According to an article by Ed White in The Grand Rapids Press, Federal authorities are finally filing criminal charges against CyberNET Group executives and principals, beginning with James Horton, the former president of the company. Mr. Horton is accused of conspiracy, bank fraud and money laundering, charges to which he pleaded not guilty.
As background, CyberNET tricked 90-plus banks into making loans, to the tune of around $100 million, for equipment, some of which did not exist. The concept was simple and consistent with many of the other frauds I have discussed – lenders made loans for, or bought, equipment that did not exist (computer boxes stuffed with bricks in some cases, according to Mr. White’s article). This particular scam, although including equipment leasing, also involved false tax returns, false checks, altered financial statements, and accounts receivable – a real auditor’s nightmare (or good time, depending on your perspective).
In the equipment leasing piece of the fraud, CyberNET used altered financial statements and fake vendors to defraud the banks and leasing companies. For instance, CyberNET would enter into a lease with a lessor for certain equipment. The lessor would then pay the vendors upon receipt of the D&A. The equipment, however, did not exist, and the vendors were shell companies set up by CyberNET. The money paid by the lessors to the ‘vendors’ was then converted to use by CyberNET.
How do you protect against something like this? Well, the best thing is to know your vendors. This always has been sound advice and is now part of the law under the Patriot Act. Let’s look at a best practices example of how you can protect yourself involving First American Equipment Financing (FAEF). Cyberco, an affiliate of CyberNET, asked FAEF for roughly $1.1 million in lease funding for equipment that it had chosen from several of its vendors.
As part of its due diligence, FAEF asked to contact the vendors of the equipment. Mr. Horton told FAEF that there was no need for it to contact the vendors since Cyberco would handle the dealings with the vendors. After receiving invoices from these vendors, FAEF did the correct thing and attempted to contact the vendors anyway. The best they could do, though, was to be put repeatedly through to voice mail, raising their suspicions. Continued follow-up, in one case with a real vendor, who did not have any of the claimed orders from Cyberco, created real concern as to the validity of the deal.
FAEF then took the next proper step and asked to inspect the equipment to ensure proper installation prior to disbursing any funds. Upon receipt of contradictory information and other obfuscation that basically precluded them from ‘touching’ the equipment, FAEF declined to do the deal. The lesson here is that FAEF had the correct procedures in place to know their vendors. More importantly, these procedure were followed, thereby saving the company over $1 million and who knows how much in legal costs. Kudos to Bill Verhelle and his FAEF team for a job well done!
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