Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
“Something’s Happened” – How a funding platform weathered a shocking crisis and is flourishing
June 21, 2024
“[The CEO] called me just before seven in the morning…but [he] would never call me at that hour, so I picked up the phone and he goes ‘Paul, something’s happened, it’s very serious.’ and I’ll never forget, he says ‘you need to take care of our company.'”
That’s how Paul Vega, Senior Operations Manager at Funders App, retold the story of a phone call he received in June 2021 that would shake up everything about the small business finance company he was working at. At the time, the business was known as 24 Capital, Funders App was a platform they were developing internally, and Mark Allayev who was the CEO, was riding high from having weathered all the uncertainties of startup life and the Covid era. With Vega having played a key role in that success and the business running smoothly, Allayev felt he had earned a much needed vacation and traveled to Europe with some friends.
“And it was just five days,” Allayev said. “But one of our friends had an event in New York and we just had to come back, and the only flight to New York was with a layover in Germany, in Frankfurt. So we got to flying and it was supposed to be a two hour layover in Germany, but came out to be an eight month layover in Germany.”
That’s when the fun and life as he knew it came to a grinding halt. The German authorities never let him get on a plane to the United States. Instead, he was placed under arrest when his name registered as a match with Interpol. Despite his insistence that it was all some misunderstanding, he was directed to a local jail and told he’d soon be extradited to the country that wanted him, Russia. Allayev, then 31 years old, who had been born in Soviet-era Tajikistan and at the time enjoyed dual American and Russian citizenship, had not been to Russia at all since he moved to the United States in 2015. He had, however, previously worked at a family business in Russia as a youngster that found itself ensnared in the unique political environment. Allayev said that his family’s business had been the victim of fabricated allegations and they had left as a result. As an American citizen he had enjoyed international travel for years without issue, and he had almost forgotten about it all. That is until this moment in June 2021 that would change his whole world view and send his family scrambling to save him. While those efforts would eventually enlist help from Democratic Reps. Debbie Wasserman Schultz of Florida and Greg Meeks of New York, Allayev was swiftly cut off from being able to manage his business and was no longer able to contact Paul Vega directly.
“I was aware of what had happened years ago with him and his family because he was transparent with me from the first day we met,” Vega said. That fateful phone call he received that morning lasted all of 3 minutes. “I was like, Okay, I guess this is what’s happening,” Vega recalled.
For Vega, the realization hit that the company had nearly two dozen employees at the time, all of whom depended on it for their livelihood, and all of whom were probably going to question the circumstances their boss was in. Nevertheless, crisis management is how Vega had been introduced to the business from the beginning. Vega started at 24 Capital in January 2020 with about six years of industry experience under his belt, with the objective of completely revamping the underwriting process.
“I think it was actually perfect timing, I think it was meant to happen that way,” Vega said. For instance, family members living across the globe had tipped him off that Covid was going to be much worse than the oblivious American media was making it out to be. Vega was also operating out of an office in New York City where a potential doomsday scenario was a lot easier to imagine than where Allayev sat in South Florida.
“When I first expressed this idea [to Allayev] of the possibility of the universe being shut down, I know that Mark was questioning whether he had made the right decision in bringing me on because here I am brand new to the company and I’m telling him that, ‘hey, the US is going to shut down,'” Vega said. Despite having come across as alarmist, Vega felt that it was better to act on his conviction and plan for the impossible.
“Behind Mark’s back I started to research the idea of remote work, and nobody knew what remote work was back then,” he said. Vega proceeded to set up staff with home computers and began testing out software they had never used before.
“By the time they shut down the city, we were well situated to just literally flip a switch and be able to process and run the business from home,” he said.
And ready they were because not only did the company never stop funding but it also never let anyone from the company go during that time. Through it all Vega and Allayev formed a really trusting relationship with each other, the kind that would only make survival of the company possible once Allayev was detained in Germany the following year.
As days turned into weeks and weeks into months, Allayev’s extradition to Russia seemed inevitable despite a growing lobbying effort to free him. Then Russia invaded Ukraine. Once that happened, the politics in Europe changed, and Allayev was suddenly freed in March 2022 and put on a plane back to the United States. The emotional journey and the circumstances that enabled his return became a big news story in the newspapers, one of many about people whose fortunes changed for better or worse as a result of the war.
