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Click here for bankruptcy! Scamming and small businesses

According to Australia’s consumer watchdog, small businesses are particularly vulnerable to online scams. Flickr/Dan Hankins

Who has not experienced the scam phone call from someone purporting to want to fix a problem with Windows on your PC, or help you recoup a large sum of money being held in a trust just waiting for you to claim it?

This sort of scam is a global problem of arguably epidemic proportions. In Australia, recent data released by the Australian Bureau of Statistics on consumer fraud identifies that over one third of Australian consumers were exposed to a scam in 2011, with roughly one in ten of those exposed losing money to the scammer.

What about small businesses?

Small businesses are also targeted by scammers but it is unclear whether they get scammed as much, more or less than individual consumers.

International research suggests that the majority of small businesses will sooner or later lose money and time to scammers.

A 2008 study conducted by the Federation of Small Business in the UK indicated that 54% of small businesses had been a victim of some form of online crime or fraud. Yes, that’s right, more than half!

The Australian Consumer and Competition Commission (ACCC) has been reporting significant year-on-year increases in the reported incidents of scams. By “significant”, we mean a fourfold increase between 2009 and 2011 from 20,554 to 83,150 scam related contacts.


A significant proportion of these reports come from small businesses but no specific small business data is available from existing Scamwatch reports.

According to Dr Michael Schaper, ACCC deputy chairman and chair of the Australasian Consumer Fraud Taskforce, small businesses are especially vulnerable to scammers.

“Small businesses are often the weak link that clever scammers will target,” Dr Schaper said. “We need to better understand this phenomenon, why businesses fall victim, and what we can do to help them.”

To begin addressing this knowledge gap we inserted some brief questions on scam prevalence in our regular small business benchmarking program. The results were interesting indeed.

While very exploratory at this stage, the rate of loss from businesses looks to be potentially five times that of consumers. In addition, we were surprised to discover that one in eight small business owners was unable to determine whether they had been scammed or not.

Results from this preliminary study and our review of the existing literature point to several characteristics of the specific business and of the owner that may well play a role in the likelihood of scam loss.

The factors that may affect susceptibility to a small business scam include:

Turnover: In the pilot study businesses with higher turnover were significantly more likely to be targeted by scammers.

Industry: There was variation in the proportion of scam victims from one industry to another.

Experience: Some owners recounted stories of losses incurred when they first started in business but they now know better what to look for in order to avoid such a scam.

Education: Our initial pilot sample had proportionally fewer scam victims with post-secondary education.

Age and gender: It is likely that age has some predictive capability that is interrelated with the type of scam approach. For example, in 2011 the ACCC reported a shift back to telephone-based scam activity that will have a subsequent impact upon certain age profiles. Investment scams such as Ponzi schemes have been shown to be particularly attractive to middle aged males from certain social networks.

Risk propensity: Calculated risk-taking is a classic characteristic of entrepreneurs that we expect will correlate with the high stakes gambling behaviour that some scams seek to evoke.

Online transaction behaviour (unguarded exposure): Some owners are likely to be more trusting of the motives of organisations they deal with. In an online world that can be risky.

Routine activities (online and offline): There is evidence that conducting more business online as an individual or as a business will raise the risk of scam exposure. In the pilot study there was a significant increase in scam prevalence among businesses that have an e-commerce presence.

Self-control: There is likely a subgroup of business owners who do not have adequate self-control mechanisms. These owners are candidates for multiple losses and thus deserved of special attention.

Gullibility: “Once bitten, twice shy” may not play out in practice. The consumer evidence shows that there are certain individuals who are more susceptible to offers that appear “too good to be true”.

The question is whether these overly trusting individuals tend to gravitate to certain types of business.

Dr Schaper said research in this area will help protect small businesses in the future.

“If researchers can build a profile of susceptible businesses, or indicate the "warning signs” of a business that’s more vulnerable to being attacked, then it will go a long way towards protecting our entrepreneurs and cutting out scammers,“ he said.

These indicative WA-based results and research are now being elaborated upon via a national study running from May until September 2012.

The bottom line is we know very little about the prevalence of scams that are targeted at small business in Australia.

We know even less about the reasons and conditions under which some owners fall victim to a scam and others do not. What we have inferred thus far from an WA study needs to be expanded and tested empirically at a national level.

We have undertaken to do this scoping work with the cooperation of the ACCC’s SCAMwatch. If our suspicions over the pervasive nature of this problem are proven right this is shaping as a significant financial and operational burden on Australian small business that will need deeper and ongoing investigation.

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