How can an entrepreneur protect himself from scammers: recognizing fly-by-night companies

One day I encountered fly-by-night companies, and it changed my view of business. How to distinguish real partners from dodgers who are ready to deceive you? In this article, I will share my experience and key tips for recognizing dangerous counterparties to protect your business.

Glossary

• 🚩 Shell company - a company created for the purpose of carrying out fraudulent transactions and, as a rule, is closed immediately after making a profit.

• ⚠️ Consequences of working with a shell company — negative results such as financial losses and legal problems that may arise from dealing with such companies.

• 💸 Lose money - loss of money from -for fraud or insolvency of the counterparty.

• 🏛️ Tax problems - legal consequences, related to tax evasion by the counterparty, which may result in fines and sanctions for the partner.

• 🏦 Current account blocking - bank action suspending access to an account if it receives questionable transactions or if a counterparty is involved in fraud.

• 🔍 Signs of a fly-by-night company - characteristic features , which can identify a company as unreliable or fraudulent.

• 📍 Legal address of mass registration - address, which is used by several companies to form their status, which is a red flag when checking a counterparty.

• 👔 Director and founders in dozens of companies — a situation where the same person manages several companies at once, which may indicate a high risk of fraud.

• 💼 Counterparty does not pay taxes - a sign of financial manipulations when a company evades fulfilling its obligations to the tax authorities.

• 📝 False or incorrectly executed documents - documents , which are not true and can be used to legalize fraudulent activities.

What are fly-by-night companies

Personally, it always seemed important to me to understand what shell companies are and how they function. In some situations, I had to deal with these “fake companies” created not for doing business, but to deceive other market participants and the state. From my own experience and with the help of certain observations, I was able to identify some signs by which such companies can be recognized.

Once I was faced with a situation when a friend of mine, the owner of a small business, decided enter into a contract with one such company. Excellent external design, positive reviews - everything looked quite convincing. We even had a meeting with them and it seemed like they were a really reputable company. However, during the work process strange situations began to arise. For example, it turned out that the employees of the shell company could not provide any reporting or supporting documents.

As it later turned out, this company was registered with numerous violations, and its founders had long disappeared. At that moment the thought arose: “Why didn’t I notice these signs right away?”

Here's what I remembered and what's important to know:

• 📄 Registration - worth paying attention how and where the company is registered. Most of these “one-day companies” are created on paper, or you can find that their founders have “no longer been alive.”
• 🏢 Lack of office - if a company does not have a physical address or office, this is a serious warning sign. For example, the said company did not have any permanent place of work, which was also alarming.
• 📉 Unreliable website - many of these companies have cheap, poorly designed websites, which should also be a red flag.
• 👥 Lack of experience - experienced companies can often present their successes and projects to clients. If a company cannot show successfully completed work, it is worth considering.

In the end, our friend lost money on this contract, but learned an important lesson that I also learned: small and medium-sized entrepreneurs must be careful when choosing counterparties. It is necessary to conduct thorough checks to avoid working with unscrupulous partners.

For clarity, here is a table with basic strategies that will help you avoid mistakes:

By following these recommendations, you can protect your business from the tricks of fly-by-night companies. Among the risks associated with unscrupulous counterparties, one should not forget about the legal consequences that may arise when collaborating with such organizations. When forming my team, I try to choose only proven partners and adhere to the principle: “trust, but verify.”

Consequences of working with fly-by-night companies

You can lose all your money

When I first encountered one of these counterparties, I thought I was doing everything right. I found an interesting supplier of goods for my online store who offered amazing conditions. The products seemed to be of good quality, and the feedback from other entrepreneurs was positive. I signed the contract, made an advance payment and anxiously waited for my goods.

