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When a Loss from a Scam Can Make You Cry!

Octávio Aronis, Attorney
July 6, 2016

I had the pleasure of speaking as one of the panelists at the NACM International Conference in Las Vegas in June on the legal and collection environment throughout Latin America, especially in Brazil. The conference, as usual, was a wonderful opportunity and I was overwhelmed with the full capacity attendance at our presentation. 

 One person in the audience asked me if my law office performs on-site visits to see if a customer’s (debtor’s) business is actually in existence. I responded that within the municipality of São Paulo, depending upon the claim amount and its collection viability, as part of our normal services a representative from our office will always try to make an on-site visit to the debtor’s location. 

But I also explained that as Brazil is a huge country, performing an on-site visit to a state and city that is quite far from our office is not an easy task, especially if the claim amount is relatively small. However, one time under a special request, I travelled to a town in Southern Brazil for a very large claim. Let me explain. 

About two years ago I received a claim for approximately US $2 million from a creditor in Korea. Usually when I receive a claim for an amount of this size, I am immediately skeptical, not only about the debtor, but the creditor as well. Unfortunately, as there have been a rash of excessively large claims in our industry over the past few years, claims of this size usually indicate fraud or other extenuating circumstances that would make the it highly uncollectible. 

I contacted and spoke with the creditor, and quickly verified that the company was indeed very legitimate. The creditor, I’ll call him Mr. Kim, was relieved to be talking with me and in an urgent voice, asked me to immediately make an on-site visit to the debtor’s location. 

The debtor was located in Curitiba, which is the capital and largest city of the Brazilian state of Paraná. The city's population is approximately 1.9 million and as of 2015, it’s the eighth most populous city in the country. It’s also about 250 miles from São Paulo. Although not very far in comparison to the total size of the country, it’s still a five hour drive or one hour by plane. 

Either way, prior to making an onsite visit, as much as possible, everything that we could do to verify the existence of the debtor needed to be performed. Within about ten days, I came to the conclusion that the debtor was no longer contactable. All numbers to reach the debtor were disconnected, the website was completely down, and our demand letter, which was sent by special courier, was returned. In addition, through our search we discovered that a few suits had already been filed against the debtor for very large amounts. 

As I had initially suspected, the debtor was a fraudster and apparently absconded with the creditor's goods. How could the creditor sell such a large quantity on credit was something I needed to understand. As Mr. Kim explained, over a one year period, since the debtor paid for the first four to five orders, each in the hundreds of thousands of dollars up front, Mr. Kim's level of trust towards the debtor was overwhelmingly forged. So when the big order for $2 million came in and the customer requested credit for 90 day terms, Mr. Kim was blinded by the size of the order, as well as the perceived sense of trust, and agreed to the customer’s terms. 

When the 90 day point came and payment was not forthcoming, naturally Mr. Kim began to call, email, fax, and frantically try in every way he could to contact the debtor. Unfortunately, I suspect that the debtor was long gone before the 90 days was up and perhaps already resold the goods making a very tidy profit. 

Although I felt for Mr. Kim’s situation, I realized that pursuing this horrible fraud would be a very costly and difficult endeavor. After all, the whole idea behind someone perpetrating a fraud is that you are not able to trace who they really are and even if your are able to finally do so, bringing them to criminal justice in Brazil is an insurmountable challenge. 

That said, Mr. Kim insisted that he come to Brazil and together we go to the debtor’s location in the city of Curitaba. The interesting thing is that Mr. Kim also insisted that "he would show me" how to track down and collect from this debtor! So even with 30 years of hard core collection experience behind me, I told Mr. Kim that if he wanted to come, he was more than welcome, and together we would go to the debtor’s location.

Within a few days, Mr. Kim was in my office and the day after he arrived we took a small flight to Curitaba. Once we arrived in the neighborhood, with a little help from the locals we found the location of the Mr. Kim’s debtor, a very dilapidated and abandoned home that apparently was for sale. 

Mr. Kim looked at me and started to cry. It wasn’t like he was bawling but he was very emotional. He was also angry, not only at the debtor but at himself for being so naive about giving credit to a company that although paid handsomely in the beginning for several orders, he fell right into their trap. They sought out Mr. Kim's company and product, devised a long term plan to build his trust, and then when Mr. Kim finally granted them credit for the big order, they came down on him like the guillotine. 

After getting his composure, we went over to the main court building to further investigate the company and discovered that it had dozens of law suits against it. Although Mr. Kim continued to insist that I pursue the matter, I told him that I think he would be putting good money after bad and as hard as it is to accept, he should put his money behind servicing those customers who are without question, legitimate and completely creditworthy. 

That evening, Mr. Kim and I returned to São Paulo and the next day he returned to Korea. Naturally I wish I could have helped him more but the reality is that in Brazil, a crime like this might take hundreds of thousands dollars to pursue and in the end, it would just not be worth it. 

I don’t think any of us are beyond the temptation of getting pulled into a fraudulent situation. Although we do onsite visits, prior to that step I can’t warn you enough to be constantly vigilant to your overseas customer’s situation. You never know when that customer may devise a very involved scheme that lures you into a false sense of trust, which ultimately defrauds you of a great deal of money. 

For any questions or comments, please contact Octávio Aronis at:

Tel: 5511-3053-3036 or octavio@aronisadvogados.com.br

This article has been edited by Steven Gan of Stellar Risk Management Services, Inc.

All Rights Reserved

 

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