The two men were well-dressed, spoke like businessmen and appeared to be legitimate representatives of a large company. But the corporate check they gave the dealership for two expensive vehicles was fraudulent.
It had originally been verified by a bank but bounced as a fake well after the men and the cars had disappeared.
This outsider scam cost the dealer thousands of dollars. The price of insider embezzlement, however, can be even greater because it often goes undetected for a long period.
Take the finance manager who rigged the books to skim money from each transaction. Viewed as a highly dedicated employee because she never took vacation, the manager's bookkeeping irregularities were finally discovered when an illness sidelined her long enough to raise questions about her records.
Fraud can sink a dealership as fast as a lack of customers and a bad economy. But dealers can take proactive measures that will make a difference. Some are simple common sense, others require an investment in security. The payoff is stopping unnecessary losses.
How pervasive is fraud? A recent National Automobile Dealers Assn. survey indicates that 20% of dealerships have been scammed and 18% have experienced employee embezzlement in the past five years.
Even more troubling is the fact that a NADA survey showed similar results 10 years ago, also a hard economic period brought on by the dot-com collapse.
The evidence shows that fraud cases increase in poor economic times, which are exactly when sales tend to tail off, as consumers conserve their cash by making older cars last longer. This double pressure can put dealers into a fight for survival.
Direct losses from fraud are only the beginning of the problems for dealerships. There is the administrative burden from handling the aftermath of theft — filing police reports, insurance claims and other paperwork. If a customer's vehicle left for repair is stolen, there is the loss of reputation that may make other customers less willing to trust the dealership.
In the long term, the impact on insurance can be costly. Even after out-of-pocket deductibles are paid, a high loss record may come back to haunt dealers, either through higher future premiums or difficulty in finding insurers who will offer them policies at any price.
An effective fraud-prevention plan tackles fraud from multiple angles. While an insurance agent can help a dealership tap into the carrier's resources to customize a plan, here are some common areas that should be addressed:
- Control Transactions. The old phrase “cash is king” has never been more relevant. Fraudulent checks and fake bank accounts are difficult to spot, so dealers should insist on cash or certified checks. If other checks are accepted, the dealer should pay the small fee to have a check clearing vendor approve the transaction. If the check later is found to be fraudulent, the vendor is then responsible for the loss.
- Also train employees to watch for patterns that indicate scams, such as someone trading in a high-price, newer car for a low-cost car (they may not have ownership of the title) or customers working in pairs to distract the salesman (they may steal or copy keys while unobserved).
- Invest in good key control. Systems that require an employee fingerprint to disburse one key at a time provide a time-stamped record of who has removed and returned keys.
- Allowing someone to take home a car before the transaction is complete should be a rare occurrence that is accompanied by a careful examination of the customer's identification for signs of counterfeiting.
- Install video cameras so that potential thieves know they are being watched.
- Manage Employees. Start off on the right foot by only hiring people after a careful screening. Also check for signs of irresponsibility. Call prior employers for references about work habits and to understand why the applicant is no longer employed.
- Separate the parts of a complete transaction so that more than one employee is involved in authorizing a deal. If one person makes a deal, a different person examines it and signs off.
- Limit the number of people who handle cash so their performance can be monitored. Keep the authority to wire money into or out of accounts within the hands of the owner or trusted executives.
- Clearly state consequences for those who violate rules or fail to follow processes, and then enforce the consequences. A dealer who is known for running a tight ship is less likely to attract employees on the lookout for opportunities to commit fraud.
- Track Business. A dealer should know what is going on inside his own business at all times. Frequent audits, of both inventory and financial transactions, allow a dealer to spot unusual trends or missing assets. When fraud is discovered quickly there is a greater likelihood of catching the thieves and limiting losses.
Of course, closing a sale is a high priority for a dealership. But making sure that fraud does not take the profit out of the sale should also be a concern.
Dave Stevenson is the Senior Director, Product for automotive and equipment dealers for Travelers Commercial Accounts. He can be reached at [email protected].