated purpose? Does it publish an annual report that contains detailed budget information for public review?
  4. How much money is being collected on behalf of the organization and how much is going towards the stated purpose?
  5. What percentage of contributions goes toward the professional fund-raiser's salaries and other administrative costs?
  6. If the solicitor is selling advertising space in a publication, ask to see a copy of the latest issue. When will the next issue be produced? How many copies will be printed? Who will get copies?

Give with your heart and your head.

Any legitimate group will disclose financial information and answer detailed questions about how the money they collect will be used. If they don't respond, be suspicious. Connecticut law also requires all organizations soliciting for charitable donation to register and file an annual report with the Public Charities Unit, a joint program of the Attorney General's Office and the Department of Consumer Protection.

Coupon Books

Small business operators are often approached to participate in coupon book promotions. The business is asked to offer consumers discounts or extras in the coupon books. The coupon books are then sold by promoters to consumers. Problems occur if:

  1. The promoters change the terms of the coupon offer to make them more attractive, or
  2. When the books are oversold or when books are primarily distributed outside the firm's normal business area.

Protect Your Business

Before entering into any agreement with a coupon book promoter consider:

  1. The total cost to the business of the goods and services to be used in the promotion.
  2. The total number of coupon books to be sold and distributed.
  3. The marketing area to be covered by the coupon book offer.
  4. The type of clientele to be solicited for the sale or distribution of the coupon book.

Keep these same guidelines in mind if you are asked to purchase a large quantity of items for use with free gift promotions.

If there are any representations made about the proceeds being used to support a charitable purpose or project sponsored by a civic organization, ask the same questions you would for other charity pitches.

Prizes & Promotions

There are hundreds of companies that use prize offers to extract money from businesses. Prizes include vacations, precious gems or luxury cars. In order to be eligible to claim the prize, businesses are asked to purchase several hundred dollars in advertising specialty products, such as pens, mugs, key chains, hats or other promotional items with the company's name on them.

After agreeing to pay for a COD package containing a few dollars worth of junk, the prize arrives. Its value never exceeds the money paid. Cameras turn out to be plastic junk, precious gems look like the gravel in the driveway. Vacations have so many restrictions you'd be better off planning and paying for you own vacation instead of taking the "free" trip.

One scam that has been around for years involves an offer for a boat. The boat is represented as a "power boat with an outboard motor." However, it ends up being an inflatable plastic raft, approximately 8 to 10 feet in length, with a small, hand held battery-operated trolling motor.

Some prize offers look like official gift certificates, bordered in gold. Others look like important official correspondence complete with validation number, or like a telegram or something important in an express delivery mail pouch.

No matter how they're packaged and how official they look, if you have to pay to win or receive a free gift, it's probably not worth the money.

Protect Your Business

Law enforcement action against these firms is very difficult. Experience shows that these companies rarely answer or adjust complaints and are hard to find once the problems are reported. If you receive an offer for a prize:

  1. Find out the name and address of the company or person placing the call. Check them out before agreeing to become part of their advertising promotional campaign.
  2. Call local suppliers to compare prizes and quality.
  3. Ask questions about the quality and restrictions on the prizes.
  4. Insist on written information from the caller.
  5. Be suspicious of offers that must be acted on immediately or require cash payments sent through express delivery services.
  6. Instruct employees not to accept COD packages from unknown companies.

The postal service allows small business operators and others to pay for COD service with a personal check payable to the firm sending the merchandise. Also, under Connecticut law any unsolicited merchandise you receive is a gift. You may keep it without any obligation.

Employee Insurance

Rising health care costs during the last decade have made it difficult for many small businesses to obtain affordable health insurance for their employees. In their search for alternatives to traditional insurance, some businesses have turned to a MEWA: a "multiple employer welfare arrangement, "as defined in the 1974 Employee Retirement Income Security Act (ERISA).

In a MEWA, employers may pool funds as a way to pay for benefits or to buy group insurance. Others have contracted with entrepreneurs offering health benefits at reduced rates to groups of employers. Both are referred to as MEWAs. Some have successfully provided health benefits; others have reneged on their obligations, leaving bills unpaid and MEWA-covered employees and their beneficiaries uninsured. It is an area rife with fraud. The Attorney General's office has been alerted to several fraudulent MEWAs which attempted to operate in Connecticut. In 1992, the office went to court to block one company from operating here.

How does a business distinguish between a legitimate MEWA and a fraudulent one? Get references. Get details. Talk to your attorneys. A legitimate MEWA can be a sensible and cost-effective way to get health care coverage for employees. Protect yourself and your employees by getting all the information you need. Contact the state Insurance Department at 297-3900.

Office Supplies

My office manager received a call from what she though was our regular copy machine supplier. The caller said that she had some surplus inventory and she'd sell at last year's prices. When we got the supplies they were not from the regular supplier, were of poor quality and very expensive.

The business highlighted above was victimized by what has come to be known as a "phony toner" scheme. The callers often have different stories to tell, but the outcome is always the same--the business pays high prices for low-quality goods and legitimate suppliers get cheated out of business.

The product being pitched is not always copy machine toner. It might involve computer supplies, paper for facsimile machines, or other supplies. Promoters who pitch inferior paper at inflated prices are so common, they have earned the nickname "paper pirates."

Your firm usually receives a telephone contact first. Sometimes an advance call is made to find out what brand of supplies or equipment the business uses. On the return call, the caller claims to represent a reputable company with which the firm often does business. The caller often states that surplus merchandise is available at a reduced price due to a cancellation or over-order by another purchaser. Sometimes, callers may offer free gifts to employees to induce sales. However, accepting the gift may mean other obligations have been accepted as well. Regardless of the sales pitch, the results include:

  1. The business receives a shipment of poor-quality merchandise, with an invoice that often demands more money than what was stipulated in the original agreement.
  2. Products are delivered not as ordered or expected. The supplier then refuses to accept returns or provide refunds.
  3. No products are ever delivered and there is no sign of the supplier who has already taken your money.
  4. An invoice or shipment is sent even though you clearly refused to place an order with the company. The supplier demands payment and threatens to turn your account over to a collection agency or attorney.

