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MALTA - We’ve all heard the stories. Someone sets up a business or company,
entering into financial arrangements with third parties who are never
paid. When the business fails, they declare bankruptcy leaving a trial
of unpaid debts behind them… only to set up a new business and do it
all over again. Josanne Cassar looks into the financial and legal
issues of commercial fraud as well as the psychological profile of a
typical fraudster.
One cannot speak about commercial fraud in a vacuum; it has to be
considered within the context of the economic climate in general.
Whoever
is in business can affirm that one of the most difficult tasks in
today’s business environment is that of getting paid on time, says
Josef Busuttil, Director General of the Malta Association of Credit
Management.
“Defaults in payments cause cash flow problems to
businesses and make profits even slimmer. Credit does not come for
free. The supplier has to manage it appropriately and find money to
fund it somehow – usually by means of an overdraft, for which interest
has to be paid. All this is to the detriment of cash flow, profit and
the well being of the economy at large.”
Mr Busuttil points out
that research and studies, conducted by various institutions, including
the European Union, contend that as a result of defaults in commercial
payment, heavy administrative and financial burdens are placed on
businesses, particularly those that are small or medium in size.
In
fact, a report issued by the European Union referred to late payment as
the major cause of business insolvencies, threatening the survival of
businesses and resulting in numerous job losses. The same report cited
that differences between payment rules and practices constitute an
obstacle to the proper functioning of the EU internal market by
limiting commercial transactions between member states.
It is within this context, Mr Busuttil adds, that one must appreciate the serious implications of fraud.
“During
last year, Maltese businesses were faced once again by malicious
commercial fraud. Some fraudsters are opening new companies with the
minimum requirements that our law permits; they register for a VAT
number and trade on credit.
Once their debts reach substantial
amounts, they declare their companies bankrupt, leaving a trail of
debts behind them. This money is difficult to recoup by their suppliers
– the honest businesses – as these malicious people do not have any
assets in their names. That’s not all. Some of these people move into
other industries, open new companies with totally different names,
register for new VAT numbers and start trading fraudulently again.”
In
fact, this practice has become so prevalent in the media that the
Institute of Maltese Journalists (IGM) is even compiling a blacklist
targeting individuals or companies that have failed to pay journalists
for their work.
Understandably, it is difficult for honest
business people to comprehend the mindset and sheer gall of those who
swindle others in this way. What is even more disturbing is that it
seems relatively easy to do.
“Although we do have legislation
for companies and a competent Registry of Companies, it is not always
easy to prohibit a person from being a company director,” Mr Busuttil
says.
Nevertheless, he continues, this type of fraud could
easily be minimised if the creditors conduct adequate research on their
prospective clients in terms of credit worthiness. But the honest
creditors require information, which unfortunately, is not always
available and forthcoming.”
So how do the same people continue to get away with committing commercial fraud?
According
to Mr Busuttil, “some companies are not filing their accounts and
although the Registrar of Companies is fining these companies for such
default, the latter are still opting not to declare their financial
data publicly as legally required and are allowed to continue trading.”
There
is something that creditors can do however. The Malta Association of
Credit Management (MACM) urges creditors to be more careful when they
receive requests for credit from these defaulting companies.
Mr
Busuttil also feels that the time has come to be more stringent with
companies. “The MACM pleads with the authorities to abolish thresholds
that allow companies to file abridged accounts. MACM even opposes the
idea that smaller companies need not to file accounts. We believe that
besides the fact that a healthy economy needs financial transparency,
these regulations do not make any commercial sense and may be causing
harm to the business community rather than minimising bureaucracy. We
argue that you can only abbreviate something if you have the full
version as a starting point. Therefore, companies can only abbreviate
their accounts if they produce their full set of accounts. Hence, it
follows that producing abridged accounts adds to administration rather
than detracting from it.”
On their part, Mr Busuttil argues, it
makes sense for small businesses to produce their accounts on a monthly
basis in order to make sure that they are in line with their targets
and forecasts so that appropriate action can be taken in case of any
variances. Ultimately, he points out, if the smaller companies are
exempted from producing a full set of their annual accounts, the wrong
business practice message may be transmitted to these companies and
this is to their detriment. “Producing financial data is critical to
every business,” he adds.
The ease with which anyone can apply for a VAT number also needs to be looked into.
MACM
suggests that before a person applies for a new VAT number, be it as a
company or as a self-employed, the person/director registering for the
VAT number should satisfy some competency requirements in terms of
business management.
“A short course addressing the basic
business management issues may be considered in order to make sure that
the new entrepreneurs are adequately skilled to manage their businesses
to the benefit of all the stakeholders – understanding the difference
between revenue and profit, the importance of sound cash flow and long
term profit, how to gain and sustain competitive advantage, managing
staff, and the responsibilities of the company directors are a few of
the critical issues for a new entrepreneur to be trained on.”
Another
precaution to minimise fraud is that before a new company is
registered, the Registrar should be allowed to examine and evaluate the
history of the applicant. “A new company will only be permitted if the
director/s have clean records. This may also apply when an individual
applies for a new VAT number.”
Mr Busuttil continues that a
company’s sales team is another effective source of market information.
“The sales team is out in the field and therefore, it can sense what is
happening. Sales people exchange information with their peers employed
with other organisations in the same industry and this is valuable
knowledge for any company.”
Finally, Mr Busuttil concludes that
by forming part of a credit circle, such as MACM, also helps, as
factual credit information is exchanged between members. Studies
maintain that business organisations that are involved in credit
circles are more credit knowledgeable, act proactively and take better
informed credit decisions. “In this way, any business can secure a
sound cash flow and ensure long-term profit, while minimising
commercial fraud.” |