Once he was reunited with family and had the opportunity to acclimate back into life, he looked toward his business, which he now had a newfound perspective on. “Before, all I cared about was just working and just living my own life,” Allayev said. “So I think what changed is me understanding that probably your family’s the most important part and you need to focus and spend more time with your parents, your siblings, all your loved ones. I think that’s the thing that really changed my mindset.”
Of course, it wasn’t as if this perspective was shaped by losing his business in the process, because it had somehow managed to continue running like normal during the eight months he was away, thanks to Vega. Even the employees stayed on, as everybody stood in supportive solidarity with Allayev.
“So one thing that I learned that was funny when I came back is that the company could be run without me,” Allayev said. “And I think that Paul and all the other team members did an amazing job, keeping everything in place and keeping the funding amounts pretty decent.”
Today, the brand Allayev and Vega are under is known as Symplifi Capital. The company’s internal infrastructure platform has also blossomed into its own publicly licenseable service known as Funders App for companies that want to be their own funders. Allayev says that Funders App provides technology, underwriting services, collections, accounting, servicing, distribution of funds, contracts, white label services, and more. It can be customized to provide just what one needs. A sizable number of companies are already using it, to the point where last year Funders App announced it had collectively originated $500M in funding to small businesses since inception.
“I think there’s so many talented kids and young people that have the vision to create their own companies but they just have absolutely no help and no backup,” Allayev said, “and this is what we want to create with funders. We want to help those people, we want to get them in, train them, help them, and provide them with the right tools, the infrastructure, and even with leverage, even the money because you need capital to become a funder.”
Allayev drew some of this inspiration from how he started in the business in late 2016, when he talked to numerous companies about what they could provide to help him launch his business and felt like nobody could provide all the pieces. As for the trajectory forward, their eyes are on efficiencies and growth.
“As you know speed is kind of the name of the game here,” Vega said. “If the typical lending house is taking three to four hours to put out an offer, make a decision, ask for additional information, our goal is to have a file from submission to funding in that three-to-four hour timeline where most people are just getting an answer back to the ISO. So we’re hoping to have the merchant funded in that timeline. And that’s going to create just a huge competitive advantage for us.”
That’s the kind of thing they’re working on today. The backdrop with what happened to Allayev is now just part of the company’s founding story. For Vega, there was never any question that it wouldn’t work out. Referencing the early months of Covid when companies were doing mass layoffs, he expected that Allayev would ultimately, through no fault of his own, do the same.
“[Allayev’s] the only person that I know in the whole industry that actually said, ‘I’m not doing that, I’m keeping everybody’ and kept his word,” Vega said. “That day he sold me. That’s a big portion of the reason why I have so much trust in him, because he’s a man of his word.”
SellersFi Surpasses $1B in Loans Since Inception, Experiences Success Through E-Commerce Funding
June 14, 2024The timing of it all was fortuitous for SellersFi. When the company announced in January that it had secured a partnership with Amazon to provide eligible Amazon sellers with access to credit lines, it was clear that its fresh equity raise and credit facility of up to $300 million were going to be put to use. SellersFi wasn’t the only partner, however, and Amazon still did most of the lending to its own sellers directly, a business it had been in for more than a decade, but it was still a big relationship to have. But then it got better. In March, Amazon announced that it would end its direct lending program and rely entirely on its partners instead. For SellersFi that meant it would have the opportunity to service even more sellers on the platform than before. Since then, SellersFi has quietly surpassed $1 billion in loans since inception.
“What we are seeing now is less competition,” said Ricardo Pero, CEO of SellersFi, in a call with deBanked. He partially attributed that to the current interest rate environment which has impacted those with small margins. SellersFi, however, has experienced a lot of success. The company knows the e-commerce space particularly well, the only space it operates in, since its the only US lending platform also approved as a payment service provider member for Amazon. They started their relationship with Amazon as a service provider 3 years ago. While Pero said they have seen “nothing that points to a recession,” their experience suggests that even if one were to happen in the future, consumers would react by seeking out bargains on e-commerce platforms, reinforcing their position as the niche to be in. As readers may recall, a flight to e-commerce is also what happened during the pandemic.