Several weeks passed and still no product. Time passed, and all my attempts to contact the supplier led to nothing. Phones were disconnected, email was silent, and the supplier's website continued to function, attracting new victims. And only then did the bitter truth dawn on me - I had fallen into the trap of a fly-by-night company. This whole story turned out to be a theater played out for gullible entrepreneurs. ⏳

How does this happen? Shell companies are created with a unique goal: to deceive as many people as possible, receive their benefit and disappear. They may look very professional (from photos to reviews), but end up being duds. After this incident, I realized that it is important not only to enter into contracts, but also to carefully check your partners so as not to lose money.

Reputation threat

Receiving a call from the tax service came as a real shock to me. The partner I worked with was involved in sophisticated tax evasion schemes using a chain of shell companies. The moment I was invited to the tax office, it seemed like the world was collapsing. How could I, a legitimate entrepreneur, become involved in an illegal scheme? 🤯

The tax service asked me to explain my actions and provide all the necessary documentation. Similar events can happen to any of us. This is why it is so important to conduct thorough due diligence on counterparties. If you have at least one dubious partner, you may get problems with the tax authorities, even if you yourself have not violated anything.

In the end, fortunately, I was able to prove that I was right. But time and nerves were wasted. Only after this incident did I begin to pay more attention to the structure of my contracts and verification of counterparties in order to avoid similar situations in the future.

My account was at risk

The complexity of the situation described above was not only tax, but also that my bank has started to block my current account. Any suspicious transaction associated with shell companies is perceived as a signal of possible fraud. This is not just a threat, it is a reality that thousands of entrepreneurs face. 💼

Sometimes, when income through such “suspicious” companies begins to fall, the mechanism the lock is triggered. As a result, you may find yourself without access to your funds at the most inopportune moment. The bank primarily protects its interests and share of responsibility, and can block the account, even if your actions are absolutely legitimate.

Studying the performance and reputation of each of my counterparties was an important step for me in reducing risks. Learn to develop due diligence tools and robust collaboration mechanisms to avoid unnecessary red tape with banks and financial regulators.

As a result, each of the employees working in financial monitoring perceives your ability to conduct non-cash transfers for a fly-by-night company as a signal. Therefore, it is always worth double-checking who you are making a deal with, and perhaps clearing your business of unreliable partners.

Simple steps to avoid problems

Each of these steps will help you avoid various tricks and risks associated with working with unscrupulous counterparties. Share your experience and be vigilant, because knowledge is your main defense!

Signs of a fly-by-night counterparty

Actually existence fly-by-night companies became a real discovery for me when I first encountered one of them. The sudden disappearance of the company with which I signed a contract led to major losses and loss of time. These small, but strategically unscrupulous counterparties can cast a shadow on the reputation of a business. And it became important for me to understand how to identify these companies in the early stages, avoiding emotional anxiety and financial losses.

Key to recognize such companies lies in several basic features. 👀 If your counterparty has several “red flags” at once, this is a good reason to think about it and double-check all the details. This type of fly-by-night attack may seem like it could happen to anyone, but I've compiled the facts and observations to help you avoid this trap.

Legal address of mass registration

When searching for reliable counterparties, I always paid attention to the legal addresses of companies. One day, when choosing a partner, I came across a legal address where more than 50 companies were registered. 😱 This alarmed me: how can you manage so many companies at the same time? Having sent a request through the tax website, I was convinced that all these companies had no real activities. As a result, I decided to cooperate with more careful players. He turned out to be right: a few months later those companies disappeared without a trace.

🔑 It's easy to check the legal address. I recommend using Google maps. For example, if you see a lot of offices in the city center, this is normal. But if there is some abandoned pavilion at the address, most likely, this is a typical one-day building.

Brief summary of addresses

Director and founders have several companies

I had a case with one not very conscientious counterparty. During the negotiations, questions arose about the director, who turned out to be associated with five other companies. The ability to evaluate a person simply by conversation is an incredibly important skill. 📞 I always knew that nominee directors are a big risk for business. Therefore, I developed a small test scheme that allowed me to get personal impressions of the communication.

