Tips for Avoiding Downstream 'Black Merchants'.

Gone are the days when business people shook hands and sealed deals based on trust alone. This is especially true in the downstream industry where the incidence of payment defaults and/or financial fraud is on the rise. Mason Cooley said, "We're all friends here" is a prelude to fraud. "I am sincere" is a prelude to lying." Miroslav Volf adds his thoughts, "In a way, fraud in business is no different from infidelity in marriage or plagiarism in scholarly work. Even people committed to high moral standards succumb." In this article we share five tips about fraud in the Downstream industry to shed light on how 'black merchants' operate so you can protect your oil marketing company.

DECEMBER 2013 • Tsuwa Thompson

In This Article

Black Merchants are essentially con-men or women who pose as legitimate business people in the Downstream industry but have no intention of paying for products that your oil marketing company (OMC) supplies them. They pay for a truck of two and then they hit you where it hurts and you find yourself unable to collect monies for ten trucks or more. They are fraudsters.

Kimberly Blanton in a white paper tagged ‘The Rise of Financial Fraud’ said that “fraud schemes share similar warning signs”. In the white paper, Kimberly shares the Boston College Financial Security Project’s list of 10 red flags that indicate possible fraud based on tips provided by securities regulators, attorneys general and anti-fraud watchdogs in the U.S.

Here is a downstream industry version that shares five tips about fraud in the Downstream industry in West Africa. Black merchants and/or potentially fraudulent deals:

  1. Look too good to be true. Their scam deals usually appear far more lucrative than what obtains in the industry.

    Case Study – "I just got a contract to deliver 250,000 Litres monthly to a mining company. I need you to increase my credit limit to GHS800,000." Questions you should ask yourself. Where's the purchase order for this deal? Why is he/she refusing for you to meet the company though it's your OMC's investment that's at risk? Which mining firm hasn't been locked in already by an OMC that your 'dealer' has the clout to close such a deal? Why is he/she asking for credit that far exceeds what they really need; have they done the numbers? Only the right questions can save you and your OMC. Don't just think volumes, think collections.

  2. Offer a high or "guaranteed" return at "no risk" to the OMC. This is virtually impossible since the riskiest deals don't just promise the biggest rewards but also are known to have high failure rates. On the other hand, safe investments typically offer predictable but modest rewards.

    Case Study – "Don't worry I know the procurement manager and I have a deal with him so we get all the orders. We will very good margins and still be paid before anyone else. So you can trust me; just give me more AGO." Don't be fooled by words or should I say promises; promises are not equal to money. Payment authorisation doesn't lie with procurement managers in most firms. CFOs and/or CEOS are calling the shots. Also, you have no guarantees that the Procurement manager will be there in the next six months. I know of one such manager who locked me out because I didn't play ball but she was made redundant about 9 months later. Evaluate the risk properly. Again it's all about asking the right questions so you can judge how truly profitable and sustainable the opportunity is.

  3. Require an urgent response or cash payment. Offers by 3rd party dealers that put an undue amount on pressure on your OMC to act should be avoided altogether. Responsible business people who know what their onions do not enter into hasty, and possibly regrettable, deals and in the same vein don't push others to behave likewise.

    Case Study – Two of the most prevalent manifestations of this are the 'pay of my debt with another OMC and you can have my station' and 'invest in upgrading my station and I will join your OMC' situations. The 3rd party wants you and your OMC to commit funds without any due diligence and/or legal agreement between both parties, all in the name of additional volumes to your OMC. Some OMCs who have hastily done this have lost both time and money along with their reputations as some have been reported to the regulator for policy breaches. Astute business people run background checks before tying the knot with a partner. Why are we so hasty in the way we conduct our business affairs? Why risk damaging your OMC's name and cashflow when a little more listening, a little more thinking and ample questions and/or investigations could have saved the day?

  4. Suggest recipients do not tell management or co-workers about the details of the deal. No case study here just some more questions? If this new deal was to blossom and deliver the benefits the customer is promising won't you need your management's support to make it happen? If the deal was really so juicy and would add more value to the bottom line why is the customer stopping you from talking about it? Lastly, who pays your salary, the customer or your company? Ask yourself, what is this person trying to hide? Probably a fraud?

  5. Resist being questioned or checked out further. Black merchants become uncomfortable and stop attending meetings when you start ask-ing serious and detailed questions. Legitimate dealers will patiently answer your questions and even give you documentary evidence.

    Case Study – A dealer brought a beautiful station project to us and we were ready to give him all he required to complete the project and to start selling within 3 months. One thing we intended doing was providing an $85,000 credit limit along with station equipment. Our process demanded that we obtain proof of land ownership to avoid any future legal squabbles. So we requested for the document and got nothing but stories till what was a beautiful project faded away like a mirage. Months after the proposed station launch date work hadn't started at the project site. Did we dodge a bullet? Maybe, maybe not but it's better to lock a deal that you are sure will give sustainable profit than one which collapses even before your OMC breaks even.

The incidence of payment defaults and/or financial fraud is on the rise in the Downstream. It seems that the number of petroleum service providers is not helping the situation rather it's creating a rat race amongst players that makes them more vulnerable to black merchants as some of these players chase volumes and forget basic business fundamentals. The question you need to ask yourself is this. "Am I asking the right questions and/or following the right steps that will protect my OMC from the black merchants out there?"

About the Author

Tsuwa Thompson is the Principal Consultant and the Chief Executive Officer of RtHE Consult Limited.

Reference - The Rise Of Financial Fraud: Scams Never Change But Disguises Do (