In the News

June 20, 2019

Sunday, June 23 is NACM’s Birthday! That's 123 years as the advocate and primary knowledge
and networking resource for business credit and financial management professionals. 

Cross-Border Fraud Requires Extra Attention From Credit Managers

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Technology Driving B2B Payment Change

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When Financial Statements Do Not Provide the Full Story

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New York Supreme Court Grants Summary Judgment to Subcontractor

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Cross-Border Fraud Requires Extra Attention From Credit Managers

Fraud knows no bounds, which is why researchers have broadened their scope to cross-border fraud detection only to find cybercriminals using similar tactics to those in the U.S. One such example is business email compromise (BEC), where cybercriminals deceive their targets by gaining their trust for the purpose of financial gain. After establishing a “business relationship” with the victim, the fraudster is able to convince the victim to complete a business transaction—often via wire transfer—tricking the business into a fraudulent transaction.

According to the Federal Bureau of Investigation, every state in the U.S. and more than 100 countries have fallen victim to BEC. A recent case on the United Kingdom’s radar involves U.S. firms and a cybercrime group, Scattered Canary, based in Africa. Threatpost news reported the group was identified by email security company Agari in June; however, the group has been active for the past decade. Reports state a single individual started the group in 2008 by producing counterfeit check scams through Craigslist that targeted individuals. By 2015, the scams evolved to BEC targeting large businesses “using methods like credential phishing and spoofing target company domains and requesting payments via wire transfers.”

“By 2017, Scattered Canary had business-critical tools and tactics in place and started to define functional roles across an ever-expanding array of revenue streams,” researchers said in the Threatpost article. “Like any rapidly-growing company, Scattered Canary took infrastructure into consideration and quickly added Remote Desktop Protocol (RDP) servers to help them scale and coordinate operations. Meanwhile, the organization continued to market-test new approaches to defrauding a growing universe of victims.”

With BEC scam losses reaching roughly $1.2 billion in 2018, according to the FBI, creditors will want to keep a watchful eye on their emails, especially when conducting business internationally. CEO and Managing Partner at Louisiana-based Innovative Risk Consultants Ryan Thomas said in today’s business world, everyone is globally connected, whether it’s through telephone, email or social media. Although beneficial, this connection also opens up businesses to electronic forms of fraud that can occur through wire transfers, ACH, email accounts or social media.

“It’s about knowing your customer and it’s much harder to know your international customer versus your national customer,” said Thomas, who spoke at NACM’s 123rd annual Credit Congress in Colorado in May. “What ties national fraud and international fraud together is the endgame: money. What fraudsters are after is money, particularly in banking. The financial services industry is easily one of the most-hacked industries. We get at least 50,000 or more attempts to breach our information system per day.”

Part of any credit manager’s job is risk analysis, specifically identifying the risk of conducting business with an international company. Are there signs of corruption within the country’s government? Has fraudulent activity been reported in the country in the past?

“If you’re an international business, you’re going beyond the FBI and Homeland Security and relying on other countries to supply the cybercrime support,” Thomas said. “Credit managers are at the forefront of protecting their company’s bottom line while conducting business across borders.”

—Andrew Michaels, editorial associate

Technology Driving B2B Payment Change

Technology advancements are pushing business-to-business (B2B) payments into the future with speed, accessibility, costs and transparency as the leading factors driving the revolution. Several announcements were made last week involving these factors, including a partnership between Billtrust and Comdata. Comdata is joining the Business Payments Network (BPN) to help its customers automate payments to suppliers on one network.

“This alliance provides all suppliers accepting payments through BPN the ability to receive truly touchless transactions in their own preferred format from Comdata's massive base of business buyers,” said Nick Babinsky, BPN vice president and general manager, in a release. "As BPN ensures that payment for goods and services seamlessly aligns with companies' preferred processes, it's a win-win for all,” added Jack Sevier, director of product strategy with Comdata, in the same release.

Meanwhile, small- and medium-sized enterprises (SMEs) in the U.K. will now have access to WorldRemit for Business, allowing SMEs the ability to pay employees and contractors in emerging markets such as Ghana and South Africa. “While some banks can take up to one week to process payments, over 90% of WorldRemit transfers are paid out within minutes,” the announcement states.

Technology has been a great benefit for credit departments but comes with certain caveats. “Bill pay portals allow customers a quick/easy method of payment; however, some of the portals also have created significant work for AR departments by forcing us to do the work for the customer’s AP department,” said Denise Glover, CBA, credit manager with AutomationDirect.com.

“We are seeing a lot of pushdown from our customers to their websites or even third-party websites, especially regarding remittance information,” said John Sweet, CCE, corporate credit and risk manager with American Woodmark Corporation. Despite the countless advancements, there is still room for improvement. “We receive many payments with no documentation or just an account number,” Glover said. “Technology needs to always force the remittance information.”

PayPal Canada is striving to make cross-border shipping easier, faster and cheaper for small businesses with its partnership with netParcel. Among the benefits for Canadian businesses are one-day delivery to the U.S. and reduced costs of up to 75% compared to other parcel carriers.

"Small businesses need access to better shipping solutions that open them up to global customers," said Paul Parisi, PayPal Canada president. "With this launch, we're looking to enable more exports and help small businesses become far more competitive in today's global economy.”

“Pressure from within to maintain or cut costs in addition to push-down from our customers is creating tension for evolution and change. We must take the initiative to integrate technology in our processes, as pressure from both ends of the spectrum is in essence requiring the transformation,” said Sweet.

