Mark Pestronk
Q: I run a large and successful host agency. From time to time, we find that one of our ICs has committed fraud against us or our suppliers. What have you found to be the most common kinds of fraud by ICs, and what can we do to prevent such conduct?
A: Fraud on host agencies is intended to deprive the host of its commission share. It is generally committed by ICs who have been affiliated with the host for less than a year, but veteran ICs sometimes unfortunately decide to resort to fraud on the host, as well.
Examples include getting the client to deposit funds into the IC's own bank account, from which the IC can pay the supplier directly using the IC's credit card. The IC arranges to pay net to the supplier using the IC's own credit card, thus making it appear as though no commission was paid.
Worse, ICs have been known to embezzle client funds by depositing them and simply never paying the supplier or the host. This practice is sadly somewhat common with church and student groups, leaving the clients and law enforcement authorities to look to the host for payments to the suppliers or refunds.
If the IC has his or her own IATA number (which is very simple to obtain), the IC may first book with the host using its facilities and reputation, and then the IC can get the client to cancel and rebook using the IC's IATA number so that all the commission comes directly to the IC.
Here are some of the ways in which these frauds can be prevented:
- First, be sure to screen your prospective ICs with care. Get references and find out from the previous host why the IC left. Do credit checks and criminal background checks.
- Second, have an IC contract that is specifically designed to prevent fraud. For example, require the IC to enter all bookings into your invoicing system and prohibit the IC from such activities as using the IC's own bank account for any transactions, accepting cash, booking on a net basis without your advance consent and signing contracts in your agency's name.
There are lots of other anti-fraud measures that you can put into your IC contract. However, the more you have in the agreement, the more likely it is that a taxing authority will attempt to reclassify the relationship as one of employment, since you are controlling the IC's behavior.
You need to strike a balance between these forms of a control, on the one hand, and the risk of classification, on the other hand. The balance depends on the state you are located in, the state the IC is in and the likelihood of fraudulent conduct by your ICs based on your own experience.
IC fraud on suppliers takes many forms, and I will devote a future column to examples and ways to prevent it. Suppliers look only to the host -- not the IC -- for redress.