There is no “silver bullet” to stopping fraud within the asset finance sector – but collectively there is a great deal the industry can and must do to reduce the occurrence and the impact of fraudulent activity. That was the message from a recent Asset Finance Connect Unconference, which identified greater collaboration and better use of data as the key challenges.
The event, sponsored by global asset and auto finance technology specialist Alfa, brought together a broad range of participants from the lending, risk, regulatory and legal communities to reflect on how the asset finance industry should be addressing growing fraud risks.
Recent media coverage of developments at Arena TV may have pushed asset finance fraud into the spotlight, but it is by no means a new phenomenon. Back in the 1990s, the €2bn FlowTex fraud rocked the German market, and there have been several high profile cases since. What’s changed is the increasing digitisation within the sector, which has both increased opportunities for fraud and provided the data sources needed to combat potential abuses.
The trade association has carried out work to identify how to move forward, given GDPR and other regulatory constraints, and share information effectively.
It is, as Simon Goldie, head of asset finance at the Finance & Leasing Association (FLA) explained, “an information data problem. It’s about sharing the right information and data, and then how you analyse it and how you understand it.” The trade association has carried out work to identify how to move forward, given GDPR and other regulatory constraints, and share information effectively.
Company culture also plays a part. As Roger Potgieter, partner in the Shoosmith finance services disputes and investigations team, pointed out, while lenders often have an established and very public way of congratulating the salesforce for bringing in new business, there is sometimes less of a focus on monitoring the progress of a contract. “How much importance does your business place on what happens on the back end on fraud, protection, fraud detection, and doing something about it when you are a victim of fraud?” Potgieter challenged. Fraud has never and will never go away, but the industry’s level of preparedness is critical.
Martin Hofmann, chief risk officer at GEFA Bank, outlined developments in Germany post-the FloTex scandal, which include the creation of an asset register routinely used by around 90% of the industry to provided what he termed a “plausibility check” on transactions. The register includes serial numbers as well as additional data which allows lenders, for example, to check consistency by showing that the serial number recorded against a particular item does match the manufacturer’s usual serial number for that category of equipment. “From our own perspective, I can say that around 75% of potential fraud cases could be prevented in the past,” Hofmann noted.
But as John Phillipou, Paragon Bank managing director of SME lending, explained, many in the asset finance sector now find themselves “tied in a Gordian knot”, partly because of regulatory constraints and also because of the competitive nature of business, which means data sharing is not as comprehensive as is required. This was illustrated in the case of Arena TV, because as soon as different lenders gathered together on site post the company’s collapse, the inconsistencies quickly became apparent.
Additionally, Phillipou pointed out that many lenders are now being challenged to do deals from cradle to grave in three to four hours, and that pace of operations opens the door to fraud.
There was widespread agreement that the most obvious route for the asset finance sector to take to tackle fraud more vigorously was the establishment of a centralised database of asset details and customer and lender information. But while the solution appears simple, the implementation is likely to be much more complex, and will only work effectively if there is universal agreement to provide the necessary data. That requires strong leadership of any such project.
It also calls for conversations with the credit ratings agencies, who may be reluctant to share what is for them competitive information about businesses they score. But the overall concensus was of a pressing need to act now, with doing nothing not an option.
Stopping fraud in its tracks
Roger Potgieter, partner in the Shoosmith finance services disputes and investigations team, outlines good practice for preventative measures:
Know your customer: Find and verify data on individuals, the business and its directors, both at the start of the contract and as an ongoing process. A fraud may not necessarily start as a fraud, but changing circumstances may see individuals seek to exploit loopholes.
Verify title: When purchasing an asset, verify the title and the background of the seller. as without title, there is no security. There need to be checks in place at the outset to understand and make sure you are obtaining good title to the asset.
Check the price paid: Verify the value of the asset before you fund it. A mis-described or overvalued asset can leave you open to fraud with a greater exposure should things go wrong.
Know your suppliers: Run similar checks on the suppliers you are dealing with to those applied to the end customer. Establish a process for what the expectations for each supplier will be if something goes wrong – will you be looking for recovery from them? Beware that some fraud does involved collusion with suppliers.
Inspect assets: Assets need to be checked, not only at the outset to ensure that the asset you are funding exists, but also as part of ongoing audits. Is that asset being used as intended, and in the expected location?
Identify assets: Labelling and plating of assets ensure equipment is not substituted. Within your business, would this work for you as an effective fraud prevention measure? And do you have the expertise that you require to deal with it? What data do you need to share with others?
Learning from your mistakes
Stephen Bassett, head of the IAFN asset finance community, looks at the role of governance and training in combatting fraud.
The most effective baseline step in preventing frauds against your organization, is simply to ensure that staff at all levels are continually reminded of how frauds tend to be perpetrated and to understand that when a fraud is successful, it threatens not just profitability and bonuses, but also jobs and sometimes even companies.
So what do you think staff have to do, to help protect both their employer and themselves? Firstly, they must not assume that any information or request they are presented with is genuine, even if it has been handed over internally. Whether it is a bank statement, a set of accounts, or a request to change a suppliers bank details, the mantra should always be, ‘…is this real?… The next question is, what could this lead to and how can I validate things? Most of the attempted frauds I have seen have been prevented as a result of staff simply using their commonsense and following through on any doubts arising.
In contrast, nearly all the successful frauds I have seen, have been as a result of someone in the process simply failing to carry their piece out effectively: by just box ticking, believing what they have seen, or been told, without any really effective double checking; ignoring or simply not seeing the warning signs; or waiving normal protocols under perceived time or target pressures.
Everyone needs to fully understand why the rules exist, and to make sure they are followed by everyone and to tighten them up when those measures look too weak.
Falsified or cloned accounts can get filed at Companies House, bank statements and ID documents can be forged. E-mails and attachments can be intercepted, while accounts can be doctored and company ID cloned. Staff really must be made aware and ever reminded, that they and their employers are actively targeted by fraudsters.
Finance companies are seen as low hanging fruit, ripe for the picking. One simple call to get some bank details changed could reap a fraudster tens of thousands of pounds, so why would they not give it a try? Fraudsters have even been known to buy reputable companies outright in order to go on a fraudulent shopping spree and once the equipment is delivered it simply disappears.
Clearly, some people will go to great lengths to get their hands on your company’s money or your equipment, but if you have been duped, don’t just blame the fraudster; you could almost certainly have avoided it, so analyze the detail of what happened to provide training material. Then once you know what went wrong make sure staff get to see how they can all be better focused on preventative measures and why protocols need to be tightened up and properly followed.