Martin Scorsese’s blockbuster film The Wolf of Wall Street depicts how a crooked stockbroker, Jordan Belfort, fleeced investors of more than $250 million. As only Hollywood could do, the movie glorifies Belfort's over-the-top lifestyle that's paid for with the stolen funds, and leaves out the story of the victims, many of whom were small-business owners.
Although Belfort eventually got caught and went to jail, there are plenty of criminals scamming people daily, and small-business owners remain a favorite target. What makes small-business owners the perfect target?
- They are extremely busy running their businesses, which means they have to make decisions quickly with limited information (a scammer's dream).
- If their business is doing well, they likely have significant amounts of cash that need to be put to work.
- If their business is doing poorly, they will be desperate to find a way out and will be more willing to try things that under normal circumstances they would reject.
- Many lack sophisticated financial knowledge, which scammers can exploit.
Do any of those traits sound familiar? Your best defense against being scammed is to know what scams are making the rounds. Watch out for these three criminal favorites.
Utility Disconnection Scam
This scam was very successful over the summer and is making a resurgence now in winter. A small-business owner receives a phone call from the utility company indicating that his or her power meter needs to be replaced immediately and failure to do so will result in the power being shut off within hours. Imagine if you're a restaurant owner and you receive that call two hours before your lunch rush, or if you're a retailer hit with this news right in the middle of a polar vortex-fueled cold wave. You'll likely get upset and panic and want to resolve the problem quickly.
The utility company representative on the phone indicates that a payment ranging from $500 to $2,000 will cover the cost of the meter and will ensure that your business doesn’t lose power. Given the urgency, the payment can’t be with a credit card; it has to be via wire transfer, debit card or some other electronic cash equivalent payment.
Those who pay learn soon after that it was a scam. Power meters are owned by the companies that supplies power and the cost of replacement is their responsibility. But by then it’s too late; the money is gone. If you receive this type of phone call, hang up immediately and, if in doubt, call your power company directly to ensure your account is in order.
Tax Refund Scam
The tax refund scam can be labeled the “scam of the decade.” It’s easy to execute, extremely lucrative and difficult to prosecute. Scam artists basically use your identity to file a tax return on your behalf. They file it using false information so the return generates a large refund. Since the IRS allows filers to receive their refunds on non-traceable prepaid debit cards, the scammers receive the cards and spend the money anonymously.
It's so easy and profitable that many criminals have abandoned their other activities to focus exclusively on this scam. Tampa resident Rashia Wilson a twenty-something, unemployed single mother used this scam to steal over $20 million from the IRS. She was caught and convicted only because she posted crazy pictures on Facebook with mountains of cash, taunting authorities to catch her.
According to the latest Treasury Inspector General for Tax Administration audit, taxpayers lost “only” $3.6 billion to this scam, a reduction from nearly $6 billion the previous year. That still means that over the past three years, taxpayers have lost more than $12 billion.
How can you protect yourself? Sadly, the only way to avoid being a victim is to file your tax return as soon as possible so the IRS receives your genuine return before the scammer can send a fake one on your behalf.
Raising Capital Scam
In 2012, the Jumpstart Our Business Startups Act (JOBS Act) became law. The main purpose of the JOBS Act is to help small businesses raise money with less bureaucracy, while allowing small, unsophisticated investors to put a prudent percentage of their savings to work financing small businesses. Over the past several years, some of the provisions of this Act have gone into effect, while others relating to crowdfunding will likely go into effect this year.
The delays in implementation, coupled with the media frenzy over the impact of the act on businesses and investors, have created a petri dish of potential fraud. Small-business owners should be extremely wary of unknown third parties offering to help them raise money to expand their businesses under the JOBS Act. It’s important to work with reputable intermediaries that can provide sound legal and financial advice when it comes to raising money. Taking money from other people is never simple, and working with the wrong advisor can have serious repercussions, including catastrophic results for your business.
These are just three of the many scams out there. Just knowing what to watch out for is a big step in protecting your hard-earned money.
Read more articles on protecting your small-business finances.
Photo: Paramount Pictures