Bankruptcy fraud: how to recognise and prevent it

At the beginning of July 2022, the Fiscal Intelligence and Investigation Service (FIOD) arrested an entrepreneur from Eindhoven. He allegedly committed fraud for €2.6 million. He ordered an expensive car and other luxury goods 'on the business,' but let the company go bankrupt and never paid off those debts. This is an example of bankruptcy fraud.

What is bankruptcy fraud?

Bankruptcy fraud is a type of fraud that an entrepreneur commits by making their company go bankrupt, for example after they have deliberately incurred debts. Another example of bankruptcy fraud is that an entrepreneur keeps certain assets or money secret when they declare bankruptcy, so they do not have to pay their creditors. Fraudulent bankruptcy is punishable by law.

Recognising bankruptcy fraud 

Recognising bankruptcy fraud in advance is difficult. However, you can keep an eye out for signals that indicate financial problems and possible imminent bankruptcy of your customer. Examples of such signals include:

• High staff turnover at the company you are dealing with.
• Irregular orders, meaning the customer buys less or more than usual.
• Irregular payments, the company you are trading with stretches the payment terms.
• Avoidance behaviour. You can no longer reach the entrepreneur and they avoid you.

Be alert to fraudulent bankruptcy. Prevent non-payment and take timely steps if your customer does not pay your invoice.

Examples of bankruptcy fraud

How do scammers commit bankruptcy fraud? There are several forms:

Favouring creditors

Sometimes, just before the bankruptcy, a fraudulent entrepreneur will quickly pay some of the trading partners who are owed money. This is called deliberately favouring creditors. The other business partners get nothing.

Withdrawals

In a bankruptcy, a curator manages the equity and assets of the company. You can find the name of the curator in het Central bankruptcy register (Centraal insolventieregister, in Dutch). The curator makes agreements with those who are still owed money. If an entrepreneur keeps money or goods out of sight of the curator, that is withdrawal fraud.  For example:

• Channelling away money through large private cash withdrawals.
• Removing assets such as cars, machines, and inventory.
• Having debtors pay into newly established bank accounts the curator does not know about.
• Selling or taking the customer base to a newly established company owned by the fraudster.

Buy without paying

Fraudulent entrepreneurs sometimes purposely buy things they cannot afford. They do not pay the seller and quickly resell the goods. By the time sellers claim the money they are owed and file for bankruptcy of the company, the fraudulent entrepreneur has disappeared.

Secretly pay for sale of company

Entrepreneurs who are heavily in debt sometimes choose to sell their company so that the buyer can let it go bankrupt. Knowing that the business is beyond saving, the buyer officially takes over the business for a small fee, while the seller quietly pays him for taking over the business. The new owner destroys the financial accounts and makes all possessions of value disappear. As a result, business partners who are still owed money do not receive anything. Not being able to show accounts or destroying them is punishable by law.

Abuse of fast-track liquidation

Turbo liquidation or fast-track liquidation is a quick way to dissolve a bv, nv, foundation, or other legal entity. This is only possible if the legal entity has no assets. In practice, this is sometimes abused. The assets are then channelled away by the director and only the debts remain in the company. Those who are still owed money are the victims. They do not get their money.

Straw owner

In the event of bankruptcy, a director is liable for the debts of the company with their business assets and sometimes also with their private assets. In order not to lose money, fraudulent entrepreneurs appoint a so-called ‘straw owner’ shortly before the bankruptcy. This is someone without money and possessions who registers at KVK as a director, owner, or shareholder of the company. This person takes over the company including the debts and assets. The assets are then removed from the business and passed on to the original owner. The debts remain unpaid. In the event of a declared bankruptcy, there are no assets to be recovered from the straw owner. The business and private assets of the original owner remain unaffected. Straw owners are often recruited on the street and are difficult to find because, for example, they have no permanent address or work.

Take action against bankruptcy fraud

Do you suspect that your company is a victim of bankruptcy fraud? Report this to the Fraud Helpdesk and contact the curator. The curator will report the bankruptcy fraud to the Central Bankruptcy Fraud Reporting Point.

Share the information you have about the bankrupt entrepreneur who still owes you money, also called the debtor, with the curator. They assess whether there has been obvious mismanagement by the debtor. If this is the case, the curator will reclaim the entire bankruptcy deficit, which is the proceeds minus the debts, from the bankrupt entrepreneur. The curator may also reverse transactions of the debtor that are detrimental to creditors.

As a creditor, it is not always possible to get all your money back. Sometimes you will get some of it back and sometimes nothing at all. This only becomes clear when the trustee has completed the bankruptcy. 

Doing business securely

You can prevent fraud if you know who you are doing business with. You may suspect that a particular company is bankrupt or is in deferral of payment or liquidation. You can check this in the Business Register. It contains all Dutch companies, enterprises, and legal forms. You can look for a foreign trade relationship via a foreign register.