How to spot Fraud
As an Invoice Finance Funder you are highly susceptible to fraud and it is essential that you know how to spot fraud.
Thankfully, overt fraud is rare but it can take many forms and can be difficult to detect if you don’t know what to look for. Moreover, you need to know what to do when you suspect this is the case.
What is Fraud?
Fraud is being committed when there is the intention to gain an advantage and to avoid detection.
When this is the case you have to look at whether its a sustained activity or a one-off, and whether there are more parties involved or it is a ‘lone wolf’.
There are various types of fraud, and they range from errors to overt fraud. An overt fraudster is more likely to have a planned exit and can be very good at covering their tracks. Luckily this is relatively rare in the UK, but it’s important not to ignore it.
And remember that even nice people can be desperate, and desperate people will do desperate things to get out of a desperate situation, so as a funder you have to be able to look behind the curtain to know what’s really going on.
Types of Fraud
In the Invoice Finance context there are seven types of Fraud to look out for.
The two main types of fraud are:
1. Fresh Air Invoicing
2. Suppressed Credit Notes or Write-Offs
Then there are three further variations on a theme, which are harder to spot:
4. Banking Cash & Teeming and Lading
5. Sales Ledger Report Manipulation
And finally there are sophisticated multi-party frauds:
6. Cross-firing within a group
7. Debtor Collusion
What to look out for
Each type of fraud has its own warning signs, but here is a non-exhaustive list of red flags for fraud:
- Round amount invoicing
- Big credit notes or journals
- Differences in monthly reconciliations
- Expanding debt turn and more old debt
- Invoicing out of line with the norm
- Short payments from customers
- Delayed payments from customers
- Poor results from Debtor verification
- Receipts out of sync on bank statements
- Reluctance to comply with repaying direct cash
- Inconsistencies from one aging to another
- Invoicing that has a high degree of dilution or in-built error
- Complex groups with several funders
- Non-standard transactions such as loans from customers.
Danger at commencement
With all types of fraud, there is a high danger at the start of a new client relationship. You don’t yet know the company and their business, and it will take time to find out their practices and norms.
They may be signing up with several Factoring Companies at the same time, and you don’t know if your initial payment goes to the right place. They may draw down on both the Invoice Finance and the Supply Chain finance on the same debt.
Every business has their own way of getting and keeping customers, and it’s essential that you find out as soon as possible what is normal and what is not. When they have practices that are very different from the industry standard, it should be a red flag for you to investigate further, even though in most cases there will be no fraud.
What to do when you suspect fraud
When you suspect fraud it is important to approach the issue sensitively. Do not ignore it but stay calm and start to investigate.
You must suspect all, but accuse none (until you have proof). The risk of tipping off a money launderer can have serious consequences for the Finance Company staff.
You want to try and build a body of evidence, confidentially. Always discuss it with your line manager and agree on a strategy.
And when you’re ready to confront the Company, it’s best done through a third party.
Thankfully, true, intentional, premeditated fraud on Invoice Finance Companies is relatively rare in the UK. However, stupid, desperate people doing stupid, desperate things is, unfortunately, more common.
How can we help?
Credebt have many years’ experience in dealing with cases in all industries, and when you suspect fraud, we suggest you contact us immediately to get us to do a Free Debtor Collateral Review.
This can be done under the guise of a regular review, and because of our extensive experience, we know how to handle this sensitively and without causing unnecessary concern.
We have spotted several cases of fraud that were missed or unconfirmed by the firm’s auditors, IBR providers and other firms carrying out audits, so even if you have done your own investigations, it is well worth getting us involved.
We can also provide a day’s training to your staff on How to spot Fraud. This has been proven to be very effective in getting your staff better at spotting the signs of Fraud and knowing what to do next.
Call us on 0845-6385256 or email firstname.lastname@example.org