—Michael Miller, managing editor

When Financial Statements Do Not Provide the Full Story

Analyzing financial statements helps reveal the creditworthiness of a customer, piecing together the figures to paint a picture of a customer’s level of risk. Beyond the traditional methods of financial statement analysis, credit scores, etc., creditors must also take internal controls into account as well⁠ should they have reason to believe something is amiss.

According to a recent article by The Street, the Securities and Exchange Commission (SEC) just settled its case with KPMG for $50 million. The case in question had little to do with financial statements, but rather, KPMG’s “employees … [who] cheated on internal training exams and altered past audit work based on stolen information,” according to the article. This, subsequently, heightened the credit risk of KPMG.

"KPMG's ethical failures are simply unacceptable," SEC Chairman Jay Clayton said in a press release.

As a creditor contemplates how to approach a potentially risky customer and internals can impact how creditworthy a customer is, they should not be the first piece of information analyzed or considered. Internals should be “corroborated after the fact,” said Charles Mulford, Ph.D., professor of accounting at the College of Management at Georgia Tech. Internals offer more context when analyzed next to a risky financial statement.

“Do you have reason to believe the company has the controls to accurately report transactions?” Mulford said. “... The idea that if you have strong controls, they have their stuff together, and you can rely on financial statements. But the controls go further.”

When considering internal controls, Mulford warned that not every company has its controls audited: Larger companies are required by law to be audited, but smaller ones are not. KPMG, a large corporation, likely received audits, making its internal control data more accurate than if the data were to come from a small company with no auditor.

With internal control data, creditors should remember the information may or may not be audited. Financial statements, conversely, are always audited, regardless of the size of the company. Whether a statement has been audited can impact the veracity of the data, and creditors should keep this in mind when considering methods to determine creditworthiness.

“It’s all a matter of, ‘Do they properly have the steps in place to evaluate collectability and accounts receivable?’” Mulford said. “Again, with good strong internal controls⁠—which you don’t see, but which directly impact the value and credibility of the financial statement⁠— the creditworthiness of the customer is determined.”

—Christie Citranglo, editorial associate

New York Supreme Court Grants Summary Judgment to Subcontractor

Defendant Plank, LLC (“Contractor”) entered into a construction contract with Dutch Village, LLC (“Owner”) to act as the general contractor for the construction of four apartment buildings (“Project”). Thereafter, Contractor entered into a subcontract with Plaintiff A.E. Rosen Electrical, Inc. (“Subcontractor”) for electrical work on the Project. After nine months of work on the Project, a payment dispute arose between the Owner and Contractor. At that time, Contractor directed the Subcontractor to cease work on the Project.

Contractor argued it had no present obligation to pay the Subcontractor because the subcontract between the Contractor and Subcontractor contained a “pay-when-paid” provision requiring the Contractor to make progress payments to Subcontractor within 15 days of receiving corresponding payments from the Owner and to make final payment to Subcontractor within 30 days of receiving final payment from the Owner.

Contractor then recorded a mechanic’s lien against the subject property in the amount of $1,877,191.72 for monies owed to Contractor and ultimately the subcontractors. Subcontractor also recorded a mechanic’s lien against the property for $117,278, the amount it was owed by Contractor. Subcontractor then filed an action against Contractor for breach of contract, account stated and violation of article 3A of the Lien Law.

Subcontractor filed a motion for summary judgment against Contractor for the balance owed under the subcontract between the parties. Contractor argued in opposition to Subcontractor’s motion for summary judgment that Contractor had no obligation to make full payment to Subcontractor because it had not received the full amount of payment from Owner for Subcontractor’s work.

Specifically, Contractor argued that the subcontract included a “pay-when-paid” provision such that it had no present obligation to pay Subcontractor because the Owner had not yet paid the Contractor. The Court rejected this argument because the “pay-when-paid” provision was merely a timing mechanism and not a “pay-if-paid” provision. Thus, Contractor could not utilize the provision in such a way that effectively acted as a condition precedent to its obligation to pay thereby shifting the risk of Owner’s nonpayment from Contractor to Subcontractor. The Court noted that such provisions are void and unenforceable as they are contrary to public policy because as a practical matter, suppliers and small contractors on a large construction project need reasonably prompt payment for their work and materials in order to remain solvent and stay in business. Furthermore, the Court reasoned that it is generally presumed that parties to a construction contract do not intend small subcontractors to wait until the determination of an extended legal dispute not concerning the subcontractors’ work.

Thus, notwithstanding the subcontract’s requirement for the Contractor to pay Subcontractor within 15 days of receiving corresponding payments from owner and to make final payment within 30 days of receiving final payment from Owner, the Contractor could not unreasonably delay its obligation to pay Subcontractor. Moreover, the subcontract stated that “[t]he parties acknowledge this is a ‘pay-when-paid’ timing mechanism, and not a ‘pay-if-paid’ provision.” As such, the Court held that while the provision provided for a postponement of payment, payment could only be delayed for a reasonable time after completion of the Subcontractor’s work. The Court reasoned that Subcontractor satisfactorily completed its work over two years prior which was an unreasonable time to withhold payment.

Accordingly, the Court held that the Contractor was no longer allowed to withhold payment from Subcontractor and granted summary judgment in favor of Subcontractor.

Reprinted with permission.

Michelle Rosenberg, Esq., is an associate in the Construction Practice Group of Pepper Hamilton LLP, resident in the Los Angeles office. She focuses her practice on construction claims, including delay and disruption claims, payment claims, government contract claims, construction defect claims and errors and omissions claims.