E-commerce, however, is a broad umbrella, and Amazon is not alone in the universe. Millions of businesses rely on various platforms for e-commerce from basic templates with API connections to Shopify and more. Even big box brick and mortar retailers are waking up and rapidly inching their way into e-commerce. Walmart is just one example, which not only accommodates individual sellers on its platform but also offers merchant cash advances to them.
“The competitive landscape is changing for our clients,” Pero said. Pero added that they know what’s going on because they talk to these clients all the time and that even in the e-commerce business there are person-to-person relationships. “Customers mention their account managers by name,” Pero said. “We have a reputation as a partner to these merchants.”
One trend they’ve noticed over the last year or so is their strategy towards borrowing. While merchants have always typically used funds for things like advertising or inventory, the previous low rate environment enabled behavior where merchants could borrow first and then figure out how to spend the funds second whereas now that rates are higher there is a lot more of a deliberative approach to precisely how much they should get and what it will be used for in advance. It’s something they see all the time now and agree with. “You need to plan,” Pero said.
Merchants Still Concerned About Inflation, Recession, (and Bird Flu?)
June 12, 2024
Seventy-eight percent of businesses expressed that they are somewhat concerned or very concerned about the cost of goods/inflation right now. The exact same percentage said the same about a possible recession. That’s according to the latest State of Small Business Report compiled by IOU Financial. Interest rates were top of mind too, though not as much as in previous survey periods. For example, while 68% said that they were somewhat concerned or very concerned about interest rates right now, that figure was the lowest recorded since Spring 2022 (at 84%), the first time that survey question was asked. Respondents were right to be concerned at the time since that’s the precise period that rates began to rapidly rise from 0% to the >5% level that they’re currently at.
Of the respondents who answered the write-in portion, a little less than half cited access to proper funding as among the biggest challenge to running their business right now and as the reason they are being held back from growing their business. Concerns about being able to hire qualified staff was also cited on several occasions, an issue that has persisted since the bi-annual survey first started asking about it.
Notably, IOU has persistently asked respondents to weigh in on their concerns about public health as a business challenge despite the world largely having moved on from covid already. While it would come as no surprise then that the percentage of respondents that were somewhat concerned or very concerned about public health in Spring 2022 (63%) had dropped in half by Fall 2022 (30%), the percentage has slowly crept upwards ever since. Fifty-one percent of respondents said that they are currently somewhat concerned or very concerned about public health. Since no further questions were asked to elaborate on that selection, one wonders if they were referring to the recent headlines about Bird Flu.
Trading MCA for Mortgages
June 5, 2024
“I like multiple ways of getting business,” said Julio Sencion, Principal at Alta Financial. “If I did one thing and one thing only and that slows down, it affects my bottom line, so I like to keep my doors open for more opportunity and I think the ISOs should as well.”
Sencion’s not funding MCAs today, he’s doing mortgages, a business he had been in for years prior to the Great Recession. In the early 2000s, he said that everyone wanted to be a mortgage broker, himself included when he got into it. Like many in that business at the time, the fallout of it all pushed him to seek out a new revenue stream and a product that was still in demand. By 2011 he and a partner were running a large MCA brokerage shop in New York with nearly 70 sales reps on the floor. Sencion liked the business but not necessarily the conversion rates on the leads he was buying. By his count only 2-3% of the leads would become a funded deal, a metric deemed too low in the industry era of yesteryear. Old habits die hard, however, because he couldn’t help but continue to think like a mortgage guy.
“We realized that we had a couple of different questions on our application, one of them was ‘Do you own real estate? Commercial, residential?’ 40 to 50% of our clients owned real estate, so because of that we spun off a division for commercial lending.”
By 2016 Sencion exited MCA and went back into traditional finance. He’s now a principal at Alta Financial, which not only does mortgages but has also found a unique niche to source borrowers from, MCA brokers.
