ing and identifying fraud on an ongoing
The client is obligated to provide cer-
tain information as part of the facility.
When used correctly, these can be vital
risk triggers, and they include:
w Month-end reconciliation.
w Receipt of bank statements.
w Receipt of debtors and creditors list-
w Financial and collateral covenants to
which the client must comply.
Other risk-based activity:
w Verification: contacting the debtors
to confirm that they have received
goods and will make payment on the
w Field audits: a similar exercise to a
pre-lend review or survey. These have
a slightly different approach, but seek
to validate client health and adequa-
cy and collectability of security.
Early Signs of Fraud
In order to catch fraudulent activities as
early as possible, lenders need to look
closely at changes in client behaviour.
All clients typically display regular, con-
sistent behaviour. Lenders need to be
alert to any changes in that behaviour,
and examples could include:
w Clients whose business appears to
be growing when other clients in the
same industry are not experiencing
the same growth.
w Clients who are overly compliant,
i.e., they provide all the information
on time in the format required, who
perhaps want to be “perfect” in order
to avoid suspicions.
w Clients who cancel field audits or who
fail to provide information on time as
they know they will be caught out.
w Requests for increase in facilities. The
vast majority of frauds require the
client facility to grow.
Top Five Most Obvious Signs of Fraud
Some of the most observable warning
signs that should alert lenders include:
1) Debt-turn extending, where the debt
is false and cannot be collected, or
the client has diverted cash from
genuine sales into their own bank
2) A significant improvement in debt
turn, where the client is recycling
cash advanced from the lender to repay false invoices.
3) Dilution through high credit notes,
where clients reverse false invoices
to avoid identification or through low
or nonexisting credit notes. A change
in behaviour of credit notes often
indicates security manipulation.
4) Increased sales. The illusion that the
business is growing rapidly where clients raise false invoices to maintain
5) Increased number of new debtors
that act as vehicles for false invoices.
Occasionally, lenders can miss fraud
because they just don’t have sufficient
time or resources to successfully manage relationships and risk. They may not
have the technology available to help
them work smarter, or they run core systems with no supporting sophisticated
risk management tools.
Technology as a Defence Shield
Using technology to spot early warning
signs of fraud removes any emotion or
subjectivity from the relationship. Risk
analysis tools look objectively at data,
trends and behaviour and allow for
constant monitoring, removing the potential for human error. Technology can
be used to identify fraud and minimise
lenders losses earlier.
There are many benefits that lenders
can take advantage of by using technology to combat fraud rather than relying
on spreadsheets and paper reports,
where the problems are not always possible to identify easily or quickly.
Any risk management tool that is
working 24/7/365, provides lenders
with a consistent shield against small
or large deceptions. It means that more
facilities can be managed by individual
managers, improving efficiency across
the organisation. It also means that staff
can spend more time with their clients
to build loyalty and long-lasting relation-
ships. More often than not, if a lender
has built a strong rapport with a client,
they will think twice before defrauding
a lender and will share their challenges
and seek a conventional solution to
resolve their cash-flow dilemmas.
While technology shouldn’t be seen
as the only preventive tool, it can help to
reduce the losses that lenders suffer as
a result of fraud as lenders identify and
intervene in frauds earlier, helping to
Improving a lender’s ability to spot
fraud signs early allows the lender to focus on the positive aspects of providing
high levels of client service that ensure
market-leading client retention, maximised income and minimised exposure
to fraud. TSL
Aaron Hughes is account director, RiskFactor Solutions Ltd. He has over 25 years’
invoice finance and ABL experience, with the
majority of his career in senior risk and operational roles with GE Capital and Barclays
Sales Finance. Hughes joined RiskFactor
in September 2012 from National Australia
Bank where he was National Operations
Director for Invoice Finance.
Hughes has been a RiskFactor user in a
number of previous roles and has an outstanding track record for using the software
to manage risk, deliver productivity efficiencies and to support and enhance governance
frameworks. His role at RiskFactor is to
assist customers in maximising their use of
the application and support the development
of the software.