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The top 5 signs of fraud

Wed 21 Nov 2018

How to spot a fraud

Leigh Lones, Director EQ Riskfactor, North America discusses the top 5 signs of fraud. This is from an article published in the October issue of The Secured Lender.

Leigh Lones, US Director of Equiniti Riskfactor, looks at the Top 5 signs that show something is going wrong with a credit facility, how to spot them early to limit potential losses, and the role robust controls, systems and staff training have in mitigating risk.

1. Fully drawn facilities.

There are many good reasons why a business may need to regularly draw everything that is available to them. Periods of fast growth for example or the fundamental cash flow dynamics of their industry. Temporary labor suppliers working on tight margins borrow heavily to meet weekly payroll costs for example.

However, heavy utilization may just be to cover losses, and where this isn’t enough, frauds can start. Where a fraud is in progress, full utilization is a common feature, with new borrowing used to repay falsified invoices.

2. Increased Credit Notes and fall in collections

This can be a sign of deteriorating product or debtor quality, which is concerning in itself. The underlying causes should be carefully assessed, as the real reasons could be fictitious invoices being credited out before they are overdue. Typical levels of credit notes and collections can be assessed over time for each client and benchmarked against other similar clients in the same sector. Deviations should be investigated, and individual credit notes checked.

3. Late submission of monthly returns

Frauds tend to come in a limited number of forms. In addition to false invoicing, these will include diverting collections to another account, moving aged balances into current months, non- submission of credit notes and misallocation of receipts. Because one knows that sales ledger manipulation will be spotted when the month end returns are submitted, the fraudster will do whatever they can to delay submission.

Timescales for submission must be clear and enforced and particular care taken in the analysis of late returns.

4. Cancelled or delayed field exams

The Field Exam gives the lender the opportunity to see at close quarters how their Client’s business operates and to sample check transactions. Because of the depth of the testing and the need to see original documents the fraudster has every reason to think he will be uncovered. 

Field Exams are a powerful deterrent to a fraud starting, and the tests are designed to spot one in action. So, the fraudster will do what they can to avoid it, or thwart it while it is in progress.

Look out for last minute cancellations, unavailability of key files or people on the day or attempts to divert attention to irrelevant areas.

5. Staff turnover or change in management behavior

Generally, it is the business owner who will start the fraud and make sure it continues. But usually they cannot do this without help. Others with no stake in the business – become involved. Often, they will leave rather than be drawn into criminality or be dismissed on a pretext if they refuse to help.

As the fraud continues – probably closely linked to trading losses and creditor demands – pressure mounts and management behavior will change. Further staff turnover may follow, but watch out for complaints, lack of information or cancelled meetings. Often behavioral signs are more telling than what the reports are saying.

To successfully combat the risk of fraud losses, the lender needs well trained and experienced staff but above all systems to spot unusual trends in client facilities. An overarching set of documented risk polices, including reporting requirements, escalation procedures and management oversight is also essential.

Download the article from The Secured Lender's Risk issue