The difficulty is that directors recruit recruitment agencies that, at first glance, look quite legitimate. However, by calling and interacting with them, you can easily determine whether the person is a specific representative of the company or just a nominal one. 😉

Recommendations for interaction with the director

Counterparty does not pay taxes

In this area, my story began with an unpleasant wake-up call. I asked myself: how is it that a simple counterparty does not pay taxes? His reporting showed zero figures for two years, and this became a signal for me. 🤔

I started doing my own research and found out that companies masquerading as legitimate businesses often cheat with taxes. For example, while observing another company, I came across information about multimillion-dollar debts. At first I didn’t believe it until I submitted a request to the tax office - it turned out that they were in short supply.

Steps to check tax returns

Shell companies work with fake documents

Want to know how I once excelled at testing? Indeed, it was a story that shocked me. 🌪️ I agreed to cooperate with the company, but the decision was based on their brilliant documents. When showing them to my lawyer, we found out that the articles of incorporation were complete forgeries.

Having checked the situation through the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Formations, it became obvious that such a legal entity simply did not exist. 🤦♂️ Ultimately, I suffered major losses and learned not to take documents for granted.

Approach to verification of constituent documents

Keep this list handy to avoid any unpleasant situations! Extensive research and vigilance will help you easily avoid fly-by-night companies.

Summary

Watch for these signs to make your business more reliable. I recommend that you conduct your activities honestly and with open documents, because, in fact, any game of ability leads to unjustified risk.

What should you be wary of

When I first started my business, on the day when I was offered cooperation with a new counterparty, the thought came to mind: “Isn’t this a one-day company?” And not in vain, because in practice I came across such “companies” that I had only heard about on the news pages. These firms act like wolves in sheep's clothing, masquerading as legitimate businesses but hiding insidious intentions beneath the surface.

One of the most striking examples from my experience was a company operating under a very convincing title. They had all the documents in order, their own website and even good reviews. But something in her story didn’t add up. The strange location, somewhere in Odessa, aroused my suspicion: I have not often encountered serious contractors from this region. Everything changed the moment I did some research. It turned out that this “company” was registered just a week ago, and its director is a man known for his bankruptcies.

💡 It became clear to me that I needed to analyze each potential partner more deeply. Here are some signs to look out for:

• 🚩 Company age: If the company is registered less than 3 months ago and offers too favorable conditions - you should be wary.
• 🔍 Tax migration: Frequent changes of addresses may indicate that a business is hiding its true intentions. This phenomenon, called tax migration, is one of the clearest signals of possible fraud.
• 📉 Lack of information: The need to verify a company online cannot be overemphasized. If it is not in the news or is not mentioned in public discussions, this is an alarm bell.

Of course, not everything is so simple in this world. Once, when I decided to conduct a thorough due diligence on a counterparty, an acquaintance who works in accounting pointed out that it was useful not only to examine the company's past, but also to understand its current business practices. After consulting with her, I discovered that this “firm” has a real certified public accountant. This came as a surprise to me. Be that as it may, something was bothering me.

In case anyone encounters a similar problem, here are some recommendations:

1. Conducting due diligence: It is important to do a complete due diligence of the company, including requests for accounting documents.
2. Customer Reviews: Make sure there are reviews from real customers with specific examples of successful transactions.
3. Control over legal relations: Check who else your future partner is cooperating with, what counterparties he has.

So, the more I immersed myself in this topic, the clearer it became that not all counterparties can be conscientious. Lived experience became an important teacher. And the results of this research allowed me to avoid major problems and financial losses.

"It's better to play it safe than to run to the wholesale markets to look for a new supplier!" - this statement of one of my experienced colleagues from the Prom company, Evgeniy Sklyar, has become a kind of ideology for me.

Steps to identify a potential shell company

Remember, observation and attentiveness are always rewarded. Conduct a thorough pre-contractual check - it can really save your business! If necessary, do not hesitate to seek help from professionals, for example, accountant, who will definitely help you find out the truth about any counterparty.

Conclusion : Briefly about the main thing

As I have already experienced in my personal experience, fly-by-night companies can often be like an avalanche, unexpectedly covering and, as a result, leaving behind a clever trick with zero in the end. I recently encountered a similar situation, and although it was several years ago, the lesson remains fresh in my mind.

