Phoenix Company Online Reputation Manipulation
This article looks at online reputation management with microtask workers for phoenix companies. The article includes an example from an Australian firm that appears to be attempting online-search-manipulation for their company name in order to bury a negative report about their past activities.
The phoenix that rises from the ashes of a bankrupt company to scam another day
Australian Securities and Investments Commission (ASIC) defined phoenix activity as:
…the fraudulent act of transferring the assets of an indebted company into a new company to avoid paying creditors, tax or employee entitlements. The new company, usually operated by the same director, continues the business under a new structure to avoid their responsibilities to their creditors.
In simpler terms, a phoenix company is a business that is set up in place of the failed company so the directors can continue to trade without taking on the debts, obligations, and responsibilities of the failed company.
When phoenix companies are set up repeatedly, and with premeditation, the activity is illegal in Australia and many other countries. The internet is still catching up to this kind of scheme. There are currently no measures in place to stop these companies from hiding their previous activities. Anyone familiar with blackhat search engine optimization (SEO) is free to hide the activities of the previous company and continue questionable trading practices.
Why people use the phoenix business setup
A phoenix company gives the organization, and directors, many advantages. If a company doesn’t have to pay you for services, it can underbid on every contract to win jobs. That’s a distinct competitive advantage in any market.
Since the directors are not personally liable unless they’ve done something legally wrong, the company can also shirk its environmental obligations, not pay employees, and avoid the payment of taxes. All of these combined activities let them conduct business with very little capital outlay or expenses.
With no plan to ever pay for goods and services, or taxes, the directors are free to make any promises they like to unaware customers in order to secure their business, without the intention of delivering on any of the promises made. The money from these customers is usually funnelled into other channels so it cannot be recovered by creditors or enforcement officials. The customers are cheated out of large deposits and payments because the bankrupt company doesn’t have to fulfill on its obligation to deliver the requested goods or services.
The directors are then free to enjoy an extravagant lifestyle with the fruits of their "labour". They then set up a phoenix company under a similar name, and do the same thing again. In the worst cases, this activity goes on unchecked for decades.
The harm to society from phoenix company activities
The phoenix scam causes harm on many levels.
A report for the Fair Work Ombudsman by PricewaterhouseCoopers puts the overall cost of phoenix activities at between $1,784,338,743 and $3,191,142,300.
After spending money on legal help, victims usually find that they have no recourse.
Employees, contractors, and suppliers to phoenix companies suffer the same losses. Employees also miss out on benefit payments that impacts them into old age.
The financial loss is usually accompanied by stress and frustration, which can negatively affect the victims’ health. They are then placed into the medical system which is a further burden to themselves and healthcare.
Blackhat search manipulation can help phoenix companies hide their previous record so they can continue their illegal activities
Below is an example of an Australian company apparently using a technique that engages microworkers to try and change the search results for its reputation management. If you want to learn about it in more detail, please first read our other articles on Microworker Search Manipulation and Blackhat Online Reputation Management.
How to protect yourself from phoenix companies
The first step in protecting yourself is information and thorough due diligence. If you search for a company name, make sure you go well beyond the first page of Google. You should also search for variations on their name and any of the directors and employees you know about.
Directors of fraudulent companies will often register a company with different incorporation endings, for example: ACME Inc vs ACME LTD vs ACME PTY LTD. All of them use the same name, but under the law, they are completely different corporations with their own sets of liabilities. Pay close attention if the name on cheques or invoices ever changes in this fashion. Also be aware if they try to solicit credit under one variation but pay you out of the other. This is a common scam where the company receives money under the Inc. company but takes on all liability under the LTD version. The LTD then goes bankrupt while the Inc. company holds all the assets safe and sound.
Every business in Australia has a unique ABN or ACN number. The numbers are unique to the company and should match the company you’re dealing with. When searching ASIC, go beyond just the company numbers. Do general searches which indicate de-registrations or liquidation sales. You should also consider doing a person search that lists all the companies someone has been involved with, and their status.
While the tax office keeps a watch list of known offenders, they cannot release the list due to privacy laws. That means the onus to protect yourself falls squarely on you.
If you’re doing business with an Australian company, you can download the ASIC Business Checks app for your smartphone or tablet. You can use the app to get a good start but don’t rely on it as your only source. Con artists are very good at manipulating the system. Go beyond ASIC and do a thorough check into the company and directors. Some companies are registered to frontmen, like pensioners or family members. Make sure the company and its directors are who they say they are.
We could write ten articles on how to protect yourself against the phoenix company scam but that isn’t the objective of this article. At Vital+Vectors, we’re focused on technology and search.
What the search engines can do to help
As with all fraud, the way to stop it is to remove the financial incentive. If search engines want to help with this kind of activity, they need to take back control of their search results and eliminate the effectiveness of microtask search manipulation and click through fraud. Only by stopping the effectiveness of click through fraud will the incentive to engage in it stop being a viable option.
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