One of the most worrisome scenarios with any important document, such as a contract, is the possibility of fraud. Identifying the signs of fraud quickly can save an individual or organization lots of money, time, and grief. Here are 5 signs of potential fraud and some suggestions for addressing them.
Every legally-binding arrangement includes at least one material representation. If a company sells widgets, for example, there should be some sort of understanding of what a widget is. Ideally, a brief indication of what the item should be in the contract.
A material misrepresentation occurs when one party knowingly omits critical information or includes false information. If you’re transferring a piece of real estate, there may be numerous representations about the location, history, and state of the property. Absent an upfront disclosure of a problem with something like a lien against the property, a buyer might assume they will have a clean title to the real estate. Only once they’ve gotten a letter from a lien holder might the buyer find out there’s a problem.
Contracts and other documents usually require signatures. Even if there isn’t a written contract, there’s a good chance a payment will activate the agreement legally. Many payments involve checks, and these typically include signatures. If there is a problem with the signature on the check, a bank might reject or flag the payment.
Mismatched signatures can also be problematic. For example, someone misrepresenting their authority as a seller might forge or copy and paste an authorized person’s signature. You should consider sending any suspicious signatures to a qualified professional for forensic handwriting analysis. Especially if the contract or document involves a major transfer of money or assets, the peace of mind will be worth it even if the suspicions prove unfounded.
Claims of Low or Now Risk
Any party that claims there is little to no risk associated with a contract should be the subject of suspicion. This is especially true if the party insists the arrangement is guaranteed. Every deal involves some degree of risk because much of the profit in business often comes from risk premiums.
Your fraud radar should be more active once you’ve heard a representation of minimal risk. Elevate your due diligence, especially if a deal involves significant assets or money. The same applies if the deal involves disclosing financial or personal details.
Anyone who wants you to make decisions quickly has a motive for doing so. Even if they’re not engaged in outright fraud, they could still be in a sketchy situation. A business might pressure a potential customer because they need sales right now to stay afloat.
Notably, the line between questionable and fraudulent conduct can be very thin in these scenarios. A desperate salesperson might pressure someone to sign a contract so they can obtain the liquidity to fulfill the contract. This means operating on a thin margin with a high risk of the deal going belly up. Even if you don’t think it’s fraudulent, you may want to protect your interests by not signing, putting the money in escrow, or asking for a bond.
Weird Business Practices
Suppose an event planner wants a promoter to make a deal to provide entertainment for a function. However, the promoter insists on leaving as thin of a paper trail as possible. The contract is skimpy, and the promoter prefers to pick up the paperwork in person rather than getting it via registered mail. These are weird business practices, and you should treat them as red flags for potential fraud.
It is a good idea to insist on using traditional business and contract-handling practices. If someone won’t go along with them, consider avoiding the arrangement if you don’t have a contract or contacting a lawyer if you do.
The most thorough due diligence still can miss key details in business deals. It is important to approach signing and handling contracts and other documents judiciously. Use all the fraud detection tools available, too.
Also, even if you’ve entered into an arrangement, you still have rights. Even after signing, you should watch for potential signs of fraud so you can protect your interests and take action if necessary.