eNews May 12, 2011

May 12, 2011



News Briefs

  1. IRS Delays 3% Withholding Requirement to 2013
  2. Department of Justice Charges Companies Red-Flagged by Verifraud Years Ago
  3. Blended Data Used as Small Business Fraud Deterrent
  4. Game Over: Customer Information Breaches Can Destroy a Business’ Reputation
  5. Business Filings Down 15% in First Quarter of 2011
  6. U.S. Exports Reach Another Record in March, but Oil Imports Stretch Trade Deficit

 

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IRS Delays 3% Withholding Requirement to 2013

Hearing Scheduled in House Small Business Committee
The Internal Revenue Service (IRS) issued final rules last week that delay the 3% withholding requirement on government contracts until 2013. Under this arrangement, the withholding and reporting requirements will apply to payments made after December 31, 2012.

Additionally, the House Small Business Committee will hold a hearing on May 26 in order to more thoroughly address the 3% requirement. A repeal bill in the House, H.R. 674, originally introduced by Rep. Wally Herger (R-CA), has also garnered more than 100 cosponsors.

The delay drew cheers from prominent lawmakers, who were encouraged by the IRS' decision, but are still hopeful for a full repeal. "This decision couldn't come at a better time. Small businesses are pinching pennies and cannot afford to receive reduced payments for government contracts," said Sen. Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Many small businesses are already suffering, trying to make payroll and expand their businesses, and this rule would close the book on too many small businesses. While the delay is a move in the right direction, I am also committed to working with the Finance Committee to repeal this requirement that harms small businesses."

Previous attempts to delay the provision have also been supported by industry and other congressional and executive leaders. In March, President Barack Obama called for a three-year delay, echoing the requests of other industry observers who hope that a delay will give lawmakers more time to enact a full repeal.

The delay is welcome news to the many companies doing business with the government that have remained largely unaware of the provision, and its potential effect on cash flow. According to NACM's April 2011 Monthly Survey, only 9% of respondents were sure that their companies were taking steps to prepare for the withholding requirement. Twenty-five percent of participants said that their company had taken no steps to prepare, and 44% of participants weren't sure.

The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on Jan. 1, 2011, but was delayed to Jan. 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA), and delayed to 2013 by last week's IRS rulemaking. Should the requirement go into effect, most transactions for goods and services with a government entity would be subject to a 3% withholding tax, to be kept by the governmental entity in question.

NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission (GWRC), NACM has lobbied for a full repeal and encourages Congress to act quickly to remove this unfair and potentially harmful provision from the tax code.

Stay tuned to NACM's Credit Real-Time blog, NACM's eNews and Business Credit magazine for future updates.

Jacob Barron, NACM staff writer

FCIB at Credit Congress

Don't miss the five-part International Track at NACM's 115th Credit Congress. Learn the essentials of Doing Business in Brazil, Canada, Chile, China and South Korea. Designed specially by FCIB for Credit Congress, these sessions will also explore the due diligence efforts required to conduct in-country business successfully.

Plus, don't miss networking with global practitioners from various industries at FCIB's International Luncheon on Monday, May 23.

Department of Justice Charges Companies Red-Flagged by Verifraud Years Ago

Three men and their two companies have been indicted on federal charges in connection with allegations of illegal exporting to Iran. At least two of the companies have been the subject of widespread industry speculation, but were never formally charged of operating bust-out schemes against U.S. creditors, and at least one had been on the red-flag radar of Verifraud, so to speak, dating back to 2002. It's a reminder of what should be a cardinal rule in credit management: know your customers.

The U.S. Department of Justice indicted 53-year-old Jeng Shih of New York-based Sunrise Technologies and Trading Company on 27 criminal counts related to alleged illegal exporting of computer-related equipment to Iran without obtaining required licenses from the U.S. Department of the Treasury. Among the charges are more than a dozen counts of making false statements and violating the International Emergency Economic Powers Act.

