Much still needs to be done to combat the ever growing problem
of leasing fraud, as this survey of European leasing associations
demonstrates
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Despite fraud being on the top of Europe’s leasing market’s
agenda, it appears that a number of countries lack the necessary
resources and manpower to effectively monitor and address the
problem.
Yet fraud risk management is the key to not only loss
prevention, but also sustaining the healthy existence of individual
leasing companies and country leasing markets alike. Harald
Podoschek, a senior manager at KPMG Austria, estimates that if a
leasing company suffers the “misappropriation of an asset”, then it
needs at least 30 profitable leases to compensate for that
loss.
The leasing industry faces fraud problems that are uniquely its
own. Jan Haraldsen, director of the Finansieringsselskapenes
Forening (Norwegian Leasing Association), says: “The lessor does
not have the same control over the equipment as an ordinary hirer
does.” Furthermore, the fluidity of leasing and its reliance upon
physical assets makes it an easy target for the misuse and abuse of
sought after and valuable equipment.
One of the largest fraud cases since the Second World War –
which involved over 100 banks and leasing companies filing a suit
in 2000 against the German state of Baden- Wuttemberg, and which
resurfaced just last month – demonstrates the vulnerability leased
assets have to being misappropriated.
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By GlobalDataAs creditors, the plaintiffs were victims of driller
manufacturer, FlowTex Technologies, signing thousands of leasing
contracts in the 1990’s – worth about €2bn – for drilling
equipment, of which only a marginal amount actually existed. The
case, which has just been finalised with no appeal allowed,
resulted in the plaintiff’s claim of €1.1bn in compensation being
dismissed for not have enough supporting evidence.
Types of Fraud
As is the case in many financial sectors, fraud in the asset
finance industry is multifaceted, its perpetrators are elusive, and
it often changes in its form and nature.
Podoschek highlights three different types of fraud: financial
fraud, which refers to fraudulent financial reporting by the
lessor, lessee or supplier; asset misappropriation, which is
conducted by an employee of a company linked to a leasing deal, the
lessee or supplier; and corporate misconduct, which refers to tax
fraud, commercial or public bribery, and kickbacks.
However, all of the leasing associations surveyed for this piece
report that lessees are the main perpetrators of fraud, mainly
through misappropriation of an asset (where the lessee sells the
asset without consent from the lessor), multiple financing of the
asset, and financing of non-existent assets. Other cases of fraud
by lessees involve stealing the assets, providing false company
data, and unlawful disposal of used assets. The Czech Leasing and
Finance Association recorded internal fraud among lessees as one of
the most reported examples of fraud. The Norwegian Leasing
Association identified a common fraud as being where an honest
company is taken over by new directors who use their company’s good
reputation to win a leasing deal, and then having done so commit a
fraud.
Supplier fraud
Christine Munch, director of the German Leasing Association,
says that in Germany fraud either involves “the lessee selling
leased assets on to a third party (usually a foreign country), and
the double or multiple financing of the asset with the help of
dummy/fake firms”, or ‘value frauds’, which occur through
cooperation with a supplier, often involving “either scrap iron
and/or accident objects which are sold as new objects to the
leasing company”.
Similarly, the Norwegian Leasing Association says it has
experience of suppliers and brokers switching good quality
equipment with low grade ones without informing the lessor.
Identity fraud, which is central to all financial sectors, also
plays a significant role in the asset finance market. Jri Pulz,
secretary general of the Czech Leasing and Finance Association,
says this form of deception is the most common form of fraud.
When looking out for fraud, Podoschek advises lessors to be
aware of: first payment defaults, accounts that default within a
few months, the unavailability of the lessee, and accounts with
more than three missed payments within six months of reporting.
Raiffesien Leasing in Austria reports that the most common
frauds in the CEE are false balance sheets, false identity cards
(particularly in Croatia and Serbia), and false salary
statements.
Trends associated with fraud
Around 95 per cent of respondents cannot specify what types of
leasing companies, whether big or small, are affected by fraud. “In
our experience it is more important what kind of asset the company
is dealing with than the size of a company,” Munch says.
Similarly Wurger says that both big and small companies are
affected by fraud, particularly those with private customers from
the Balkan region, such as Croatia and Serbia, who tend to reside
in the Central or Western European countries for a short period of
time.
