Detecting Fraud

Look for Red Flags to Detect Fraud

As more emphasis is placed on reducing the time required to process new applications, funding sources expose themselves to new and different risks.  All businesses are trying to streamline processes and make their services easier for customers to use.  These efforts may unwittingly assist fraud.  So what do you do?

Use the smell test – A gut reaction may be your best defense.  If the borrower is in too much of a hurry (“the financing we had fell through and the equipment is being delivered tomorrow”), the deal is too good to be true, or some excuse is given as to why it is impossible to check bank references or obtain other standard data, then a red flag should be raised.  Once you suspect a red flag, contact the customer and resolve the issue before funding.  This very act may discourage perpetrators.  Trust your gut.

Samples of red flags include:

• D&B report created around the time of the application.  Independently confirm reported information.  Much of the information on the report is self-reported.
• Excessive inquiries or multiple UCC’s filings within a short time frame.  Be aware of potential double financing schemes.
• Shipping and billing addresses that don’t match.   These transactions carry a higher risk of fraud.
• A large number of identical expensive items.  Always compare invoices and verify serial numbers.
• Fraudulent Financials – Too good to be true, unaudited by an accounting firm and/or numbers don’t add up or incomplete.
• Sale Leasebacks with unverifiable or incomplete information.  When considering sale lease back, confirm payment through a cancelled check matching the submitted invoice.  This will also help determine when the equipment was accepted and its true age.
• Address for vendors and borrowers that are located in known residential areas.
• Large well known companies.   Many frauds have been committed by using the names of  “large companies” i.e. IBM or UNIX.  Do not assume that you have a true branch or location.  Always confirm with the corporate headquarters that this is a true part of the organization by requesting a Corporate Resolution identifying authorized signors.
• Starter checks, money orders or cashier’s checks.  This form of advance rental payment should always be questioned

As funding sources engage new technologies to ease access to funds, they open the doors to would be perpetrators of fraud. In order to be competitive, you need to approachable and timely; however, these pressures require that lenders must proactively protect themselves.

Consider these tips:

• Physically inspect your equipment and the business location.  Tag your equipment, so that other lenders know it’s already encumbered.
• Insist on audited financials from a reputable accounting firm.
• Get a copy of the signer’s driver’s license – This provides some protection against forged signatures, particularly in states where a copy of the driver’s signature is included on the license.
• Scrutinize your vendors and brokers, as if they were your credits.
• Insist on corporate resolutions – the first time business is done with a new borrower, it is advisable to obtain either a certificate signed by the secretary of the corporation stating that standard resolutions have been adopted by the corporation’s Board of Directors or a copy of a consent in lieu of meeting signed by all of the directors. The resolution should state that the transaction is approved and that the officers are authorized and empowered to enter into the relevant documentation.
• Check the existence of borrowers and vendors – A call to the Secretary of State will generally confirm whether a corporate vendor or borrower exists. Another good idea is to require the new borrowers or vendors furnish a copy of the page of their local telephone book indicating their name and address.
• Adopt a closing checklist and stick to it – There is no excuse for taking less than the standard set of papers. If the borrower objects to signing three times, furnishing bank references, etc., then a red flag has been raised.
• Develop a Rules-Based Fraud Detection System.  Like the name suggests, a rules-based fraud detection system compares each credit transaction to a set of rules before the funding can be approved. Based on the rules, the system will then automate a response, such as approving the credit, declining the credit, or pulling the credit for manual review.
• Network with other lenders and share fraud experiences.

The time you spend taking your own steps to avoid fraud, can save your Company serious money.  Only you can decide what steps are reasonable and cost effective.  The question is not whether you can afford to take these steps; it’s whether you can afford NOT to.

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