Here’s how the I-Buy-From-Myself fraud works in E-Commerce: Lets say you’re the CEO of a VC funded e-commerce venture (lets call it FlashStarABC), dealing in apparels. You (or your family member) sets up a company (lets call it BestProcureXYZ) which procures unbranded apparel from a country where you can get it at a cheaper price than India, say, from China.
BestProcureXYZ creates new labels, like Miss2795, for handbags. These are bought from China at Rs 100, and are still cheaper than branded goods on the flash sales site. Normally, unbranded bags would be bought by FlashStarABC for Rs 150, but BestProcureXYZ gets a friendlier rate of Rs 200, and they’re sold in a flash sale for Rs 350. The investors of FlashStarABC are shown that the company gets better margins in case of unbranded goods, so they’re happy with the sale, not knowing that the margin could be higher, and a relative of the CEO runs the company which is supplying goods.
The CEO keeps quiet about who these goods are being procured from, and sometimes has multiple friends and family members importing containers of goods. Now if this happens across product categories, you can imagine that the amount of money that can be made using this modus operandi would run into multiples of crores. At the same time, consumers are buying and revenue is increasing, except that investors are being shortchanged. That is, until the company gets stuck with unsold inventory of unbranded goods, which it procured in the name of warehousing. Keep in mind that while we’ve mentioned procurement of containers from China as an example, we’ve heard of instances of procurement from India as well.
Investors need to keep a close watch on the supply side of the e-commerce business.
Editors Note: There are instances of fraud which we hear about, but for which we don’t have the proof; these are hearsay and unsubstantiated, but doesn’t mean that possibility of there being fraudulent practices doesn’t exist. Through this series, we’ll highlight some of the processes specific issues in both Internet and Mobile.
Our intent is not to cast aspersions on legitimate businesses or an industry segment. Our objective is to bring these process related issues to light, in the hope that as more and more people become aware of these practices, checks and balances will be put into place, and their incidence will reduce.
How you can contribute
Explain to us in detail these or other processes by which fraud is committed, either by using our Anonymous Tip feature, or by calling Nikhil Pahwa at +91-98103-10053. We’re looking for information on fraudulent processes across digital businesses, whether e-commerce, IT and server procurement, content deals, advertising deals. You may wish to name companies, but we have decided not to name names. Your identity will be kept confidential in case you disclose it to us.
Rules Of Engagement
If you’re aware of who we’re referring to, no names should be mentioned in the comments, or even any significant indicators. No one can be accused without proof. Any unsubstantiated comments will be deleted, since we cannot afford to take the liability. However, if you want to detail out processes on fraud in the comments (without naming names), please feel free to do so.