How to prevent factoring and invoice financing fraud during the current COVID-19 crisis

In the current period of economic uncertainty, increasing pressure on businesses makes fraudulent activity a pervasive risk for lenders – a troubling trend not only for the company (s) involved, but also for the economy as a whole. In particular, corporate fraud has the potential to deter banks from lending – a dangerous outcome during a global crisis that has severely constrained liquidity and limited corporate funding.

Each year, fraud costs the global economy more than $ 5,000 billion. However, fraud by companies accessing asset-based financing solutions, especially those that rely on invoices, such as factoring and supply chain finance, can be particularly difficult to detect. . It is not uncommon for these fraud cases to go undetected for years. It emerged last year, for example, that the managers of a UK electrical wholesaler submitted false invoices from 44 bogus debtors to their factoring company for £ 550,000 in the 18 months prior to their capture.

However, by implementing the right processes and staff training, coupled with sophisticated fraud prevention technology, letter carriers can remain vigilant and detect signs of human and data fraud as it occurs. they arise.

Circumstantial and premeditated fraud

Factoring fraud can be broadly divided into two categories: circumstantial and premeditated. The former usually arises when struggling businesses urgently need cash, but the necessary funding cannot be made available. As a result, opportunistic entrepreneurs may produce an invoice slightly in advance and submit it to their letter carrier for prepayment.

This type of “pre-billing” fraudulent behavior can be incredibly difficult for lenders to identify. And, while it can be committed by a borrower intending to legitimately increase the bill, it can quickly develop into a much bigger “fresh air” billing problem, as the business owner will likely continue to do so. faced with the same underlying cash flow problem.

Unlike circumstantial fraud, premeditated fraud is a form of organized crime. Here, the criminals are targeting factors by setting up bogus businesses to represent the limited cash provider and its customers. To present these companies as legitimate, fraudsters create false invoices to extract advances from the factor; they then use that money to “pay” the bills, effectively recycling the mailman’s money, generating the emergence of real cash flow and a growing business. Everything is fine until the scammers try to “kill”, take the money and disappear.

Prevent factoring fraud

Fortunately, all types of fraud have telltale signs, it’s just a matter of putting in place the right processes, technology, and training to properly detect and interpret these signs.

An effective first step in avoiding fraud is to tackle what can often be the weakest link: the human factor. Prospective customers should be carefully screened and undergo the required KYC and AML checks. Once integrated, clients should be audited regularly to ensure that their situation has not changed to the point where they may be tempted to commit fraud.

Verifying invoices is another key step that can protect lenders. The verification itself could involve a physical examination of documentation or electronic invoicing, although, of course, it is not always realistic for lenders to verify all invoices. Sampling is therefore a common solution, with lenders often using verification by value and by payment terms, while application of Benford’s law and random sampling are two other methods.

Sophisticated factoring technology, increasingly deployed by lenders, also offers additional protection through data analysis and trend monitoring. A large volume of new accounts receivable or a significant increase in sales can all be telltale signs to alert staff. Again, workforce can be a strain on these controls, and assigning risk scores can provide teams with a less tedious way to track trends.

Finally, the establishment of additional lines of defense, including the introduction of the “four eyes” principle and rigorous audit follow-up, can provide useful protection against collusion and human error, which is particularly important. important when teams are managing ever growing portfolios.

There is no doubt that the current pandemic and the resulting pressure on businesses is creating an environment conducive to fraud – lenders need to be prepared. Factoring is particularly vulnerable, but advances in receivable finance technology, combined with proper training and realistic controls, can ensure that fraudsters do not fall through the cracks.


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