The Justice Department brought similar charges against 48-year-old Massoud Habibion, also known as Matt Habi, and 43-year-old Mohsen Motamedian, both of Costa Mesa, CA-based Online Micro LLC. Justice documents allege the charged parties were involved in a plan to ship hundreds of laptop computers per month with estimated values of $300,000 to $700,000 to Dubai, which would be eventually routed to Iran; created fake invoices to conceal the business dealings and lied to federal investigators.

It's not the first time Online Micro and at least one of its proprietors have been under suspicion in regard to illegal business dealings, though neither had been charged or prosecuted in criminal court. Verifraud, which manages NACM's Asset Protection Group, had warned clients of Online Micro's abnormal market presence in 2002 and 2004. There was also concern in 2008 about Online Micro serving as a reference for Global Memory Products, which had been involved in a trail of what were suspected to be companies involved in alleged bust-out schemes that also were not prosecuted in any criminal court. Many Verifraud clients, as such, placed the company and anyone working for it on pre-pay or very tight terms because of said abnormal market presence and aforementioned previous business dealings. Verifraud's Gary Bares, who reiterated there was no "smoking gun" or successful prosecution of Online Micro or Habibion, said the following questions needed to be raised upon a thorough review in addition to their credit rating:

  • Why is their Market Presence Indicator (a Verifraud metric measuring operational footprints left in a marketplace over time) score so
    low at the time if they're doing so much business (from a dollar value perspective)?
  • Why were they acting as a reference for another small reseller/competitor in 2008?
  • Why is there a discrepancy between Online Micro's claimed incorporation date (1992) and the incorporation date listed with the California Secretary of State (1999)?
  • Why did one of Online Micro's proprietors start a completely new business in the same industry with the same principals at the same address as a previous one (IRA Systems) when few want to grant a new company credit?

"If a company shows up with a low score, among other things, we wonder, where are they moving all this product? You don't know for sure it's fraud; it's just about managing the risk," said Bares. "They [Online Micro] didn't seem to have near the market presence based on our MPI to be doing the level of sales they claimed to be doing."

Bares noted the main lesson coming out of the charges, as well as previous concerns about the company, is among the main fundamentals of risk management.

"You have to use very aggressive means to know your customer and your customer's operations," he said, noting that technological advances are being used by both the good guys and fraud perpetrators out there. "That includes looking at companies from non-traditional angles to spot abnormalities. Most high-risk companies aren't going to show up on the traditional radar or have the same operational characteristics that most companies tend to have. That's why our R&D efforts focused on measuring things that a company cannot manipulate, such as market presence or operational footprints."

Brian Shappell, NACM staff writer

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Blended Data Used as Small Business Fraud Deterrent

The smaller they are, the harder it gets.

Companies selling to small businesses and sole proprietors already face enormous challenges when investigating creditworthiness, even when it comes down to verifying the business owner's identity. "Clients face challenges unique to small business verification," said Jessica Ford of Experian, who noted that a number of items typical of a B2B credit investigation have made it an enticing arena for potential fraudsters.

"Many business transactions today still use ineffective or limited data sources in the review process. There continues to be an overreliance on single sources like public records checks," said Ford. "Public record checks are important, but should not be relied on exclusively, as this information alone can be easily manipulated." She added that organizations using single-source tools often review each application manually, rather than in the consumer arena where companies rely on several analytical tools to help them establish a consumer's fraud profile.

However, most of these tools are available for use in commercial transactions today, but simply aren't leveraged as often by the B2B credit granting community. "Today's tools have gone beyond verifying basic contact information on the business and/or guarantor," said Ford. "Commercial fraud tools have become increasingly sophisticated through the use of analytics. Analytics, combined with business and guarantor verification, improves operational efficiency and has allowed more focus on the riskiest accounts, improving time to revenue and making better use of people and monetary resources."

Experian has found that companies selling to small businesses can get a much clearer picture of their customer's creditworthiness by using these consumer tools, and consumer data, to shore up the dearth of commercial information available on the nation's small firms. "Small businesses frequently have little or no commercial information on file; without sufficient commercial data, evaluation of risk can be difficult," said Ford. "We've found that the use of blended data, combining consumer and business credit and demographic data assets, provides a better overall fraud risk assessment of the small business applicant. Blended data is highly predictive and can help offset an applicant's limited commercial footprint."

