Fraud Prevention Requires Sweating the Small Stuff

The equipment finance and leasing industry is not immune from fraudsters, but some simple precautions can go a long way toward detection and prevention of traps or attacks that threaten leasing transactions in the modern marketplace.

That’s according to Paul Bent and Gary LoMonaco of The Alta Group, who get real about a hot topic that impacts not only in this industry but also so many others across the board. In a recent article in the Monitor, they raise the alert level by providing an overview of potential problems and important tools to address them in everything from the application to documentation and the funding phase.

“Certain types of fraud specific to leasing can also be quite simple — for the perpetrators to pull off and to detect and prevent. There are straightforward steps and checks that every leasing company can implement to prevent some of these basic (but no less harmful) forms of fraud that ripple through the industry,” they write.

Employees are key to preventing fraud

First, key personnel must be trained to call out potential red flags at every turn, say Bent, senior managing director of The Alta Group and head of its Legal Services practice, and LoMonaco, a director at the global advisory firm and leader of the Business Assessment practice. Encourage employees to sound the alarm if something doesn’t look or feel right, even at the risk of raising false alarms.

“Greater experience sniffing out the warning signs will lead to fewer false alarms and more actual fraud detection,” they note.

Generally speaking for lessees and borrowers, here are some things to keep in mind:

• Corporate filings – Most obligors are business entities subject to state registration and can be looked up on the website of the applicable state corporation commission, secretary of state or third-party filing service. A quick check may provide lots of information about the legitimacy and longevity of a business.
• Websites – An unprofessional look and feel likely will prompt a deeper look.
• OFAC checks – Conducting an Office of Foreign Assets Control check on new applicants is critical to avoid serious legal consequences. Sanctions lists show persons or entities sanctioned by the U.S. government and may reveal multiple aliases or similar related names, which can alert you to unscrupulous behavior.

Malware, keep out!

Another area of concern for leasing professionals, according to Bent and LoMonaco, is email traps that could trigger the download of malware.

“The best way to smoke out a fraudulent or misleading link in a text, email, PDF or other document that includes links is to hover your mouse over the link itself, without clicking,” they write. “The address to which the link points will pop up in a small window over the link. The text of a link (usually shown in blue and underlined) may say anything at all, but these words have no direct connection to the address to which they refer. This is a common trap for the unwary.”

Remember that once you click that link, there is no going back. Also, be wary of email addresses from Gmail, Yahoo or other free email domains. These can be acquired by anyone and made to look like anything. When in doubt, ask the party providing the email address for a company-specific email address.

Verify to the nth degree

In the application stage, a simple online check of addresses and telephone numbers can help to verify the information provided and alert you to possible concerns, such as a bogus or borrowed phone number. This should be routine on new applications, even if the name of the applicant appears to be a well-known or repeat customer.

Don’t take references for granted, either. Names, business details and telephone numbers should be checked out, just like the applicant’s. These are easy checks to make and may uncover some second-level concerns, according to Bent and LoMonaco. Apply the same degree of scrutiny to reviewing prospective guarantors, especially if they are related parties or are part of the ownership or management structure of the lessee or borrower. Guaranties are not just formalities.

As for sole contacts, “a surprisingly large number of fraud schemes in the leasing industry have been facilitated by originators’ or leasing companies’ reluctance to identify the actual funding source in a transaction,” they write. “Particularly in private-label or syndication situations, originators may require funders to make no direct contact with obligors. Fraudsters have exploited this requirement in a number of major leasing industry frauds by requiring funders to deal solely with one individual without contacting anyone else about the deal, including customers, vendors or other third parties. This situation is made to order for mischief.”

They say that leasing companies providing funding for deals of any significant size should, unless the deal is provided by a well-known and reliable entity, include in due diligence contacting more than one person representing the originator, even if the company has a track record with the originator.

Timing is everything

One factor in many fraudulent transactions is an exaggerated sense of urgency on the part of the applicant. Although many businesses are anxious to acquire the equipment they need, the imposition of truly unnecessary timing constraints and conditions should trigger a closer look.

Likewise, last-minute changes in payment or bank wire instructions, equipment delivery requirements, document delivery or other transaction details that have already been confirmed may be an effort to turn a seemingly legitimate deal into something that is designed from the outset to be fraudulent.

Documentation professionals, meanwhile, must be alert to significant changes in the way signatures appear, say Bent and LoMonaco. And if a lessee or borrower submits audited financial statements, take a few minutes to validate the accountant or accounting firm signing off on the statements. They also note that phony invoices are an unfortunate reality in our business. Indeed, modern technology makes it easy to reproduce invoices or other forms digitally. If in doubt, ask the lessee or vendor for supporting materials such as online references to the questionable equipment or direct contact with the manufacturers or other providers.

“Incorporating various fraud prevention applications and software into your overall deal-flow procedures is also a good practice,” they write. “These may be incorporated into front-end or lease-management systems, or they may be standalone processes that function in specific areas of activity, and they may provide important help in detecting the kinds of fraud discussed here.”

Periodic third-party vulnerability assessments, unannounced audits and consistent account reconciliation can address small problems before they become larger ones. And remember, applied common sense is the best detector of this type of fraud.

Always be skeptical, always be aware, sweat the details and don’t hesitate to sound the alarm.

For the full article, click here