How factoring fraud takes place

How factoring fraud takes place
Pexels/Tima Miroshnichenko

Cash-strapped businesses grappling with the cost of the pandemic are increasingly securing loans against the value of unpaid invoices, or 'factoring' as it is often referred to.

However, such a trend is also proving irresistible to criminals keen to exploit the opportunities of this growing market.

The recent announcement that the Serious Fraud Office is investigating suspected fraud, fraudulent trading and money laundering in relation to the financing and conduct of the business of companies within the Gupta Family Group Alliance, including its financing arrangements with Greensill Capital UK, (which specialises in supply chain finance) is a timely reminder that lenders need to be alive to the pressure now placed upon businesses emerging from the pandemic and desperately seeking cash to simply keep their businesses going.

So, what is factoring fraud and, more importantly, how can it be prevented? In its most basic form, factoring fraud is a fraud committed against a debt factoring company by one of its customers.

The aim of the fraud is to obtain money from factoring fictitious debtors, by forwarding false invoices to the factoring company. The fraud can be perpetrated in several ways.

Perhaps the most common modus operandi is committed by legitimate businesses experiencing cash flow problems. The temptation by a hard-pressed business owner to create false invoices and submit them for payment to the factoring company among other legitimate invoices can be a tempting way of boosting short-term cash flow, even if the intention at the time is to pay back the finance company in full.

This is one of the simplest ways to obtain funding without any actual sale taking place.

Most invoices, particularly lower value ones, are financed without review, so uploading a fictitious invoice can create additional funding with little risk of being spotted.

It is only three or four months later when it is overdue that it will begin to draw attention to itself. Directors may initially intend to settle it with other funds and cover their tracks, but if their cash flow difficulties continue to deteriorate the risk of being unable to do so increases.

The larger the sum, the more difficult repayment is likely to become, and eventually the truth catches up with reality.

Organised crime groups have taken factoring fraud to another level. Here, criminals target factoring companies by acquiring businesses or creating a bogus business.

To portray these businesses as legitimate, fraudsters create fake invoices to extract advances from the loan company; they then use this money to 'pay off' the invoices, effectively recycling the factoring companies’ cash, generating the appearance of real cash flow and a growing business, thereby increasing their credit limits.

Having gradually increased their credit worthiness and the level of loans from the factoring company, the criminals fold the operation and pocket the money. In some cases, the OCG may have hired business premises to add weight to the deception, but when the factoring company comes calling, such business premises will be empty and vacant.