Ford and her Experian colleague Mary Kathryn Jarcy will offer these tips and more in "Protecting Your Company from Credit Fraud: Unlocking the Secrets of Small Business Risk," just one of the many timely and valuable sessions offered at NACM's upcoming Credit Congress, scheduled for May 22-25 in Nashville. To get a look at the rest of this year's program and plan your visit, click here.

Jacob Barron, NACM staff writer

MLBS Offers Complete Lien and Bond Services and More

NACM's Mechanic's Lien & Bond Services (MLBS) brings best-in-class service options to today's construction credit professional.

MLBS' Lien Navigator is a web-based service that provides up-to-date information for all 50 states and Canada, including notice, lien, payment bond and suit timelines, procedures and other relevant information in a state-by-state/province-by-province format.

MLBS also offers two preliminary notice to owner (NTO) services, deadline tracking, a lien and bond filing program, and a suit against bond and foreclosure service. Both NTO services include, at no additional charge, a Next Action Notification Email. These reminders are sent automatically to ensure that your lien and suit deadlines are met during each step of the lien process.

For more information on NACM's MLBS, click here.

Meet Greg Powelson, director of MLBS, in Nashville during NACM's 115th Credit Congress & Expo. Greg will be presenting "Mechanic's Liens & Bonds: Critical Elements for Every Construction Credit Manager."

Game Over: Customer Information Breaches Can Destroy a Business’ Reputation

It's all fun and games, literally, until some company loses (or, rather, has stolen) its customers' personal and financial information. However it happened and regardless of how surprising, Sony Corporation now is dealing with one of the largest consumer data breaches in the technological age. And while the business model between business-to-business credit obviously differs greatly from that of a corporation-to-consumer relationship, there are some significant lessons that can and should be taken from the mess Sony is now charged with cleaning up.

Around April 19, Sony shut down its PlayStation Network online gaming platform, which generates about $500 million in annual revenue, after discovering that the information from at least one-third of its 77 million users had been compromised and stolen by a hacker that was still unknown weeks after the fact. As such, it has prompted scores of gaming customers to put fraud flags on their accounts as most had credit card and/or bank account information stored with the company exposed in the process.

As businesses take credit card payments from other businesses in an effort to get payments in any ways possible during financially troubling times, safeguarding personal and financial information of customers may be more important and difficult than ever before. Rudet Fountain, VP of NACM Relations at United TranzActions, said the breach should serve as a warning bell for those in the business credit world.

"Thieves are looking for data anywhere they can get it," said Fountain. "For whatever reason, some companies seem to think they have a choice in or options about PCI-DSS (Payment Card Industry Data Security Standard). Quite frankly, they don't. We all do have an obligation; I don't care how big you are."

Fountain, moderator of the "FAQ on Credit Card Processing" session at NACM's Credit Congress in Nashville, later added the breach "is going to cost Sony big time, even if no one uses the data." Therein lies perhaps the biggest long-term problem for breached companies: credibility.

"If you are not handling information properly, people won't do business. It can be devastating for a smaller company," said Joe Prudente, VP of worldwide credit for Future Electronics. "I know I'd be apprehensive to ever buy from a small guy that had been breached."

Prudente, a panelist at Credit Congress, noted that if such a breach could happen at a large company like Sony, with all of its resources, "you have to believe it can happen anywhere." As such, credit managers should be tightening up their controls and pushing for other departments to do the same. But this is not limited to the technological tools alone. Fountain believes the biggest risk could be hiding in what appears to be little more than a cluttered desk.

"Statistics show that 80% of these breaches still occur in the brick and mortar environment...and the biggest I see is information on applications that are just lying on desks," Fountain said of credit departments he's passed through in recent months and years. "You have to wonder who has access to all this information. What if it sits there overnight? What stops anybody, like a janitor or someone else, from passing by and having access to all of this personal information? That's not a technology situation, that's human interaction."

Regardless, both sources tell NACM that now is the time to tighten up on securing information, whether through computer technology or through paper any passerby can view, and to pay close attention to anything that resembles a red flag with a debtor's habits.

