“Everybody you meet in business is going to be nice”. Yeah, right!

“Everybody you meet in business is going to be nice”. Yeah, right!

One of the best things about being in a start-up business is that most people are trying to achieve the same result, which makes for a friendly and constructive working environment. However, the sad truth in the world is that not everybody is there to help you. Rather like the Fox giving you a lift across the river in the children’s stories, some people are there to rip you off, make your life miserable, steal intellectual property, or just get one over on you.  Sadly, fraud is a very real factor in business life.

It is not my intention to make anybody about to launch himself or herself into a start-up become paranoid. All I’d really like to do is get off my chest some of the things which I have seen happen, and to give one solid piece of advice:

If it looks too good to be true, just walk away, whatever you’ve already invested

The ability to walk away from a deal when it starts to turn that is an extremely important attribute of any entrepreneur. So let me raise a few flags so that when people do make use of those things which are simply too good to be true, you have some questions to ask and, hopefully, you’ll be able to walk away before too much damage is done, or too much has been invested.

1.    So, one of the first flags that you should look for is someone who says to you that the entire deal is being structured for “tax reasons”. This is often a badge of fraud. Strangely the word “tax” causes people to turn off their brains. Fraudsters rely on this, hoping that you will simply accept the ridiculously complicated structure they propose is in order to benefit them for 5 to 10% of tax charges. You can pretty well assume that there is something nasty hidden in that structure.

2.    Another great flag you should look for is anybody that puts forward a proposal which is, in effect, ”geared to fail”. By deploying significant lending, and by deferring costs, it can be made to appear that the deal is extraordinarily profitable. But it is incumbent upon you to check that the deal is profitable over the reasonable lifetime of the project.  Excessive gearing can give initially misleading results, and it is almost always the case that you will be the loser.

3.    You should also flag any significant deferred terms. One of the nastiest deals that I’ve ever seen contained two terms widely separated in a legal agreement, which could be brought together for the fraudsters advantage: on one hand the fraudster had the right to call a loan on demand, whereas on the other hand, the borrower would not be able to pay a loan immediately.  By demanding repayment, the fraudster was able to trigger default and take control of a very significant company.

4.    I have a basic allergy to any contract that includes an exclusive period….  “Hang on a minute!”, you might say. Any significant contract includes an exclusive period! I might agree with this, on a general principle, but there are many occasions where the exclusive period is actually designed to prevent the victim company from being able to raise finance, approach others for help, or get out of a hole. You need to work through in your head all the consequences of that exclusivity before you grant it. After all, they might just be ensuring you run out of cash so they can screw the terms down in their favour!

5.    Another favourite tool of fraudsters is the complicated ratchet.  My general advice is that one should avoid any ratchet the consequences of which cannot be worked out on the fingers of one hand. You must assume, when entering negotiations, that any ratchet that can cause you harm, will cause you harm.

7.    Complexity can be concealed in a list of milestones. You may feel that you can meet each individual milestone in a series. But the fraudster is more than well aware of the simple mathematical fact that you may be able to make each one, but that as you compound each milestone with the other, you are highly unlikely to meet all of them in sequence. My advice is to reduce both the numbers of milestones and the complexity of each one. If the other party resists, walk. Walk fast!

8.    Fraudsters are also fond of the obscure back-to-back financing arrangement. They will claim that as a consequence of the deal they have to do with you, they must do a deal with someone else, or with the bank. My advice is to call their bluff and to have them put the money into your lawyer’s escrow account ahead of the deal. If there are not willing to do so, the rule about walking away applies.

9.    I have seen complicated, and very, very successful, frauds run where there were companies have identical names.  Many people are not aware of the multiple jurisdictions in which companies have the suffix (Limited) or (SA) or (Inc).   it is however sadly rather easy for funds to have “Company A Limited” in the United Kingdom and “Company A Limited” in Hong Kong at the same time. Then, by opening bank accounts for for both these companies in United Kingdom and in Hong Kong at the same time, the Fraudster can have income in one and expenses charged on the other.  This goes a long way towards enabling them to leave creditors and victims high and dry later.

10.    Another wonderful little tool of the fraudsters, is the “invisible principal”. This is a person whom you never meet, but to whom all decisions must be referred. My advice is simply to assume they do not exist, and make your decisions appropriately.

11.    Another subtle tool of the fraudster is the long and big setup. You are constantly teased along saying a deal is about to occur, about to occur, about to occur, about to occur …. and at some point you are asked to commit your own funds. If that moment is before you have seen their commitment, then you should simply assume the deal will not occur and behave accordingly.

12.    Any deal that involves a politician in a foreign country should be assumed to be fraudulent. There is no nice way of putting this. The harsh fact is that people only invoke foreign politicians where fraud is their major motivation.

After all that, you might feel that I am being too cynical? Perhaps you might feel that I am the result of a decade spent in investigating corporate fraud. Whatever you think, you have to realise that not everybody is there to be your friend, and, without wishing to be unpleasant, you should have a look at the list of 12 items above every time somebody offers you a deal.
It might save you a lot of trouble later….

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