At that time, my company was looking for a new contractor to do construction work. At first glance, the company I chose looked good. They had a modern website, beautiful photographs of completed projects and attracted documents that confirmed their activities. But my inner voice kept telling me something. In serious transactions it is worth listening to him. I couldn't get rid of the thought that something was wrong.

Unfortunately, this turned out to be true. Almost at the very start, it turned out that the mentioned company was registered only a few months ago and already had more than a dozen positive reviews, which sounded mysterious. I began to dig deeper and checked information about the counterparty in the public domain. And this is what I found:

• 🕵️♂️ New registration: the company was registered just three months before our first contact.
• 📉 Lack of real objects: all the projects they showed ended up with artificially constructed photos taken from the Internet.
• 💰 Different prices: Their offers were almost 30% below the market, which seemed too good to be true .

After these discoveries, I called them with a few follow-up questions about projects and clients. Surprisingly, their specialist began to get confused in his answers and his speech sounded uncertain. This was the moment when I realized: I need to act more carefully.

As a result, I transferred the project to another contractor who was more reliable. This way I was able to save not only money, but also preserve nerve cells. Based on my experience, here are some tips that can help you in assessing counterparties:

• 🔍 Check legal documents: Always check how long a company has been registered, and take the time to research its reputation through independent resources.
• 🤝 Request recommendations: contact other clients who have worked with this counterparty. Feel free to ask clarifying questions about the quality of services.
• 🛑 Beware of Low Prices: If an offer looks too good to be true, it probably is .

" Never sign a contract without deep analysis and verification. Vigilance can save you from possible losses." - my mentor once gave me this advice, and I completely agree with him.

Caring about the reliability of counterparties, I now always use rules based on personal experience. Make sure that your counterparties really exist, and not just digital ghosts!

With each new project, a useful skill is acquired, and each experience is a step in the side of lower risks. Do not tolerate dishonesty and look only for the best.

Experience Eobuwie

Eobuwie is one of the leading online footwear and accessories retailers in Europe. Since its inception, it has made significant strides in providing customers with a wide variety of products and improving their shopping experience.

Goals and objectives:

• Increased customer base by 30% within one year.
• Optimizing work with counterparties to minimize risks associated with shell companies.
• Increasing customer satisfaction through improved service quality.

Main problem: Eobuwie faced difficulties in choosing reliable counterparties for the supply of goods, which led to financial losses and problems with tax authorities. There was a need to develop a strategy to identify and eliminate shell companies from the supply chain.

Target Audience Characteristics: Eobuwie's target audience includes:

• Young professionals looking for fashionable and quality shoes.
• Family buyers who value convenience and reliability.
• Sports enthusiasts in need of specialized footwear.

Key points of interest to potential customers:

• Wide range of products from famous brands.
• Loyalty program offering discounts and bonuses.
• Transparent conditions for returns and exchanges.

Project Results Review Table

“Working with reliable partners and monitoring counterparties have become the key to our success, ensuring stable quality of services and trust from clients.” – Angelika Lipnitskaya, representative of Eobuwie.

Results : As a result of this work, Eobuwie has significantly reduced the risks associated with shell companies by carefully vetting and monitoring its suppliers. Thanks to this, the company not only expanded its customer base, but also improved its reputation in the market, which contributed to further business growth.

Frequently asked questions on the topic: How can an entrepreneur protect himself from scammers - recognizing shell companies

Thank you for reading and for becoming more experienced! ✨

When you first started to deal with fly-by-night companies , there were a lot of questions and only a couple of answers. But now, thanks to this material, you have become a real expert in identifying dangerous counterparties! 🚀 Remember, entrepreneurs, knowledge is your armor in the world of business. Now you can confidently avoid the tricks of scammers and protect your interests. If you have any thoughts on this, feel free to comment below! Your opinion is important!

— Roman Revun