“So let’s say for example you’re an ISO and the client says ‘yes, I own real estate’ I’ll be interested in looking at that product,” Sencion said. “Then you will click a link that we will give you, that link will open up the questionnaire and you will fill out that questionnaire and then my agent will receive that lead from that questionnaire with all the data in it.”
Referrals of this nature in the biz are not new, but perhaps the circumstances are. One of Sencion’s account managers, Jamie Schiff, is also a former MCA rep himself, and he’s found this business to be better.
“I think over the past a year and a half, from my perspective, I think the MCA space is just a bit saturated,” said Schiff. “There’s a million and one funders out there.”
The challenge with this different product, according to Schiff, is getting an MCA broker to wrap their mind around a deal that could take a month to close when they might be used to 2-3 days. But on the upside Alta Financial does all the work and they really just want a broker to qualify a lead and submit the details. If a loan closes the broker gets paid. Quite a number of MCA broker shops are already doing this with them, the company said. Once these files are in hand, they underwrite various factors including credit score of the borrower. While just about any kind of property could qualify except for gas stations, they said that multifamily properties are the most common they get.
“People will be surprised how many clients have real estate, not just a [primary home], but they own just a small multifamily down the road that they never touched or tapped into,” said Sencion. “So I think it’s important nowadays to have the ISOs ask the question because if they didn’t do the cash advance they could always flip this into a mortgage.”
While all of Alta’s loans are secured by real estate, they can look beyond the value of the asset by evaluating an applicant on the rental income they generate or look at the average revenue from their business bank statements and base a loan amount off of that. Naturally, the rates and terms are much more attractive than what’s available in the unsecured market. There’s also the added benefit of these products being able to work alongside an MCA or to buy out existing ones. It’s a commission a broker might not have gotten otherwise.
“I’m actually excited, it’s something different but it’s kind of the same,” said Schiff. “And it’s such a smaller space that I don’t have to worry about every other month 10 other new funders popping up…”
As for Sencion, he said that the barriers to entry are higher than the MCA business, between the education, state licensing, how to process the files, etc.
“It takes years to get to the level of where we’re at, to be able to underwrite, fund deals, sell to a secondary market,” said Sencion. “And I think that’s where the edge comes in, you can’t get a cash advance guy, no matter how big they are, to get into my space unless they team up with a mortgage company. No one’s out there trying to become a mortgage company anymore like it was back then.”
At the AFBA Conference
June 3, 2024I’ll be moderating a panel on “Hot Topics in Revenue Based Finance” at the Alternative Finance Bar Association (AFBA) conference early Tuesday morning at the office of Covington & Burling in Times Square, NYC. (Agenda here) This is the AFBA’s 6th annual conference. The first day (June 3) of the two-day event was only open to attorneys, while business people are permitted to attend on day two (June 4).
Panelists include:
• Heather Francis, Elevate Funding
• John Viskocil, Fora Financial
• Mary Donohue, Revenue Based Finance Coalition
• Marshall F. Goldberg, Glass & Goldberg
Among the major speakers of the day will be Andrew Smith, a partner at Covington & Burling LLP, who was formerly the Director of the Bureau of Consumer Protection at the FTC.
Almost Sold Out – The Industry’s Legal Conference in NYC (AFBA) – Features Big Name Speakers
May 29, 2024
This is the last chance for attorneys and executives interested in the most comprehensive industry legal education to register for the Alternative Finance Bar Association Conference taking place in NYC. While the day of June 3rd is for attorneys only, the evening of June 3rd and the full day of June 4th are open to business people!
The outstanding lineup of speakers includes Andrew Smith, a partner at Covington & Burling LLP, who was formerly the Director of the Bureau of Consumer Protection at the FTC, and Bob Zadek, Of Counsel for Buchalter.
A June 4th panel moderated by deBanked‘s Sean Murray will feature speakers Heather Francis at Elevate Funding, Mary Donohue at Revenue Based Finance Coalition, John Viskocil at Fora Financial, and Marshall Goldberg at Glass & Goldberg. Tickets are almost sold out.
