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DRC urges caution during 'silly season'

by Tim Linden | September 09, 2009

The executive staff at the Ottawa, ON-based Dispute Resolution Corp. calls it "silly season," referring to the time of year when less-than-scrupulous operators seemingly come out of the woodwork and basically steal loads of U.S. produce and dump them on the Canadian marketplace at well below market values.

"It's an industrywide problem," said Fred Webber, vice president of trading assistance for the DRC. "It's that time of year that production from up here is drawing to a close and virtually everyone is importing from the U.S."

He said that the illegitimate operators end up getting loads of produce with no intention of paying for them. Hence, they can offer it for sale to wholesalers at ridiculously low prices, which creates problems across the board, especially for legitimate operators who then have difficulty competing at those below-market prices.

"Everyone is starting to understand that it is a problem for all of us," said Mr. Webber. "We have been getting good cooperation from the wholesalers and buyers in Montreal and Toronto, who are finally willing to report the 'bad apples' among them."

George Pitsikoulis, president and buyer for Canadawide Fruit Wholesalers Inc., based in Montreal, said that the selling of stolen goods is "a huge problem that hurts everyone. It hurts the market by watering down the price and making it impossible to get a fair price for product that you bought legitimately. We have to convince everyone that they are hurting themselves when they buy stolen product and sell it for below the legitimate cost."

Mr. Webber said that product dumped at wholesale at below-market prices can be done for a host of reasons both legitimate and illegitimate, which makes it difficult to capture the perpetrators.

It does indeed happen that loads of product from the United States are refused by a retailer for quality reasons and then are diverted to the market to be reworked or sold at bargain prices. Hence, when a wholesaler is offered a load or a partial load at below-market prices, it is not always easy to know whether the load has been obtained through fraudulent means.

Although the legitimate below-market sales happen, Mr. Webber said that any time a wholesaler is offered a product at a ridiculously low price, it should raise a red flag. He said that a buyer should first ascertain whether the seller has a DRC license. While not every legitimate produce operator is required to have one, it has become common practice, and the lack of a license should at least trigger more scrutiny.

Wholesalers within the market can go a long way toward solving this problem, but both Mr. Webber and Mr. Pitsikoulis said that U.S. shippers who sell to people they don't know are just as culpable. "It is sad, but there are people that make a living by selling produce they have no intention of paying for," said Mr. Pitsikoulis. "They will make 40 calls a day [to U.S. shippers] until they get one or two to ship them a load."

He said that due diligence by the shipper should alleviate most of the problems. While it is somewhat self-serving for a longtime wholesaler like Canadawide to advocate that shippers only do business with established companies, Mr. Webber concurred. "If you don't know the person, you should be doing a very thorough credit check," he said. "People who should know better - even those with credit departments - have been stung by these bad operators."

The DRC executive admitted that the illegitimate players are getting more sophisticated, which makes it more difficult to root them out ahead of their fraud.

But he said that an understanding of how they operate should help.

These operators tend to come in and out of business quickly, he said. Hence they do not have much of a track record. Often, they will open a bank account and make a six-figure deposit to appear legitimate. A quick credit check by a seller will reveal a large bank account, but that's about it.

"They will also get a listing in the Red Book and the Blue Book, which means nothing without a rating," Mr. Webber opined.

Their typical mode of operation is to pay for the first load in cash before it is shipped and the second and third load with a check immediately after receipt of the product. This typically legitimatizes the receiver in the eyes of the shipper, who will then begin to ship multiple loads on credit.

"Under international banking laws, it is possible for a company to be bouncing checks for 30 days before the shipper knows it," said Mr. Webber. "There might be 20 loads that haven't been paid for when he finds out the check for the first one bounced."

Mr. Pitsikoulis revealed how easy it is to be fooled. "Last year a guy offered me some oyster mushrooms from France. He gave me a competitive price and we had created a following for the product [with our customers] over several weeks. All of a sudden, he disappeared and we couldn't get a hold of him anymore. We called the French growers and they told us they cut him off because he wasn't submitting payment for any of the product he was selling to us. They told me the price they thought they were going to get for the product, and it was exorbitant. They should not have been exporting the product to Canada."

But the story doesn't end there. "Just recently, the guy came around again and offered my mushroom buyer some mushrooms from Hungary," said Mr. Pitsikoulis.

Instead of purchasing that product, Canadawide called the DRC and alerted the shipper in Hungary. An investigation currently is underway.

Mr. Webber reiterated that a proper credit check would solve almost every problem except outright theft, which is also on the rise.

"The message we want to get out is that shippers tend to point their fingers at the unscrupulous buyers on the Montreal and Toronto markets, but in almost every case we have, the seller has been guilty of selling someone that they just didn't know anything about," said Mr. Webber. "Typically, these guys have no license and are not members of the DRC. It is an industry problem, and it takes effort by both the shippers and receivers to fix it."