Two Staffing Agencies Fall Victim to Classic Payrolling Scam

If it seems too good to be true, it probably is...

(Editor's note: I am hoping this story will help prevent future scams of this type. Toward that end, I am making it available to the public as well as my savvy subscribers, who are always up to date on important legal news).

The last time a scam like this happened was in 2008, when a group of six individuals defrauded forty-two staffing companies out of more than $5,00,000. The scheme involved creating an imaginary technical staffing project for the FBI (sure sounds legit) and a fake prime staffing contractor who induced the staffing firms to "payroll" the personnel who were allegedly supplying the technical labor.

To the staffing firms, it looked like manna from heaven, a government end-client that always pays its bills, and high billing software developers that just fell into their lap, no recruiting required!

Contracts were signed and timecards were duly submitted. The staffing firms paid their "consultants" week after week, sometimes for months, before beginning wonder why their invoices to the prime contractor staffing client were going unpaid. It turned out they were not being paid because there was no FBI project, and the "technical personnel" were actually the perpetrators of the scheme, collecting hundreds of thousands of payroll dollars from some of the largest staffing firms in the business. The only flaw in the scheme was that the preparators had to use their own identities and social security numbers to get paid, so they were easy to catch. What they did not count on was the real FBI getting involved and bringing federal wire fraud charges. The six perpetrators ultimately received prison sentences of up to eleven years: https://archives.fbi.gov/archives/denver/press-releases/2012/perpetrators-of-scheme-to-defraud-staffing-companies-sentenced-to-federal-prison-for-conspiracy-to-commit-fraud-mail-fraud-and-wire-fraud

They say there is nothing new under the sun, and the maxim is proving true with a similar scheme recently perpetrated on two unsuspecting staffing agencies, Frank Recruitment Group and Back Office Staffing Solutions. The scheme is described in two bankruptcy court cases against the alleged perpetrators, attached below for those desiring the gory details.

In the Frank Recruitment Group scam, the fake end-client was Citibank, and the payouts to the perpetrators totaled $609,470. In the Back Office Staffing matter, the fake client was Wipro, and the losses total $703, 638. The schemes were quite elaborate, but the common thread is the failure of the staffing firms to have strong due diligence controls when accepting payrolling assignments. Payrolling is dangerous for several reasons. First, you do not have a relationship with the end client. Second, you do not have a relationship with the company in need of payrolling services. Third, you did not recruit the candidates. Then you should always wonder, why do they need payrolling services in the first place? Even if legit, is the prospective client just looking for money it needs to make payroll? Every one of these things is a red flag in need of investigation before agreeing to advance hundreds of thousands in payroll dollars to strangers. This is why most staffing firms should not perform payrolling - they do not have mechanisms in place to perform the necessary deep dive investigation.