A common fraud affecting the leasing industry is the double financing of assets. Martin Ward finds suppliers, brokers, and introducers may assist in perpetuating the fraud.
Readers will recall the infamous case in 2007 of GEPP Realisations Limited, which created hundreds of fictitious invoices for machinery that didn’t exist or was already financed. GEPP fixed bogus magnetic serial numbers to the machinery to dupe the financiers’ auditors.
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GEPP committed the fraud through sale and lease back/hire purchase back of assets in their possession, and by provision of convincing false documentation.
So how can you protect yourself from double financing?
Know your customer: The practical step of meeting your customer and obtaining proof of identity will help avoid fraud and money laundering.
Thorough credit checks should be completed regularly, along with a review of available accounts. Customer arrears should be monitored closely, with regular spot checks.
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By GlobalDataKnow your supplier: Suppliers should provide original title documents evidencing ownership of assets before they are financed, which will preclude the same invoice being used to obtain finance later. Suppliers’ assets should be price checked against the market to ensure they are not inflated.
Security: Significant lending should be supported by security. As an example, chattels mortgages allow title to an asset to be transferred to a financier on the basis that such title is transferred back on full payment. To be perfected, a chattel mortgage should be registered at Companies House (incorporated entities), or the Bill of Sale Registry (individuals).
A perfected legal mortgage is an effective form of security, preventing sale or remortgage of the secured asset, and defeating title claims of the bona fide purchaser without notice of the financier’s interest.
A fixed charge attaches to the charged asset, allowing the financier to prevent the sale of the asset without its consent. It also allows the financier to sell the asset and claim the proceeds in priority over other creditors should the customer default.
Registering your interest: Registries work well in the industry to avoid double financing, especially with HPI for motor vehicles, and the International Registry of International Interests in Aircraft Equipment for aircraft. The proposed registry for yellow plant is welcomed, and universal use of the registries by financiers should be encouraged.
Inspecting and auditing: Inspecting the asset on delivery will ensure the asset exists. Auditing (or touching) the asset ensures that the financier knows that the assets remain in situ throughout the life of the agreement.
Plating/labelling: Although plates can be bogus, as in the GEPP case, plating and labelling remains an effective way of avoiding double financing. It also allows the financier to identify its assets quickly in an insolvent situation.
Martin Ward is an associate at Shoosmiths
