Asset Leasing Fraud

Frans THIERENS posted on 19/02/2013 in Themes

Description. Asset Leasing Fraud involves falsified finance application documents to lease/finance assets that do not exist, or have an artificially inflated value. As the value of the underlying asset is lower than the amount of money financed, the leasing company will have insufficient recourse to the asset if payments are not made. This fraud always involves at least one of three elements: a false/fraudulent supplier or a fictitious/non existing asset or a false/fraudulent client. The biggest risk, collusion between the lessee and the supplier, is practically impossible for the lessor to detect. But if the fraud is repeated it’s possible to detect and identify signals. The fraudsters have an interest to make as many deals as possible with different companies before disappearing.

Variations.
Fictitious Asset: the asset simply does not exist.
Price Fraud: the asset is worth less than the sum being financed. This can in particular be a problem in sale and lease back deals, as in this case the ‘supplier’ is the client himself.
Double Financing: the asset does not give legal title for recourse as it is the object of another (legal) financing agreement.
Maintenance Fraud: maintenance contracts for a value higher than the real value of the maintenance.

Prevention.

1. Know your Counterparties


1.a Know your customer

1. There should be clear and strict rules for client acceptation
• Check the client identity and history.
• Check credit and bank references of parties involved.
• Financial analysis according to the same standards as used by the bank analysing a client requesting a credit. Include limits on local credit delegation, even on number of existing dealers. • Visit the local premises and repeat this periodically.

2. Check the shareholdership
• Big changes in the recent past are negative indicators.
• Interrelatedness: if shareholders of client and supplier are the same, the operation is to be considered high risk.

3. Generate evidence (e.g. pictures) of the equipment, projects, production facilities, buildings, etc.

4. If locally allowed: create a blacklist and check all involved

5. Only allow financing to suppliers, vendors and dealers located within a certain distance (e.g. 100 km) and be very critical on exceptions.

6. Set criteria for the acceptance of clients regarding a minimum annual turnover and the number of employees.

7. Verify the payment behaviour of existing clients.


1.b Know your other Counterparties (dealers, vendors & suppliers)

1. There should be clear and strict rules for dealer/vendor/supplier acceptation.

2. Check whether the activity of a party did not change shortly before the application for the financing.

3. Check the shareholdership for important changes in the recent past.

4. Set up limits for each supplier and each vendor or dealer.

5. Check excessive results of all counterparties (“golden boys”).

6. Check the payment behaviour of the previously financed clients of a dealer/vendor/supplier.

7. Check the number of clients with bad debts per counterparty.

8. Check if the dealer/vendor/supplier is prepared to accept a commitment for remarketing or buy back agreement.

9. Build up the portfolio of the counterparty gradually.

10. Periodically review the quality of the portfolio of the counterparty.


2. Know your Transaction (assets)

1. Check whether the equipment fits with the clients’ activity and financial situation.

2. Check the physical existence of equipment (being present at delivery, take pictures) and the veracity of the legal title .

3. Try to restrict delivery of the assets to the premises of the client. If not, only allow payment if proved that the assets are up and running. Allow payment only after delivery and receipt of the original fiscal invoice.

4. Check for cars -if locally available- the registration and license files.

5. Check the price of the assets based on an official price list (if available)

6. Set the obligation to install a GPS device on more expensive assets (above a certain threshold).

7. In case of sale and lease back, request the original invoice of the asset, preventing the client from making the same deal twice (only valid if applied by all leasing companies ).
 

3. Other

1. Consider whether an additional guarantee can be asked. Consider new financing only after a certain time has elapsed since the previous one.

2. Check whether insurance is available/necessary.

3. Contact other competitors and local professional organisations to discuss and exchange experiences. Detection If preventive controls work well, fraud should be limited. Nevertheless , based on the controls and monitoring mentioned above, signals of fraud can be detected by a.o.
• The periodic visit and review of clients and dealers indicates changes (activity, shareholdership, premises, turnover, etc.).
• Changes in payment behaviour of a client • A party is put on a risk list.
• Excessive results of a (small) dealer without acceptable explanation.
• Decrease in quality of the portfolio of a dealer (including an increase in bad debts amongst the dealer’s clients).

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