The invoice finance sector is no stranger to client perpetrated fraud. The nature of the lending and the fact that invoices are easier to manipulate than a tangible asset means that whatever the due diligence lenders do when taking on new clients, they are always susceptible to fraud and must be alive to warning signs which arise during the client relationship. The purpose of this article is to remind lenders of the practical tools available to them to help in detecting fraud. Early detection means early action and most importantly it means early recovery.
The many faces of fraud
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In order to better detect fraud and take action against fraudsters, it is important to consider the motivation of those individuals and the common types of fraud perpetrated in this sector.
Invoice finance clients who commit fraud against their lenders generally fall into two camps: those who intend to abuse their facility from the outset and those who turn to this in times of increased financial pressure, possibly with the intention of reimbursing the lender when they are back on their feet. We’ve seen an increasing number of ever more ingenious types of invoice fraud while working with such lenders, the most common of which are:
‘Fresh-air’ invoicing: notifying invoices which are inflated or which have been created by the client even though the relevant services or goods have not been provided;
Direct banking: where the client’s customers make payment into an account other than the trust account and the client does not notify the lender of the payment or transfer it into the trust account;
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By GlobalDataDouble funding: the practice of obtaining funding for the same suite of invoices from more than one lender;
Disappearing acts; clients who draw down from their facility once or twice and then are never heard from, usually because they have moved onto the next funder.
Practical tips
Detecting and acting on fraud at an early stage makes a significant difference, not least so that a stop can be put on the facility limiting the lender’s exposure. All invoice finance lenders have their standard terms and conditions which when implemented at the right time and in the right way can be very useful in the fight against fraud.
Information requests and audits
All lenders should have the ability to request information from their clients, regardless of whether there’s been any breach of the facility, both in terms of the client’s general financial position and in respect of the invoices which have been funded.
A classic early warning sign of fraud is the failure to provide information which is required under the facility on a monthly basis. For example, clients undertaking direct banking may purposefully withhold their bank statements to hide this. Lenders should monitor the provision of information and not be afraid to use their contractual powers to verify the book debt. Lenders should utilise their powers of spot audits and maintain regular quarterly or biannual audits which if undertaken correctly and firmly should interrogate the performance of the debt. Lenders should check purchase orders and proofs of delivery and ensure that only invoices from the actual client are being assigned and not that of a sister or similarly named company. The best way of checking this is by ensuring the registered company number of the client has not changed.
Demands
Where a fraud or potential fraud has been identified, demands should be made on the client as soon as possible in order to keep the client under pressure and to stop the fraud in its tracks. Making demand on the director pursuant to his or her personal guarantee is also important. Where lenders only require limited guarantees from directors, they should also look to obtain an unlimited indemnity or fraud warranty to cover serious fraudulent actions and in order to pursue the director for the full amount outstanding. Where the lender is considering maintaining and repairing the relationship with the client, demands can also be a useful tool in renegotiating the terms of a facility.
Disclosing and reasserting title to the debt
If a facility is confidential and there has been a material and identifiable breach, one of the first steps we recommend is disclosing on the facility immediately. This includes a blanket notification to the client’s customers as to the existence of the assignment to the lender, the lender’s title to the debt and warning the customers that if they make payments to the client directly this will not discharge the debt.
Even if it is a disclosed facility, urgent letters should go to all outstanding debtors reasserting the lenders title to the debt.
Collect out
Once notice has been given to the client of its breach, the lender should proceed to an urgent collect out of the unpaid amounts from the client’s customers. This is also one of the most effective ways to unearth or gather evidence on the fraud. While there will always be customers that seek to take advantage of the situation or that are colluding with the client, by urgently pursuing and engaging with the client’s customers, we always collate helpful and important evidence against the client themselves both for the use in future legal proceedings and as a powerful negotiating tool.
It’s a lot more difficult for a client to claim, for example, that its direct banking or invoice manipulation was a genuine mistake or one off when faced with a litany of customers advising that they have never placed the relevant order or were told by the client to pay into an account other than the trust account.
Catherine Wasilewski is a solicitor at Turner Parkinson LLP