For questions, email Lindsey@lrohanlaw.com or fitzgeraldmegan19@gmail.com
Agenda below:
How Everybody Suddenly Became a Direct Funder
May 8, 2024
It’s hard to distinguish a broker from a funder these days especially in an environment where seemingly reliable evidence might not indicate what you think it does. For instance, I recently made an off-the-cuff post about “white label funding” on social media that opened up a lot of eyeballs to a practice that’s been happening behind the scenes for years that could totally change what you think you know about the business, and help explain why deals might be spreading further beyond what a broker intended. For instance, the catchphrase “of course we’re direct, just check our lawsuits out in the courts,” cannot be relied upon to indicate one is direct at all. Say what!
Here’s how white labeling came about, what it means (roughly speaking), and how it works. Please note there are certainly many iterations and variations to it:
More than ten years ago, the MCA arms race to recruit ISOs became ultra competitive and everyone began looking for an edge. Some tried high commissions or faster approvals or higher risk funding or customer service and so on and so forth. Others got more creative, turn the ISOs themselves into funders and leverage their incredible abilities to sell themselves! If a broker was called Cool Funding Co, then the funder might organize an LLC or register a DBA with an extremely close spelling, like Cool Funding Capital, LLC or Cool Funds Co, Inc, something that otherwise wouldn’t raise any eyebrows if one was dealing with Cool Funding Co. The real Cool Funding Co, white label entity in hand from a funder, could now market itself as “direct” and take to the interwebs and telephones to solicit deals from fellow brokers. When Cool Funding Co would get the deal, they would direct it to the real funder, who then prepares a contract with the white labeled name that looks very much like Cool Funding Co. Cool Funding Co gets a cut of every deal funded and also the honorary and distinguished advantage of being a funder in a market full of brokers! They can even syndicate on them which perhaps makes it look and feel even more direct!
Thus kicked off an extraordinary boom of white labeling, which carries through from beginning to end. If a deal defaults under the Cool Funding Capital, LLC contract, then that’s the name that will appear as a plaintiff in the court system. Hence, court records can be misleading to an outside observer who aren’t aware of this practice. You might be dealing with Cool Funding Co, but Cool Funding Capital is actually another funder entirely who actually did the deal behind the scenes.
Not content to let just one funder dominate this market, dozens of funders followed by offering white label services to brokers to front as a funder. This would allow brokers to shop a deal around to all those they have a white label relationship with and create the appearance that whomever approved it was actually them in the end. For a time, not offering white labeling was considered a major disadvantage because then brokers would have to reveal some other company’s name on the contract, risking the possibility that whichever broker they had solicited would cut them out of the process in the future and go truly direct.
The only tell would be that suddenly Cool Funding Co sure seemed to have a lot of legal names, like Cool Funding Capital, Cool Funding Two, Cool Merchant Funding, Cool Cap, and more, both on their contracts and in the court system, all indications but not necessarily definitive proof of white labeling. And not to say that any of this is deceptive or bad or immoral. White labeling exists in many industries and at the end of the day it allowed really good sales people to capitalize on the relationships with people who already liked them. It was smart, genius even. And if the deals get funded and everyone is happy, who cares?
Even some funders got in on it too, shopping out their declines to other funders only to put out a contract in front of their broker with a white label, leaving them to have no idea that someone else is actually doing the deal. Again, this isn’t necessarily deceptive, and can easily be marketed as a benefit. Instead of a broker having to waste time submitting a deal to five funders, they can submit to just one that they really like and the funder will get it done whether on their own balance sheet, through syndication, or through a white label somewhere else. The broker will only have to deal with that one relationship. The deals get done. Everybody wins.
The ironic thing is that white labeling became such a common feature that few people even talk about it anymore. White labeling can even be done in-house in which a funder today can just be a composite of several different syndication funds all while being white labeled under one marketable brand name. The point is that determining who is direct is not easily determined, and especially not from “looking someone up in the courts.” If there is one solid takeaway from this information its to be informed about what is possible and to help you ask better questions with potential relationship partners.
Ask questions things like these:
- Do you rely on white labeled contracts?
- Do you rely on syndication? If so, from who, where?
