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How To Protect Yourself From 419 Fraud: The Online Scam Targeting Small Businesses

John Canfield (guest contributor - Forbes - 17-09-13
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As more business is transacted through online platforms and marketplaces like the Airbnb’s and FreshBook’s of the world, more complexities are created in the flow of payments between buyers, sellers (also known as “merchants”), and platforms. Ultimately, these complexities create more opportunities for potential fraudulent activities. Working with payments for online platforms and marketplaces, we’ve seen a range of nefarious activities over the years and how these new fraud schemes have greatly expanded in scope and adapted to the modern online economy.

There has been a steady increase in incidences where fraudsters attempt to deceive legitimate merchants before quickly disappearing before the merchant or the online platform provider realizes what happened—leaving the platform on the hook for all fraudulent charges. This type of fraud is an example of how the definition of the traditional “419” fraud has expanded as online platform providers and marketplaces play an increasingly important role for merchants.

While it’s important for platforms and marketplaces that process payments to partner with a strong payments provider to combat fraud and mitigate risk, it’s just as important for these providers and the merchants that they serve to be aware of possible 419 scams.

What is this scam?

The 419 fraud was named for Article 419 in the Nigerian Criminal Code because the activity was often associated with attempts to convince would-be victims to pay to help release funds held for them in a Nigerian Bank. However, gone are the days of those typo-ridden letters or emails that promise a share of a large sum of money as reward for a seemingly innocent action. Fraudsters today have evolved and perpetrate much more sophisticated and plausible stories against legitimate online businesses that often operate through online marketplaces.

Who is affected?

When a fraudster is successful, the scam can have a significant impact on a small business. They can certainly wipe out profits, but they can also cost more when factoring in the opportunity cost associated with making sense of what has happened. They can also undermine your confidence or sap your energy; as a small business owner, you can ill-afford to turn your focus away from growing your business.

When and where is this new scam perpetrated?

In most of the cases that involve small businesses, a fraudster approaches a business via email looking to work with them. The fraudster first pays the business with a stolen credit card, and then asks the business to pay a subcontractor via wire transfer with a portion of their initial payment. The subcontractor is actually the same fraudster, who now vanishes with the non-refundable wire transfer. The small business owner will later find the initial stolen credit card payment is charged back as fraudulent, and they are left with a significant debt.

How would a real life scenario play out?

Let’s say you’re the owner of a business that provides website design and development services. A fraudster may contact you to say that they are impressed with your online portfolio and reviews, and they wish to utilize your services to build a new website. As you are working through a contract, they mention that they want to use professional photography on their new site and have a specific photographer in mind. They request that you pay this photographer now, and then add the cost to the amount you bill so that it is all within a single invoice. They may explain that this is helpful for their bookkeeper or that their procurement department will only allow one vendor per initiative. Of course, this plausible explanation is far from the truth. The fraudster will disappear the moment you’ve paid their “photographer.”

When and where is this new scam perpetrated?

In most of the cases that involve small businesses, a fraudster approaches a business via email looking to work with them. The fraudster first pays the business with a stolen credit card, and then asks the business to pay a subcontractor via wire transfer with a portion of their initial payment. The subcontractor is actually the same fraudster, who now vanishes with the non-refundable wire transfer. The small business owner will later find the initial stolen credit card payment is charged back as fraudulent, and they are left with a significant debt.

What should a small business owner do?

When a new customer emerges out of nowhere and wants to pay you a large sum of money without ever having spoken with you before, it likely is an opportunity that is too good to be true. It is always recommended that you meet with a prospective client before agreeing to any work. The dialog will not only provide you with a greater understanding of the task at hand, but it will also help you suss out any inconsistencies or red flags that might alert you to a potential scam.

Even though we live in a global, connected world, use great caution if you find that someone wants to work with you from far away - be that three states or one ocean away - when they could probably work with many others much closer to their location. Further, every small business owner should be wary of any outreach that asks for money and/or personal information. You should apply common sense and caution when dealing with unusual payment requests and train your employees to be equally wary of such requests. Finally, always partner with the right platform or marketplace provider that has tools, technologies, and processes in place to help you mitigate risk and prevent schemes like the modern 419 fraud.

John Canfield is the VP of Risk of platform payments provider WePay. Prior to WePay, John spent 7 years at eBay as Senior Director of Fraud and Risk Management. He holds an engineering degree from MIT and an MBA from Stanford’s Graduate School of Business.


Tags: What is this scam, Nigerian, fraudster, scam, 419, Who is affected?, When and where is this new scam perpetrated?, How would a real life scenario play out?, When and where is this new scam perpetrated?, What should a small business owner do?

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