Big names behind telco finance scam ?

In October, ACCC launched heavyweight legal action against 28 parties involved in ‘bundled services’ deals alleged to be illegal.

There’s growing evidence that the same general type of scheme has been run by other groups, including a warning by the Telecommunications Industry Ombudsman.  It also seems that well known Aussie financiers may be involved.

So what’s the scam ?

One variant works like this.  A third or fourth tier telco reseller (we’ll call them FunnyTel) approaches an SME (we’ll call them NiceBiz) with a great deal.

‘How’d you like to pay just $1,500 a month, get $2,000 a month in included value calls by landline and mobile, AND we’ll throw in a free new PABX ?  All on a 48 month contract.’

‘Great !’ says NiceBiz.  ‘Where do we sign ?’

A couple of weeks later, a new PABX arrives.  Great.  And then the first phone bill comes.  $1,500 as promised.  Sweet.

So what’s the problem ?

Well, there was a little more to the deal than FunnyTel explained.  Actually, it was working hand in hand with a finance broker (we’ll call them HotBucks).  When NiceBiz signed its contract, HotBucks arranged finance to the tune of $60,000 cash in a lump sum, and gave it to FunnyTel.

The $60k is equal to the ‘phone bills’ NiceBiz has contracted to pay over 48 months, less a factored in interest rate.

FunnyTel arranges for a new PABX at NiceBiz, at say $10K.  That leaves it with $50K cash in hand.  In effect, it represents prepayment for NiceBiz’s phone accounts for the next four years.  FunnyTel can spend it as it wishes.  It’s now FunnyTel’s money.

Each month, the ‘phone bill’ that NiceBiz pays is really to make the 48 monthly finance payments needed to repay HotBucks.  And in the meantime, the fine print in the original contract says that the PABX is mumble rented mumble preferred finance mumble mumble arrangement mumble.

It’s all fine, unless …

This would all be fine if FunnyTel continues in business for 48 months and delivers the promised phone services to NiceBiz.  After 48 months, HotBucks is paid out, NiceBiz has its free PABX and has received the phone services it paid for.  All good.

But what if FunnyTel goes bust ?

‘No problem’ says NiceBiz.  ‘It’s a pity, coz it was a good deal.  But we have our PABX and we’ll just have to find a new phone service provider pronto.’

Then the bad news from BigCorp arrives

It doesn’t say this, but this is what it adds up to:

Dear NiceBiz,

You didn’t know it, but you owe us a lot of money.

If you look back really carefully at the contract you signed with FunnyTel (or maybe not the contract itself but a piece of paper they left with you, or something they mentioned, or maybe forgot to mention, or something – we’re not actually too sure, since we had no direct involvement in it) you’ll learn that when you believed you were:

• getting a free PABX, and
• entering a 48 month phone contract

you were really:

• borrowing $60,000 from HotBucks so FunnyTel could pocket $50,000 cash, and
• being rented a $10,000 PABX from HotBucks.

Now here’s some more great news:

• In a secret arrangement that you never heard about (til now) us guys at BigCorp really stumped up the cash. HotBucks was our secret agent. But it’s cool, that’s perfectly legal.
• FunnyTel has gone broke. Boo hoo.
• You owe us $60,000 plus charges plus interest.
• Pay up within 7 days or we’ll sue you.

So NiceBiz has a $10K PABX, a debt of $60K and no phone service.  Thanks a million FunnyTel, HotBucks and BigCorp.

It seems that different versions make different levels of dodgy disclosure

Sometimes, NiceBiz ‘knows all about’ HotBucks.  It’s kept no secret that the PABX is being supplied under a rental or hire purchase arrangement.  What NiceBiz doesn’t appreciate is that the payout on that arrangement isn’t the $10K that the PABX is worth (or whatever balance is owed at the time) it’s $60K or $70 K or $80K – reflecting the whack of cash that FunnyTel received on Day One.

Whatever is (or isn’t) told to NiceBiz, nobody in their right mind would agree to rent a $10K PABX with a $72K debt attached to it so that a third or fourth rate phone company can get its hand on $50K cash, and then pray that the company kept its promise to keep the phones working for four years.

What’s legally wrong with it ?

First, these kinds of arrangements almost certainly breach the ‘third line forcing’ prohibition in the Trade Practices Act 1974.

It’s illegal in business to say ‘We’ll sell you a washing machine but you must promise to go to our preferred installer (that’s an independent company) to have it installed.’

That’s called ‘exclusive dealing’ aka ‘third line forcing’.

In the Axis Telecoms case, ACCC is alleging that by giving customers no choice in financier, ‘FunnyTels’ were effectively forcing ‘NiceBizs’ to deal with ‘HotBucks’.

Where that happens, the contract is void and in breach of the Trade Practices Act.

Second, as we said above, no properly informed customer would dream of such a risky deal.  It follows that companies pushing the ‘special offers’ had an interest in making sure that customers were not properly informed.

Surprise, surprise … the allegations in the Axis Telecoms case include:

• Misleading or deceptive conduct
• False or misleading representation with respect to the price of a service
• False or misleading representation concerning the existence or effect of a condition of a contract
• Was knowingly concerned in, aided and abetted or procured misleading or deceptive conduct
• Was knowingly concerned in, aided and abetted or procured false or misleading representation with respect to the price of a service
• Was knowingly concerned in, aided and abetted or procured false or misleading representation concerning the existence or effect of a condition of a contract

We would expect that some degree of misrepresentation would be almost essential to get one of these deals across the line with NiceBiz.

But what about BigCorp ?

From BigCorp’s point of view, it’s all a paperwork deal.  It appoints HotBucks to get deals signed, and HotBucks gets in bed with FunnyTel, and DodgyTel, and CreepyTel and whoever else it can partner with.  As long as the partners have fast talking sales teams, it’s all good.

Contract gets signed … HotBucks passes paperwork to BigCorp … money is paid out … and it’s all good.  Until FunnyTel goes out of business and BigCorp steps from behind the curtain and demands its money back from NiceBiz.

The problem is that, legally, BigCorp is tainted by any legal defects in the original deal.

If the deal was illegal, or obtained by misrepresentation, BigCorp can’t say ‘That has nothing to do with us.’  It can’t get a clean contract if FunnyTel and HotBucks had a dirty one.

Of course, BigCorp plays all innocent as if butter wouldn’t melt in its mouth.  ‘We’re just doing our duty, sir.  We have these documents with your signature on them, and they say you owe us $70,000.  What’s that about exclusive dealing and misrepresentation ?  Sorry, sir, it’s a bad line.  Oh, the Trade Something Act ?  Oh, no, sir.  You see, we have these documents with your signature on them, and they say you owe us $70,000.  FunnyTel told you what ?  Oh, no, sir.  We don’t know anyone called FunnyTel.  Anyway, didn’t they go broke ?  But we have these documents with your signature on them, and they say you owe us $70,000.  When can we expect payment ?’

BigCorp can try to wash its hands, but at the end of the day the whole scam depended on its participation.  It was the ultimate ‘bag man’.

So who is BigCorp ?

Of course, ‘BigCorp’ is just hypothetical, like FunnyTel and HotBucks.  But we hear there are real BigCorps out there, at least one with a big name and reputation.

So hopefully, the Axis Telecoms case will bring down the shutters on these dodgy deals.  And hopefully, all the BigCorps that aren’t yet in court with ACCC will leave all the NiceBizs alone, and not try to enforce deals that were signed up in very shady circumstances.