Protecting your business from organized crime

During the early stages of the COVID-19 pandemic, many cash-short small businesses turned to their banks, while others sought help from family and friends. Unfortunately, these sources weren’t enough in all cases. When government aid arrived, it was too late for some companies. For others, government loans and grants helped but didn’t fill the cash shortfall.

The resulting crunch provided an opening for organized crime enterprises to infiltrate the corporate world. Of course, organized crime has always represented a threat to legitimate businesses. But the increasing number of fraud schemes perpetrated by criminal gangs means you should examine your company’s transactions more closely.

Common schemes

Organized crime has several ways of inserting itself into your business. Look out for the following common scenarios:

Extortionate loans. When faced with a lack of cash, desperate owners may be willing to accept any form of financing — no matter the strings attached. However, rates and terms offered by organized crime can cripple and even destroy a business.

Instead of seeking any form of black-market financing, contact banks with which you do business, your credit card company and alternative lenders. Although traditional lenders generally require high credit scores and extensive financial documentation to underwrite a loan, some alternative lenders rely on eCommerce activity alone to issue debt.

Substandard suppliers. Organized crime sometimes forces companies to buy products and services from vendors the criminals control. Initially, they may offer competitive or below-market terms. But over time, they typically raise prices and may enforce payment with threats of violence. In exchange, you’ll probably receive inferior goods.

If a prospective supplier presents a compelling case for switching, exercise caution. Be particularly wary if the company is under new ownership and the new owners appear unfamiliar with the products and services they ostensibly sell. If in doubt, stick with your original vendor until you have the time to research suitable replacements.

Government loan “partnerships.” An organized crime group may offer to facilitate quick access to government funds disbursed via financial institutions. To make this happen, criminals corrupt a bank loan by paying a bank employee to quickly rubber stamp an application and approve the disbursement of funds within days. In return for loan facilitation, the criminals require a portion of the loan proceeds.

Know that applying for government aid can take time. However, early in the pandemic, banks appointed to disburse COVID-19 relief funds generally processed most requests within 10 days.

Cheap business acquisitions. Sometimes, the only option available to businesses short on funds is to sell. Troubled companies can attract the attention of criminals because they can buy assets for a fraction of their value and use a business to launder proceeds of illegal activity.

If you intend to sell your company, work with reputable M&A, tax and valuation advisors. The process may take longer than selling on the black market, but an aboveboard transaction will help you avoid legal headaches involving criminals who will likely wish to conceal their identities and the nature of the transaction. With a legitimate sale, you can also be certain you’ll receive the price and terms negotiated with the buyer.

Consider other options

Although organized crime is an ever-present threat, financial and social emergencies can aid criminals and fraudsters. You might be tempted by easy capital offered by these shady characters. But given the potential repercussions to your business, there are almost always better options available.

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