Identity theft continues to be a growing problem nationally and globally. Many businesses especially financial institutions and creditors have facilitated identity theft when they unknowingly conducted business with people who used false identification.

There are often two victims-the business and the legal person whose identity was misused. While the immediate impact to both is often financial, such fraud facilitates additional crimes and victimization that can take years for the victims to learn of and resolve. Most often we hear of the consumer victim, while the business victim is renounced. A new law, the Red Flags Rule, was designed to help businesses and consumers from becoming victims of identity theft.

Do you bill your customers? If so, you are covered under the Red Flags Rule, which the FTC will begin enforcing on May 1, 2009. The FTC has already granted a six-month grace period to give small organizations in all sectors—private, public and volunteer an extended period to comply.

Any sole proprietor or organization that bills a business or consumer customer is subject to the new law according to a recent clarification offered by the FTC.

Financial institutions and creditors are broadly defined in the law. The expansive definition of creditor under Equal Credit Opportunity Act (ECOA) says any entity that bills a customer after products or services are delivered, even in the absence of finance charges or installments, is a creditor regardless of size or sector. The ECOA definition encompasses many small businesses and professionals such as doctors, lawyers, consultants, contractors and other merchants that deliver goods and services and bill their clients. A medical practitioner that submits claims to health insurance carriers on behalf of patients is included too.

The law is intended to reduce identity theft by mandating that organizations classified as financial institutions or creditors authenticate the identity of those who open a new account or who request to change an existing account. Accounts established in name of a consumer or business victim can haunt the victim by damaging their credit and ability to conduct personal or business transactions smoothly and safely because of inaccurate financial, health or character records blemished by an imposter.

What are your choices if you bill customers? Either accept payment in advance or upon delivery, or comply with the Red Flags Rule.

What compliance is required? Fortunately the new law is risk based, meaning that the level of compliance depends on the nature of the business and the risks involved. The new law is not intended to impose a significant burden on small businesses. The major compliance steps are simple.

1. Identity the steps your business will take to authenticate the identity of a new or current client? What "Red Flags" will you use to identify fraud? How will the business handle a suspicious new account or an account that is determined to be fraudulent?
2. Put your policy and procedures in writing.
3. Train your employees on the policy and procedures.
4. Review the identity theft prevention program annually, and revise it as necessary to keep current with changing threats in your business.

By complying with the law at a level that is reasonable and appropriate for your business, you will not only prevent innocent people from becoming victims of identity theft, you will also be minimizing the related risks and liabilities to your business, which include financial loss, legal and regulatory actions, fines and penalties, customer complaints and lawsuits and bad publicity.

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