COVID-19 drives fraud pandemic

As forensic accountants, my colleagues and I routinely discover things about businesses and individuals that are surprising and in many instances criminal. But we have never seen the level of fraud — and the number of companies trying to rip each other off — as in the past two months when COVID-19 spread around the world.

Since the outbreak began, our firm in downtown Minneapolis has been asked by numerous companies seeking personal-protection equipment (PPE) to investigate prospective sellers and verify that they have what they say they have.

However, in most ways, this is routine work for us. Our firm specializes in helping companies comply with U.S. laws in their dealings overseas. As a result, we continuously look at how our clients deal with counterparties to help them remain in compliance.

The coronavirus outbreak has disrupted routine business for many. But it has also created enormous demand for certain products that are in short supply. That distortion has led opportunists to attempt fraud of enormous scale.

We're seeing problems on both ends of a transaction — buyers and sellers.

The buyers of PPE range from private companies, hedge funds and wealthy individuals to "agents" who claim to be representing state, federal, and foreign governments.

The buy side presents a series of obstacles, ranging from falsifying Proof of Funds "POF" reports, to representing the ability to purchase product without the authority to transact.

These POFs supply the name of the account holder, available funds, related bank contact information and in many instances a certain stamp of authenticity.

Last month, we were provided a POF from a potential buyer who claimed a purchasing capacity in the billions of dollars. Four days later, from a different buyer's agent on the opposite side of the country, we were provided with the same exact POF with one minor change, the account holder.

When we asked for an explanation, the response was: "We have a misunderstanding." I think not.

The sell side is even worse. We have had a front-row seat as vendors and agents claiming access to 3M Co's popular N95 respirator face masks have tried to line up buyers with claims that are outrageous.

3M, of course, has undertaken an incredible effort to ramp up production of the popular and effective product. It is trying to double production from the 1 billion units it had planned for 2020. At the same time, 3M has little control over the vast network of wholesalers and other middlemen moving its masks around the world.

Many sellers have contacted us claiming to own certain amounts of 3M N95s. When we add up the various claims, they total well beyond 3M's annual production capacity. While it's possible that some firms may have hoarded and warehoused their purchases of N95s, it would take several years to do that at the volumes such dealers and agents are typically allowed.

We have been in contact with "approved 3M vendors" who claim the ability to deliver to buyers over 1 billion masks every 2 weeks, consolidated from factories around the world. Of course we followed with, "Prove it." These so-called vendors can't do it.

Our team is in constant communication with agents, buyers and sellers as the times continue to change and needs continue to adapt. Fortunately, there are credible buyers, suppliers, and manufacturing facilities that can put PPE into the hands of emergency medical teams, essential workers and health systems that need it most.

Our recommendation to businesses looking to acquire PPE is to simply see and touch the product. Don't be afraid to stand your ground with sellers until you have a reasonable amount of certainty that the product exists.

If the seller represents the product is here in the U.S., request one of three things: (1) "Proof of Life" Video with today's newspaper visible; (2) SGS Report and lot numbers; or (3) an address for inspection. Asking for one of those things is completely reasonable and should weed out any sellers who aren't serious.

Our goal is to ensure these transactions remain possible by picking the bad apples off the tree.

Cory Svihla is a director and co-founder of Intellex Forensics, Minneapolis.