Gateley: Fraud Traps For Unwary Manufacturers
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Ruth Armstrong, partner, Gateley LLP
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In the current troubled economic climate, businesses are looking to make revenue wherever they can. This is causing many manufacturers to operate in unfamiliar territories and with unfamiliar commodities. Diversifying into a new market or a new sector can be a lifeline for a struggling business but it can also be a potential nightmare. Familiarity can sometimes lead to individuals dropping their guard especially when it comes to long standing customers and contacts. This is not a problem if a transaction is legitimate but it can cause significant problems if any part of the transaction is an issue, whether you are sourcing raw materials or components for the manufacturing process or identified new markets for sales. Here are two examples where businesses encountered problems as a result of letting their guard down when dealing with long standing trusted contacts. In both cases the contact introduced the business to a new supplier in a new terrority. In both cases, the materials were supposed to have originated in an eastern European country and travelled overland through Europe and in to the UK via the channel tunnel. In each case, the paperwork appeared legitimate. In the first case, the commodity was pharmaceuticals. Our client bought medicines from a new supplier in Belgium following an introduction from a long standing agent. Their first indication that anything was amis came in a raid by the police and the MHRA (Medicines & Healthcare Regulatory Agency). The MHRA carried out a detailed investigation into the medicines which it transpired had actually originated in South Africa in circumstances which made them unfit for the UK market. The fraud was extremely hard to spot if you did not know what you were looking for, and our client was left significantly out of pocket having paid for several shipments which could not ultimately be used or sold. Not only that, but our client was subjected to a criminal investigation, a raid of its premises, cautioned interviews and the threat of criminal proceedings for its part in the illegal importation. It was only after the investigation had concluded that our client’s innocence was finally accepted by the authorities and a criminal prosecution avoided, but it was a salutory lesson in not doing adequate due diligence into the origins of the new product. The second case involved the metal manufacturing industry. Our client received a number of shipments of metal from a new supplier introduced by a long standing trusted agent. After a number of shipments it became clear that the goods were not from a legitimate source and the originating paperwork was fraudulent. Our client had been an unwitting party to a large scale money laundering operation which included VAT fraud – a costly investigation to be involved in when you are innocent! The key similarities in these two cases were striking. In both cases it was a long standing trusted agent who made the introduction to the new supplier was not. In both cases the industry sector was well known to our client, but the new supplier and territory were not. In each case, our client relied heavily on the advice and input of the trusted agent. In both cases our client did not ask enough questions of the agent as to the bonafides of the opportunities and did not carry out sufficient checks about the originating supplier and the general business practice of the originating territory. In short, they failed to do enough due diligence and ended up exposed to risk as well as the disruption and cost of the criminal investigations.
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