There was an interesting story in today’s Toronto Star about credit card fraud. It is a reminder for small business that while they are not hit with credit card fraud they are certainly exposed to the possibility. More importantly, when you think about it, as people build better mousetraps either you get better mice or else the mice move to areas where there are no mousetraps. In this case, bigger business has been hit with credit card fraud, so the fraudsters either are trying new ways to get at bigger business (because there is still a lure of a larger “score”) or else they focus on small business where there are less security measures.
As of June 30, 2005 (the latest date for which I could easily find statistics), the credit card industry was losing over $200 Million per year to fraud and the annual rate was increasing. This is certainly a large incentive for the fraudsters.
So, what happens if you are the victim of fraud. It depends on the arrangements with your credit card company / bank and the circumstances in which the fraud occurred – for example, did you fail to supervise your employees and the fraud was an “inside job”? It may be that you are on the hook for the fraud losses. Again, this may also depend on whether you have insurance that covers “fidelity” issues (eg. employee theft).
Let’s suppose that you are responsible for the loss and there is no insurance coverage. Can you sue the (by now ex-) employee? Yes. What are your chances of recovering the money? Not very good. In my experience, a 25% recovery is a good recovery. I have only had one civil fraud matter in which I retrieved over 40% recovery of the losses – and even in that case (which was quite abnormal) the recovery was only 60% or thereabouts. Why is this the case? Because often the fraudsters are male and just as often the money is spent on “wine, women and song”. More realistically, fancy dinners with expensive wins, leases of high end cars that cost a lot of money for both the lease and the upkeep, renting of high cost living accommodations. The end result – the fraudster lives the high life but everything is rented and therefore owned by someone else who takes back the items when the fraud is discovered so there are no assets to seize.
The target is lucrative, the losses (to the fraudsters) are minimal and there is great incentive for fraudsters to operate. While small business owners should not be losing sleep over this problem, they should similarly not be turning a blind eye and hoping that the problem won’t land on their doorstep.