Protect Your Business

The following procedures will help your business and employees from being victimized by phony office supply schemes:

  1. Assign one person or department to handle sales calls and approve all purchases for office supplies.
  2. Instruct employees not to give out information on office machines and copiers, especially when responding to telephone sales solicitations.
  3. Check out unfamiliar companies and offers before placing an order. If it sounds too good to be true, it probably is.
  4. Keep a list of regularly used venders as protection against schemers who claim the order is a "renewal."
  5. When you do place an order, ask for confirmation in writing with all conditions clearly spelled out.
  6. Compare prices and quality of products with other suppliers.
  7. Notify the supplier of unauthorized shipments or invoices immediately in writing. Clearly state that you did not place an order and will not accept delivery.


Phony Billing

Connecticut businesses should be on the alert for invoices demanding payment for supplies, goods and services never ordered or received. Every year, businesses lose substantial amounts of money because they fail to question or even recognize these phony demands for payment.

The most common type of phony billing scheme involves solicitations for "yellow page" advertising. Consumer complaints indicate that a variety of firms send statements for "yellow page" directory advertisements that look very similar to invoices mailed by better known directories. The solicitations even include the familiar "let your fingers do the walking" symbol. Sometimes businesses are contacted by telephone asking them to renew ads from last year, leaving the impression the transaction is routine.

Since the solicitations and invoices appear to be identical to a normal billing, the invoice is often inadvertently paid with a number of other routine bills. These invoices range in price from a few dollars to several hundred dollars. The directories may be published, but the independent promoters rarely provide details about how many directories are published and where they are distributed.

The directory publishers try to stay within the limits of the law by including a statement that says "this is not a bill and you are under no obligation to pay the amount stated." That's usually in the small type, however.

Connecticut businesses may also receive invoices for office supplies that look quite authentic. They are often personalized to include the name of the business or even the purchasing agent. Sometimes these are advertisements cleverly disguised to look like bills.

Follow-up letters and invoices are often sent, to give the impression that you are late in making a payment. One company follows its solicitation with a letter threatening credit rating damage if the phony invoice is not paid. Other billers may assert that a tape recording has been made of the agreement to purchase goods or services and that collection procedures will begin in order to get the money.

In Connecticut, it is illegal for a person to tape a conversation without the other party's consent.

Protect Your Business

Take the following precautions to protect your business against phony billing schemes:

  1. Don't place phone orders unless you are certain it is a reputable firm.
  2. Be sure of the organization's name, address and phone number as well as the solicitor's name and his or her position with the company. Check records to confirm and claim of past business.
  3. Read your mail carefully. Warn employees to be on the alert for any unusual invoices.
  4. Check business records to determine if merchandise or services were authorized, ordered and delivered before paying invoices. It may be helpful to have one employee review and approve all invoices.
  5. Before placing any advertising, verify that the publication exists. Make sure its circulation suits your needs.
  6. When is doubt about yellow page directories, contact the directory you want to carry your advertising to verify that renewals have been mailed and clarify procedures for payment.
  7. Report phony billings, the Better Business Bureau, the Department of Consumer Protection, or the Attorney General's Office. Also, alert other businesses.


Business Opportunities

Many small business owners are approached to invest in other business opportunities.

Promoters may claim the venture will increase customer traffic flow into the current business or that little effort is required to collect high profits.

Protect Your Business

Ask the following questions before you invest:

  1. Is the product or service a proven value or just a gimmick?
  2. What are the true costs of the venture?
  3. Will the seller supply training, management and promotional assistance?
  4. Is the seller primarily interested in selling distributorships or in marketing a product or service?
  5. How many other investors are involved?
  6. How many other distributorships will be sold or are already operating in the area?
  7. What profits can be expected and documented by the seller?

Review all aspects of any agreement before signing. Ask for copies of business and financial statements. Check how long the promoter has been in business or if any complaints have been filed with the Better Business Bureau, Department of Consumer Protection, or Attorney General's Office.

If you're interested in a business opportunity, obtain the names of other investors and contact them to discuss their experience with the plan.

Vanity Publishing

This scheme begins with a letter addressed "Dear Business Executive" or "Attention Professional Engineer." The letter goes on to describe how the publisher of "Who's Who in the Business World" or "The World's Top Engineers" wants to include your name and accomplishments in the next edition.

Often, the recipient is flattered into providing the details of his or her career. The vanity publisher counts on people who think they've received a special recognition being more than willing to pay to see their name in print. The publisher charges a fee for the privilege of being included in the listing, then tries to sell copies of the book at inflated prices.

A variety of the scheme involves a business being contacted by a phone caller who wants to include the company's name in some kind of directory. These directories are usually aimed at a specific market or profession. A fee is charged and the directory is usually distributed, if at all, to subscribers only.

Protect Your Business

Ask yourself how much of an honor it is to be in a directory when you're required to foot the entire bill. Get the answers to these questions:

  1. Exactly what costs are involved? Ask about processing and photography fees, handling charges and costs to purchase additional directories, certificates or plaques.
  2. When will the directory be printed?
  3. How many directories will by printed"
  4. Where are they distributed?

Check with your local library or book store to see if they have ever heard of the directory or carry it in their collection.

Protect Your Business Against Fraud is produced by the Connecticut Office of Attorney General

Content Last Modified on 10/18/2005 3:50:26 PM