Contractors and Property Managers Beware of the Latest Scam: the "Vendor Compliance" or "Approved Service Provider" Scam
[Originally published: May 25th, 2014]
Over the years, there have been several kinds of misleading solicitations targeted at businesses. What these solicitations have in common is that they offer to provide services at high prices that businesses can easily do for themselves for free or at minimal cost. They can charge a business to provide the same information to the solicitor that the business has to submit anyway (such as corporate filings); or to be sent printed copies of information available for free online (such as labor law postings); or to supposedly update a directory listing (the "Yellow Pages scam").
These types of scams are usually one-off, and typically involve just the solicitor and the business. However, one new type of scam solicits a business and then, if successful, uses it to rope other businesses into paying for a questionable service. This is the "vendor compliance" or "approved service provider" or "credential management" scam. This solicitation offers to 'monitor' contractor license and workers comp insurance status - both of which can be done for free online - or other notices that are already required to be provided free by law. These solicitors may also offer to provide background checks, but do not represent themselves as stand-alone background check services, and so are just charging a premium to businesses that can use one directly.
Here's an example of how it works: here is a scan of an actual letter sent by Pro Compliance, Inc., which uses the logo of and represents to be sent from Pernicano Realty & Management, a property management company. This letter was sent to all of the licensed contractors that have performed work on Pernicano properties. It demands a "slight fee" be paid to Pro Compliance "within 20 days of your receipt of this letter" in order to be allowed to continue to conduct business with this customer.
Also in the letter, the contractor is told that they need to contact Pro Compliance directly to find out the amount of this fee. When they call, the contractor is told that the fee amount depends on the customer; and for a vendor of Pernicano Realty, that cost would be $100 per year - regardless of whether any new work is ordered. (Some solicitors may also ask for a credit application before quoting the fee, so they can use that confidential information to determine how much a vendor can afford.) Further, this solicitation letter attempts to entice vendors by stating that paying the fee provides "opportunities with other companies looking for approved companies," but doesn't reveal that the solicitor usually charges the contractor/vendor another fee for each additional property management company and HOA that the solicitor has roped in to approving their vendors. And since the solicitor isn't adding any value beyond what they're already doing for the first customer, this is a blatant pay to play scheme.
Pro Compliance represents itself as a "vendor compliance service" for property management companies, supposedly providing value by charging to 'maintain' insurance and license credentials that are available at no cost either automatically from the contractors' insurers, or as public information from online databases. Yet nowhere on their website do they make any legal disclaimers or warranty the validity of the information they provide; and in fact they specifically refuse to guarantee their Vendor Screening Process: "We can't possibly know the work or quality of the service your vendors provide." But by contract, a property manager or HOA is restrained from being able to hire or use any vendors other than the ones who have been willing to pay the solicitor. And eventually, as property managers become more removed from the approval process, they have no way of the verifying the thoroughness and objective value (rather than financial incentive) that led to a vendor being approved - other than by performing the due diligence they needed to before the solicitor came along.
As such, the approved service provider or credential management scam represents a new and dangerous twist on the other solicitors that represent themselves as experts but actually just charge hefty fees for junk services. Because those other 'services,' while definitely unethical, can technically be legal. But by involving other businesses in a pay for play scheme, the vendor compliance solicitors may also be engaging in illegal restraint of trade and violating antitrust laws.
This article may not adequately summarize all important aspects of this topic. If you have additional information or corrections appropriate to this topic, you are welcome to email them (with supporting documentation) to firstname.lastname@example.org.