Stay Vigilant When Hiring Outside Service Providers

Posted: Updated:

Recently, I heard about a new form of theft against a central Indiana nonprofit. Using the organization's login information for its credit card processor, a perpetrator was able to issue repeated refunds to a Russian bank account. The first two - one for $9,000 and the other for $21,000 - were processed. The third attempt for $80,000, however, was caught by the business administrator when he logged into the account and noticed the pending payment.

Fortunately, insurance refunded the $30,000 that was stolen, but ultimately the organization has the responsibility for selecting a qualified service provider. With that in mind, businesses and organizations should exercise caution when using credit card processors, donation websites, and any other outside service providers that involve financial information.

In another example, executives of CenterCede, a payroll services provider, defrauded its payroll clients of more than $2 million. The president and the chief financial officer collaborated and did not pay their clients' federal taxes in appropriate amounts by applicable deadlines. Instead, they diverted funds to pay their exorbitant salaries and to cover growing liabilities, including the tax liabilities of other CenterCede clients. Eventually, both men were sentenced and sent to prison for two to four years.

Due diligence is your best defense when considering a new financial relationship.  Below are some questions and tips to assist you before signing on the dotted line with a new service provider.

An effective due diligence process should include these questions:

  1. How does the company protect users’ private information?
     
  2. Have there been any fraudulent claims against the company?  If so, how were they resolved?
     
  3. Who is liable if illegal activity occurs?
     
  4. How accessible is its customer service department?
     
  5. How could your organization’s financial information be used by someone intending to do harm?

Investigate the prospective company:

  1. Conduct a background check.
     
  2. Identify the major lines of business and volume of a payment processor’s customers. Look for any red flags.
     
  3. Visit the company’s business operations center, if possible, to verify legitimacy.
     
  4. Check for any complaints with the Better Business Bureau (BBB).
     
  5. Review consumer complaints and procedures used to handle these complaints.


Payment processor activities that should raise suspicion:

  1. Does the processor use more than one financial institution to process payments? Spreading the activity among several institutions may allow the processor to engage in inappropriate activity that avoids detection. This strategy is also used in case one or more of the financial relationships is terminated as a result of suspicious activity.
     
  2. Is the processor using a financially troubled institution in need of capital? These troubled financial institutions may be more willing to engage in higher-risk transactions in return for increased fee income. Check with rating services, such as Bankrate or Bauer Financial, to determine how the institution is performing.
     
  3. Does the processor resell its services to “Independent Sales Organizations” (companies contracted to procure new merchant relationships). These organizations can in turn sell services to other merchants who are unknown by the processor
     
  4. Nonbank payment processors are not subject to certain regulations; therefore, they may be more vulnerable to money laundering, identity theft, fraud schemes and illicit transactions.

While all illegal activity can never be completely eliminated, conducting a thorough due diligence protocol can minimize your risk when entering into a new business relationship. Investigative due diligence is an essential step for businesses and nonprofits concerned about the unknown scope of a new relationship, even when the provider is a reputable company or comes highly recommended.

  • Perspectives

    • Wojtowicz founded Indianapolis-based Cambridge Capital Management Corp. in 1983.

      Fixed, Long-Term Interest Rates Protects Against Rate Hikes

      A Hoosier small-business owner recently told his banker that, “Interest rates are as low as they ever will be” in the foreseeable future, and he wanted to get a loan with a “friendly” rate. The Fed made that official recently when it indicated  another quarter-percent rate hike will likely occur in December.  Most pundits expect there to be  three more rate hikes in 2019. Small-business owners are under pressure to act if they are considering...

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • Rolls-Royce in Indy Selected For $100M Contract

      The U.S. Department of Defense has awarded a contract worth up to $100 million to Rolls-Royce Corp. in Indianapolis. The contract is related to Phase I of the Advanced Turbine Technologies for Affordable Mission-Capability program for the U.S. Air Force.

    • WOWO Names 'Morning News' Host

      The program and news director of WOWO radio in Fort Wayne has been named host of the station's morning show. Kayla Blakeslee will lead Fort Wayne's Morning News, succeeding longtime host Charly Butcher, who passed away in August. Blakeslee has served has the station's program director for the past two years, and previously served as news director and afternoon anchor. She led the station's "Penny Pitch" campaign in 2017, which earned a Service to America award from...

    • USA Gymnastics Interim CEO Resigns

      Just four days after being appointed interim president and chief executive officer of Indianapolis-based USA Gymnastics, Mary Bono has resigned. In a statement released Tuesday, Bono said her decision "comes in the wake of personal attacks that, left undefended, would have made my leading USAG a liability for the organization." Bono, a former congresswoman and principal at Faegre Baker Daniels Consulting in Washington D.C., drew criticism for a...

    • $25M Behavioral Hospital Coming to Central Indiana

      Danville-based Hendricks Regional Health is partnering with US HealthVest to develop a stand-alone behavioral center on the Hendricks campus in Plainfield. Known as the Indianapolis Behavioral Hospital, the facility will provide specialized inpatient and outpatient mental health care to patients of all ages.

    • Wesemann Hall at the Valparaiso University Law School (photo courtesy Tony V. Martin/The Times of Northwest Indiana)

      Valpo School of Law Transfer Denied

      A proposal to transfer Valparaiso University's law school to another university has been shot down. The Tennessee Higher Education Commission has denied the transfer to Middle Tennessee State University, which would have led to the creation of a College of Law at the school.