- How many of your own underwriters do you have? Can I speak to them?
- How much of your own money do you put in the deal?
- If I look up the legal entity on your funding contract, who will show as the owner?
Red flags for a possible white label or broker:
- Says they can fund any and every type of deal
- Multiple commission structures
- Relies entirely on statements like “look me up in the courts” for authenticity
And there you have it. Be careful out there. A great way to cut through the nonsense is to get to know your relationships in person! There are also plenty of funders who don’t white label at all because they don’t want to deal with any of the risk or complexities that come with it.
The Long Running Mysterious Fraud in the Small Business Finance Industry and How to Defend Yourself
May 1, 2024The submitted deals are real. The merchants are real. Everything checks out until suddenly it doesn’t. The merchants block the payments and find out they’ve been scammed.The funders find out they’ve also been scammed. But it’s too late because the money is gone and the fraudsters disappear without a trace.
deBanked reviewed hundreds of court documents, emails, and websites in preparation for this story and spoke with multiple people familiar with the matter, though only one would agree to go on record. Here’s the story of how the scam works and what you need to know to defend yourself.
It was a textbook merchant interview call. The business owner answered the questions succinctly and convincingly. He knew his stuff and sounded confident, like somebody who wanted to just finish the process and get the underwriter to issue a final approval on his funding application. His accent said little about where he was from. It sounded like it could be Mid-Atlantic or perhaps lower New England, just a regular business owner on Main Street USA.
“It sounded a little nasal, right?” said Alex Shvarts, CEO of FundKite, after playing the recording for me to judge.
The tone of the voice did actually sound unusual after thinking about it. Something was off about the call and that was the only tell. For the person on the other end of the phone wasn’t who they claimed to be. It would later be debated if they had used voice changing technology, one of many layers of obfuscation that had been put in place to cover up what is quickly becoming the scheme of the decade.
FundKite had signed up a new broker and promptly received two deals from them. On this particular one the paperwork attached to the application was real. This was a real business and these were their real documents. But the real owner of the business had no idea that any of it had been used to apply for funding with FundKite.
In a typical identity theft scenario, a scammer gets a lender to send the loan proceeds to a bank account that is controlled by the scammer, keeping the victim completely in the dark that their identity is being used for the fraud until much later when a default occurs. But in this case the scammer intended to have a funding company send money to the victim’s actual bank account. It’s a twist that understandably makes it very difficult for the funding company to later believe that the merchant’s identity had been stolen since they were the ones receiving the proceeds. But once the business has been funded, the scammer executes the next step in the scheme, convincing the business owner to send the money to them. If that sounds like a whole lot more work to make this heist successful, then you have no idea how many layers of deceit are in play and the scale at which it’s operating.
It started sometime around 2019 (maybe even earlier) and is still happening to this day across the industry. The scammer uses stolen identities to incorporate businesses, followed by using those entities to open up bank accounts for them. One account is used to impersonate being a lender and another to impersonate being a broker. They first get to work by being the fake lender and register a domain name that closely resembles and could be mistaken for a real lender they’re trying to impersonate. According to records obtained by deBanked, domain names challenged via UDRP and seized as part of an ongoing investigation into the fraud reveal that the scammers also use stolen identities to register the domains, making the real buyers untraceable.
The objective of having these fake domains in the first place is to contact existing real borrowers of the real lender and to pass themselves off as the real lender. It’s a classic phishing scheme.
There’s various theories as to how this is done, but there’s a possibility that public records are sufficient for the scammer to accomplish this step. A reverse UCC search can reveal the names of a lender’s customers and the time in which they received a loan. From there, big data or cursory internet searches are enough to obtain the contact info of those borrowers. This type of list building is nothing new and fairly common in the data business.
The scammers then email the borrowers from the fake domain, purporting to work for their real lender, and give them the great news that positive repayment history has afforded them the reward of being able to refinance their loan at a lower rate.
It is generally good practice to check the domain name of a sender, even though that itself is not foolproof, but an incorrect one, especially one that resolves to a “404 Error Not Found” page, should be a sufficient indicator that these emails are coming from an impostor, yet business owners still fall for it, perhaps because they recognize the name and find the offer consistent with their expectations.
