Contract surety bonds are a requirement for nearly all state and federal contract work. But exactly because they’re so prevalent, scammers are taking the opportunity to trick contractors into buying fake bonds.
Fraudulent surety bonds, because they must be mailed, constitute mail fraud and are considered a serious federal crime. One recent case saw a 10 year sentence for a Maryland man. This means you need to be on the lookout when getting your surety bond to keep your business safe.
What can happen if I buy a fraudulent bond?
While ultimately it’s the bonding agent that faces stiff fines and jail time, your business will also suffer negative consequences. The main thing is that until you acquire a legitimate bond, all work your company is engaged in needs to stop. This can lead to enormous costs and can do serious harm to your relationships with your customers.
But how can you avoid being duped into buying a fake bond when even large and well-known bonding agencies and insurance companies often have their names used in scams?
1. Begin with some background checking.
You’ve got to begin searching for a surety bond by playing detective a bit. Even if a bond has a large and well-known underwriter, that doesn’t mean the underwriter hasn’t been tricked, as well. Digging a bit deeper is necessary.
The Treasury Department’s surety bonds page is a great place to start. There, you can find a list of approved companies offering surety bonds. If the company you’re investigating isn’t listed, you should be extremely skeptical. Of course, you can always avoid the hassle of investigating a surety company by working with a reputable and proven agency.
2. Look out for “bonds” which require upfront payments.
If the bond requires you to pay the full amount upfront, be aware: that’s not how surety bonds work. You’re using a bonding agency so that you can pay a fraction of the full bond amount in exchange for their providing up to the full amount if a claim is filed (though it should be pointed out that you’re still ultimately responsible to pay the amount of the claim). If they want the full payment right away, they’re not the real deal.
3. Be Wary of High Rates.
In the same way you need to be on the lookout for upfront payments in full, you need to be aware of typical market rates for a bond. Know the norm, and you’ll be able to catch anything fishy right away.
Bonds charge a percentage of the total bond amount, called a premium, and this is based on your credit and finances (more on that in the next section). Rates are typically in the low single digits. For smaller bonds, you’re not going to be able to get bonded with bad credit. Larger bonds, by contrast, focus on your financial status more broadly. In either case, if the bond has high rates or claims that your credit or finances don’t matter, it’s likely fake.
4. If they don’t ask questions, you should.
If it wasn’t clear already, applying for a bond is a bit like applying for a loan. So if the process differs significantly from that of a bank loan, it could spell trouble. For contract bonds over $350,000, the bonding agency should be requesting a variety of documents from tax returns and credit information to general business financial statements. If they don’t ask for these kinds of documents, they’re probably not legitimate.
It All Starts with Knowledge
The best way to avoid being cheated and harmed while finding a contractor surety bond is just to be familiar with the process. If you know how surety bonds work and what to expect during the surety bond process, you should be able to detect when something’s not quite right.
It also doesn’t hurt to work with-well respected surety bond providers. For more information on the overall surety bond process and how it works, check out JW Surety’s helpful surety bond videos.
Have you ever encountered a fraudulent bonding company? Let us know about your experiences in the comments below, so we can better understand how fraud is affecting the industry.
Eric Halsey is a historian by training and disposition who’s been interested in US small businesses since working at the House Committee on Small Business in 2006. Coming from a family with a history of working on industry policy, he has a particular interest in the Surety Bonding industry and loves sharing his knowledge for JW Surety Bonds.