"A breach of any kind says something about your data security," Fountain warned. "What is it worth to a reputation? Do you want to be known as a company that doesn't protect their customers' data?"

Brian Shappell, NACM staff writer

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To learn more about CFDD, click here.

Meet fellow CFDD members during NACM's 115th Credit Congress & Expo in Nashville and join us for a special CFDD Luncheon on Tuesday, May 24—the perfect place to learn all about CFDD!

Business Filings Down 15% in First Quarter of 2011

Business bankruptcy filings for the first quarter of 2011 fell by 15% when compared to the same period last year. A total of 12,376 businesses filed in the three-month period ending March 31, 2011, compared to the Q12010 total of 14,607, according to the Administrative Office of the U.S. Courts, which released the numbers last week.

The Q12011 business filings total also represented a 5% decrease from the 13,030 total business bankruptcies filed in Q4 2010.

On a year-over-year basis, business filings for the 12-month period ending March 31, 2011 totaled 54,212, down 11% from the 61,148 business bankruptcies filed in the 12-month period ending March 31, 2010. Consumer filings for the same period were up 3% over last year to 1,516,971. Overall, though, when counting both business and consumer filings, figures were down all around; the total number of cases filed during Q12011 was down by 6% over the same period in 2010, and down 1% from Q42010.

"The drop in bankruptcy filings demonstrates the continued effort of both consumers and businesses to decrease their debt loads and shore up their finances," said Samuel Gerdano, executive director of the American Bankruptcy Institute. "We expect that bankruptcy filings for 2011 will fall below last year's total of 1.5 million."

By chapter, filings under Chapters 7, 12 and 13 in the 12-month period ending March 31, 2011 were up by 2%, 23% and 5%, respectively. The only chapter to experience a decrease was Chapter 11; reorganizations under Chapter 11 fell by 14% when compared with the same 12-month period a year earlier, to 13,051.

The complete data set can be found at the U.S. Courts' website: www.uscourts.gov.

Jacob Barron, NACM staff writer

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U.S. Exports Reach Another Record in March, but Oil Imports Stretch Trade Deficit

U.S. trade activity went through its increasingly common routine of one leap forward, one leap backward in March, the latest U.S. Department of Commerce statistics indicate. The sum of it all remains an ever-growing trade deficit.

U.S. Commerce Secretary Gary Locke announced that U.S. exports of goods and services in March 2011 increased 4.6% between February and March to a record $172.7 billion. Both the goods side ($124.9 billion) and services ($47.7 billion) hit high-water marks historically. Among other records were the surge in the export value ($7.7 billion) as well as value of trade routed to Canada and South and Central America. The U.S. even managed to shave its Chinese trade deficit down from $18.8 billion to $18.1 billion. Ignoring the elephant in the room, escalating demand and prices for oil products, Locke celebrated the news in a brief statement on the Commerce website:

"Now more than ever, America's ability to create jobs here at home depends on our ability to export goods and services around the world. We have seen the private sector add 2.1 million jobs across industries from manufacturing to education to retail, and exports supported more than nine million U.S. jobs in 2010. We are off to a strong start in achieving the goals of the National Export Initiative, but we still have more work to do to ensure that our economy continues to grow and that small- and medium-sized businesses have the right tools to compete in the global marketplace."

The National Export Initiative is a somewhat re-launched effort by the Obama Administration to double U.S. exporting activity within the next five years. Earlier in May, Commerce officials touted the noticeable surge in the trade surplus stemming from U.S. private services to nations such as Canada, Japan and Brazil. Commerce defines private services as "non-tangible items of value that are either consumed when purchased or at a later date by their terms of sale, such as school tuition or an airplane ticket."

Far less discussed by Commerce officials was that the trade deficit increased to $48.2 billion, about a 6% bump from February to March. Oil imports spiked by 18% in March to a dollar-value-level of $39.3 billion, the highest in nearly three years, and served as the key culprit in the widening trade gap.

Brian Shappell, NACM staff writer

To view past eNews issues or to visit the NACM Archives, click here.

 

 

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