In one case that deBanked reviewed, the opportunity was presented to refinance a double digit APR loan down to as low as 4% with the same lender. When the victim was asked during a deposition if that number had struck him as suspiciously low, he said it did not, especially considering his belief that he had “excellent payment history” and that he felt like it made sense to get a break after all the stresses of covid.
The scammers generally communicate with perfect English over email but will also do phone calls. They use Google voice numbers in the area code that match up with the real lender. deBanked called an older one that had been used and nobody picked up. They might use the name of a real employee at the lender or create a fake one, going so far as to generate a paper trail online that shows the name of that person working for the lender.
Once on the hook, they ask the victim to submit lengthy documentation over email so that the refinance can be reviewed. These are typically documents like tax returns, bank statements, a copy of a driver’s license, A/R and/or A/P schedules, etc. After that the scammer moves on to the next phase, using the phished documents to apply for loans or merchant cash advances. This is where the scammer’s fake broker entity comes in.
These fake brokers tend to pass a background check because they rely on stolen identities that are clean, the business entities they’ve created under them are real and match up, there’s a tax ID, there’s a bank account in their name, and there’s no sketchy stuff about them on the internet. They even have a website, again registered with the fake identity, that often looks like or is an outright exact copy of another broker’s website. Even a diligent funding company can be duped despite a background check. Once the fake broker is signed up with a funder, the phished merchant data is submitted but with the scammer’s phone number and email address. Oftentimes the deal amounts are large. deBanked reviewed several cases related to this scheme that ranged in size from $200,000 to $600,000.
Since all the merchant information is legit, the merchants tend to get approved. The scammers are also adept at pretending to be the merchants in an interview phone call with an underwriter, like the one I listened to previously. They can even guide the merchant through a funder-mandated bank verification under the illusion that it’s all related to their current lender for the refinance. If any questions arise about the mention of another financial company name, it’s explained away as an affiliate partner or related vendor that they use.
Once the scammer is confident the funds are coming, they tell the merchant the refinance has been approved and that there is a narrow window to complete the final steps. As part of this they send a lengthy legalese-filled digital contract with an e-sign for the fake refinance that looks exactly like their real lender’s, again reinforcing how legitimate the whole thing feels.
Once complete, they’re told that a large wire will be arriving in their account, which will actually be from the funding company they don’t know about. In a normal refinance, a lender might withhold a portion of the new loan to apply to the outstanding balance, but in these cases the victims are told that they have to receive the full amount of the funds from their lender first and then wire the outstanding balance of the loan straight back to the lender. The merchant nets the difference if there is any left over. This round-trip transaction is communicated as being their way of managing their accounting, an excuse that again seems to come across as plausible to those that think they’re dealing with their trusted lender the whole time.
In the earlier iterations of the scheme, the name on file for the bank account to wire the funds to would look almost identical to their lender’s name. When the victim sends the wire to pay off their outstanding loan, they are completely unaware that they have just wired funds to a scammer and that the entire thing had been a very elaborate ruse. It’s not until days later when their account starts getting debited by a funding company they have never heard of as part of an agreement they had never entered into do they become alerted that something is amiss. By then it’s too late. Doubly too late if the funder has also wired the fake broker a commission for putting the whole deal together in the first place.
Although the scheme can yield several hundred thousand dollars at a time, it ultimately results in the loss of their fraudulently opened bank accounts as the funders respond with an investigation that can include litigation and/or a report to law enforcement. That means the scammers have to open new accounts under new stolen identities. That’s easier said than done, which is perhaps why last year they apparently improvised on this step. They don’t need to open bank accounts for the fake lenders anymore.
Instead, according to at least three examples reviewed by deBanked, they’re more recently asking the victims to wire the funds to the general deposit account of a cryptocurrency exchange. If this sounds like it would be too obvious, consider that it has worked. The wire forms, which look identical to the earlier versions, are only different in that they contain a different account name to send the funds to. The lender’s logo can still be found on the top.
