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DRC notes uptick in fraudulent activity

by Tim Linden | January 11, 2009
The Ottawa-based Dispute Resolution Corp. issued an alert to its members the last week of December stating that its staff has "received an increased number of reports of fraudulent activity involving cross-border transactions."

DRC President and Chief Executive Officer Stephen Whitney said that these fraudulent firms appear to be well organized and can put up a very good front that can fool some people. He said these companies are operating "outside of the confines of DRC membership," but in other ways they appear to be legitimate.

"We are concerned that some shippers either don't know [that a license is required] or are not paying attention and are being led down the garden path," said Mr. Whitney.

Fred Webber, vice president of trading assistance for the DRC, said that shippers must do their due diligence to ascertain the legitimacy and credit worthiness of the firms with which they are trading. The alert indicated that these fraudulent companies do have listings in credit reporting books, such as The Blue Book, and they often provide bank information and credit references to their customers.

Mr. Webber said that shippers at the very least must make sure the firms they are doing business with have a license. He said that any firm in Canada that imports produce from the United States must have either a DRC license or a license obtained through the Canadian Food Inspection Agency. He said that a listing in a credit reporting book is not a guarantee that the firm is licensed or legitimate.

Ken Schultz, vice president of rating services for The Blue Book, agreed that a listing and a rating are two different things. While he is certain that the vast majority of subscribers to The Blue Book know the importance of the rating, he suspects that some might consider an unrated listing evidence to still be of legitimacy. He said that a listing in The Blue Book without a rating is not giving much more information than one would get from a phone book. Even a rating in the most recent edition of The Blue Book can be misleading.

Mr. Schultz said that on a daily basis, The Blue Book rating analysts pore over financial statements and industry feedback to update ratings. On Tuesday, Jan. 6, The Blue Book executive looked at the previous day's ratings and noted that there were 16 that had changed. "We published the fall book in October," he said. "If we have 10 to 20 rating changes a day, obviously we have had many changes since that book came out."

All subscribers have access to The Blue Book's daily changes on-line, and Mr. Schultz suggested that every shipper should be checking its customers' ratings on a frequent basis.

Tom Oliveri, director of trade practices and commodity services for Western Growers Association, said that knowing a firm's most current financial information and payment history is extremely important. He said that the sales department of every company should be constantly monitoring a firm's rating to make sure that it meets the company's criteria.

While every shipper would ideally only sell to the top-rated firms, Mr. Schultz acknowledged that firms at the other end of the spectrum are also buying product on a daily basis. "If you have a bumper crop and you have supplies left over after you sell to your top-rated customers, you need to move down the list to sell the product. I understand that. But every company should have their risk-analysis department working hand-in-hand with their sales department."

Mr. Schultz said that as a shipper moves down its customer list to firms that are slow pay or worse, the risk analysis should be factored into the cost of the product.

The Blue Book vice president said that an aggregate review of produce industry financial statements does reflect the economic downturn that the nation as a whole is facing, but he said that the agricultural sector that he monitors does appear to be doing better than many other sectors of the economy.

"People do have to eat, but they don't have to buy cars," Mr. Schultz quipped. While he said that financial statements do show smaller profit margins, the decline has not been as great as one might expect considering the state of the U.S. economy.

"The number of companies that qualify for AA or A or AB or B (which indicates that they pay within 30 days or less) has declined, but not drastically."