Scam Alert: How to Protect Yourself Against Purchase Order Finance Frauds

Don’t make expensive mistakes with Purchase Order Finance. Watch this video to learn what overseas manufacturers do to mislead and deceive Australian importers.

Daniel and Leigh talk you through a scenario that actually happened to us and point out the various steps that could save you from extreme money loss and embarrassment with your customer. This is crucial information for anyone looking to acquire trade finance or dealing with overseas factories.

Press play on the video below or checkout the transcript also below.

Hi I’m Daniel from AR Cash Flow I’m here with Leigh from AR Cash Flow, Hello everyone. He’s a Product Specialist. Today we’re going to talk about Purchase Order Finance gone wrong and to do that we’re going to use a real example of a client of ours from a couple years ago, we’re going to show you exactly where this deal went bad and not only that we’re going to show you some of the things you can do in your business to stop it from happening to you.

So where do we start. We had a client who had procured a Purchase Order from a very very well known and large retailer here in Australia, when they got that Purchase Order in order to fulfill it they had to get the products manufactured in china overseas and of coarse the manufacturer wanted to be paid before the goods were shipped, that’s when the client actually approached AR Cash Flow. They approached us and said look we need some trade finance, we said fine, we cant pay for the goods by TT but what we can do is we can put up the collateral for you to the bank to issue that letter of credit but in order to do that we have to do a few things first.  We had to check the validity of the Purchase order and to do that we wrote to the customer, the retailer and said can you verify please that these goods are being ordered, they said yes, fine. The second thing we did, was we ordered a factory review which is what we do on most new factories, not all of them but a lot of the time to check that they’re a real factory. Yep unknown factories, factories that aren’t producing major goods bring to Australia or factories the client hasn’t visited yet and haven’t checked out you know if the factory can make the goods to specifications. Another thing on that as well is to check say your dealing with sony to check your really dealing with sony and not dealing with some grey manufacturer overseas. So you want to check the credentials on the manufacturer.

OK so we got comfortable with all of this and then we proceeded to issue the letter of credit. Our letter of credit we made subject to a third party inspection for a survey and this is all where it went wrong. There’s two key scams if you like that some of the manufacturers overseas run on Australian businesses. The first one was we issued a letter of credit, the factory new it was subject to a third party inspection but they still gave our client who gave us the signal that the goods were ready to be inspected. The first thing that happened was we sent the inspector in to the manufacturer and we said well lets have a look at the product. For a start the quantities we had ordered were not there, the factory had told the client who told us that they were ready to go and when we went into the factory we found the goods were not there in the quantity we needed to order. So part of the reason of using a letter of credit is really a performance guarantee, the factory can get paid for those goods as long as they make the goods to the specifications that relate to the order. So the second issue that we had was not only were the goods made not to the quantity but the goods didn’t match the specifications of the purchase order in fact the goods they had written on them that they were one product and when we tested and checked the product we found that they were in fact an entirely different product all together and they were a totally different specification and low and behold the specification was much cheaper to produce. When our inspector pushed the owner of the factory the factory owner confessed to the scam and as a result of that hands down, hands up, as a result of that the whole the whole transaction had to be unwound. So that was the issue that ended up exposing a lot of risk. We could have lost a lot of money and the client could have lost a lot of money if that product had of been delivered to the customer and the customer had found the products were faulty or fraudulent, whatever you want to call it. Effectively we have stopped it from here losing capital there by using the letter of credit. So we protected the client and also protected ourselves. So what are some of the things Leigh that if you were importer that you would do to stop this happening, I know there is a third party inspection being ordered but how do we make it so that it doesn’t have to be unwound and doesn’t fail the inspection, that’s the question.  I usually recommend to most clients although it’s a bit of a process, to actually visit the factory where you are getting the goods produced even prior to spending the money flying over there, get a third party inspector to actually inspect the factory, to approve them to say that factory can actually match the specifications that can make a product that can match the order that you’re actually trying to fulfill. Samples, you’d want samples signed off. So there’s a whole load of third party inspection. There’s one thing you didn’t mention – in this situation we issued a letter of credit, the samples are a good idea, send us what you’re going to manufacturer and we’ll check it, its still not a silver bullet. So protecting yourself even further would be not issuing a letter of credit until the goods have actually been produced, they’re ready to be inspected, if they pass then you raise a letter of credit. If they don’t, you’ve saved yourself a whole lot of money, a whole lot of hassle and not only that you’ve saved yourself from the embarrassment from your end client. Also these guys would have a cross claim against you for delivering faulty goods and then sue you. So I guess the key point there is checking the goods before you issue the letter of credit, so maybe paying a small deposit sometimes to get the manufacturing underway without issuing a letter of credit. Cause this creates foreign currency exposure; you’ve got bank charges. Why not put a little bit of money out the door and see how they go on a small order. You don’t need Trade finance till you can be sure they can produce the goods. There’s another small way, ill just mention quickly, you can also raise a letter of credit which is like a 90 day letter of credit or 60 day letter of credit depending on if your factory will allow it. Which enables the goods to come into the country, get delivered if they are accepted, they’re not faulty and they do match the specifications, then the factory can be paid 60 days afterwards which can add a small layer of protection there. It can but everything we are talking about today its not a perfect science things can go wrong, even if you do everything your supposed to do it can still go wrong and I gotta say in every situation, it depends on who the manufacturer is, who the client is, how many orders they have done, depending on the level of due diligence that we feels required.  But these are just some of the ways and some of the things that can happen to you when things go wrong. Thanks for listening. Thank you.