The Czech Leasing and Finance Association was the only
respondent which specified the types of leasing companies affected
by fraud. It highlighted them as being those “universal lessors and
or providers of consumer credit not specialised in some types of
commodities”. Pulz added that software, good cars and slot machines
are the most vulnerable assets.
Throughout Europe, the majority of asset finance fraud occurs in
relation to wheeled assets, particularly passenger cars. According
to the website of the Finance & Leasing Association, which
declined to comment for this piece, its motor finance members lost
a total of £15m between 2003 and 2006.
Despite the lack of specific data on commercial leasing fraud
losses, or the sectoral costs of fraud prevention, the FLA
calculates spending £500,000 annually on funding policing within
the UK finance fraud sector.
Fraud detection and management
Surprisingly, about 95 per cent of respondents say that fraud is
not on the increase. But all respondents admit that they are unable
to determine what the current levels of fraud are in their
respective leasing markets, which demonstrates the lack of data,
research and analysis of the problem – a result, perhaps, of the
way information is gathered and processed.
It appears that for most leasing markets, research, analysis and
monitoring of fraud is not a pre-emptive measure, but merely
something which occurs after the event has taken place. All the
associations and companies say that they have not carried out any
research into fraud, and it seems that on the whole the carrying
out of fraud detection and prevention is up to individual companies
and police.
Munch says that the German Leasing Association is planning to
set up a forum in which members can exchange their experiences on
fraud prevention, and also set up a process of systemising fraud
cases in order to be able to detect fraud earlier.
The Czech Leasing and Finance Association appears to already be
doing this, according to Pulz, who says that to tackle fraud the
association “exchanges information on fraud and fraudsters” and
provides “corporation with debt databases, an early warning system
and general exchange of information on types of fraud in the
framework of CLFA”.
Reinhard Wurger, manager of car sales at Raiffeisen Leasing,
says the company has two main ways of gathering information on
fraud: through a fraud prevention system that gathers data on the
customer and is integrated into the acquisition process, and
through a claim management process.
But Wurger admits: “We have not done research into fraud
specifically, we learn by analysing fraud cases. We try to analyse
cases of fraud and collect information from other companies to make
a fraud prevention system. I think we will be able to give this
system to other leasing companies.”
The cost of fraud
Raiffeisen Leasing approximates that fraud costs its business
€500,000 per annum, and about €3m in total for Austrian leasing
companies, although this excludes cross-border leasing to Southern
Europe.
Furthermore, the majority of the leasing associations surveyed
say that government and intergovernmental bodies provide little to
no facility for the recovery of assets or fraud prevention.
The only exception appears to be in the Swiss leasing market
where fraud cases are not only investigated by public authorities
but, according to Markus Hess, manager of the Swiss Leasing
Association, “in the case of change of vehicle-keeper the
authorities are obliged to ask for the consent to deletion of said
registration lessor”.
As a result, the picture across Europe is that catching
fraudsters is still somewhat of an enigma in both mature and
immature leasing markets.
While there appears to be a fairly high success rate in terms of
finding fraudsters and getting compensation in Germany, because
“many of the companies are sensitised against fraud”, Munch says,
“there are nevertheless many cases of fraud which are not
recognised early enough”.
Meanwhile Wurger says that about 20 days per year and €30,000
per annum is spent on fighting fraud with a success rate of only 30
per cent, and Haraldsen says that the success rate of getting
compensation in the Norwegian market is very poor.
Similarly, while Hess approximates that there is a 50 per cent
success rate in finding fraudsters and getting compensation in
Switzerland, there are still a lot of unknown cases where the
“lessee pays rentals or a purchase price to the lessor after he had
already sold the leasing object”.
Aside from the role that senior management plays in determining
policies and strategies for fraud risk identification, detection
and reporting, staff training and awareness relating to fraud
prevention is an essential ingredient for a leasing company.
Podoschek says that core business processes should involve
remediation of risks through control optimisation, and
identification of fraud types, conflict of interests and red flags.
The latter refers to monitoring a new lessee/manufacturer or
dealer, a sale and leaseback transaction, and also the potential
existence of tax fraud.
About 80 per cent of respondents say that providing information
to employees is an important part of fighting fraud.
Wurger adds that installing a fraud manager and implementing
fraud systems via IT services are another important part of this
process, while Marian Tibensky, director of the Slovakian Leasing
Association, specifies prevention of double leasing through
implementing strict registration of leased cars as the key to
preventing vehicle fraud.