In one case, deBanked was able to obtain records that allowed for the funds to be traced. The scammer had the exchange convert the wired funds into Ether, to which the Ether apparently moved between three crypto exchanges before disappearing into a generic holding address of an offshore exchange with millions of transactions. Another dead end.
deBanked emailed one of the two exchanges it reviewed related to this scheme to ask about their customer KYC procedures but received no response. The other was not contacted to avoid tipping them off to a possible active investigation. The exchanges both have deposit accounts at US banks, both of which are known for their fintech relationships. Typically, crypto exchanges that take on US customers do rely on some level of KYC. It appears based on limited evidence so far that the crypto accounts opened up by the scammers are done under the stolen identities of the merchants so that everything matches when a wire comes in. This is where it gets murky because the scammers may ask the merchants to take selfies of themselves, ones that could include holding up their ID in their hand or holding a piece of paper with a specific written message on it as proof that it’s them. That a merchant might jump through these hoops on the belief that it’s all to secure a purported refinance with their existing lender requires some suspension of disbelief, though many online finance companies these days are requiring varying levels of customer identity verification.
The outcome, in any case, is that millions of dollars have been purportedly stolen over the course of several years. The scam has been directed at all sorts of funders, from the A paper players to the Z paper players. The merchants, as the original dupes that make this possible because they fall for a basic phishing scheme, are also left to pick up the pieces. The scammers may have even scammed another high profile scammer, at least according to documents reviewed by deBanked. There’s a brazen fearlessness to it all.
A main connecting link has been funders that will do large deals, hundreds of thousands of dollars in a single transaction. But that might be changing. Industry chatter more so than hard evidence suggests the web of intended targets might be growing and that thanks to innovations with AI and crypto, the scammers may attempt to use artificial identities for the brokers rather than real ones. A lot of the steps involving bank accounts and stolen identities are no longer as necessary, which means if you’re a funding or lending company and you’re reading this, you may be vulnerable.
Sources familiar with the matter say that it’s good practice to remind your customers about possible phishing risks and to keep them informed about what methods of communication you will use throughout the life of the relationship. This includes whether or not you might employ phone calls, emails, texts, or snail mail communications, and the precise sender information they should expect. This might limit the likelihood of your own customers from getting phished but there’s tactics you can use to prevent becoming the victim funding company as well.
According to Alex Shvarts, a good start is only conducting a merchant interview on phone numbers assigned to the business. “If it’s a cell phone we have to have a cell phone bill that verifies the owner’s information,” he says. Also, if the customer has a website, avoid communicating with them over a free email address like Outlook or Gmail or Proton Mail and instead direct all communications to an address on their company domain name, one you’ve confirmed is really theirs and not a boilerplate setup by the scammers to deceive you again. Other possible steps are to use live ID verification or a common tool like CLEAR, he suggests. Shvarts wouldn’t disclose some of the proprietary methods they’ve come up with so as not to tip off a scammer reading this.
When it comes to the broker, do proper due diligence. It’s been said that a fake broker may test the waters with a small deal first before submitting the large fraudulent one to generate a level of confidence that everything is on the up and up.
According to documents reviewed by deBanked, the scammers typically rely on a relatively bare bones website for their fake broker shop, a collection of borrowed templates and verbiage from other companies out there. It’s a rabbit hole that can lead one down many wrong directions, especially in an era when similar bare bone lead gen sites litter the internet by the thousands. Consider doing a FaceTime or Zoom call with the broker so that you can see if their face matches the identity that’s been provided!
The scammers have used different domain name registrars and hosting services. They may push for a weekly or monthly payment option so as to create lead time between when the victim wires the funds to them and when the first debit hits from the funder they’ve targeted for it. They seem to prey on merchants that have an outstanding business loan rather than an MCA because it makes the low in-house interest rate refinance all the more plausible. So if you see debits in an applicant’s bank account from any one of the more commonly known online business lenders, you should be thinking about this story and ways to make sure you are speaking with the actual business owner. Do they know who you are? Have they been offered a refinance? Do they even know who their broker is?
“When you first identify the fraud, notify law enforcement including the FBI,” one source familiar with the matter said.
