For months now the news has been full of “the credit crunch”. This phrase now seems to be a day-to-day reality and the warnings are of difficult times ahead. Troubles, we are told, never come in “single spies”. Also, rarely out of the news is the information that fraud, in its many guises, is dramatically on the increase. In September 2006 fraud was estimated to cost the UK £40 billion annually. By the following year this had increased to £70 billion with approximately 43% of companies worldwide indicating they had suffered one or more frauds in the previous two years.

So how are these problems connected and what can financiers do to minimise their exposure to loss?

The end of easy money – or is it?

Put very simply, the credit crunch means that it has become harder, and more expensive, to borrow money. Additionally sales are down and costs are rising. How does a company feeling the pinch close the gap? Enter the fictitious invoice.

A cash flow crisis presents the classic three prompts to commit a fraud: incentive, opportunity and a rationalisation for the action, “We need some additional cash to meet the bills this week, let’s just notify some more sales, we’ll be able to pay it back next week”. If that final assumption is wrong, and there is lack of vigilance by the financier, that ‘one-off’ quick fix can quickly snowball into a major habit that can only be maintained by increasingly audacious conduct. Other business pressures can lead to the same false friend.

Then there are the people who are just dishonest.

It is no secret that the financial services sector has
the highest prevalence of fraud. Now is not the time
to ignore the dark warnings but to act to protect your own business.

The classic warning signs

Hindsight being the marvellous tool that it is, it is very easy to put together a list of warning signs for financiers that, if heeded, would alert them to the possibility that a client is conducting a fraud against them. What is instructive is the frequency with which the same elements appear in virtually every fraud we at Hammonds deal with. The most common indicators of a fraud we see are:

  • An unusual, inexplicable or unseasonal increase in turnover.
  • Pre-invoicing before contracts are performed.
  • More foreign debts that are difficult to verify.
  • An increase in debt turn.
  • An increase in the value and percentage of credit notes or a significant number of credit notes issued for the full value of invoices.
  • The fraudster is one of your biggest and best customers.
  • Someone who has used this type of finance before.
  • Decision-making and control of the business focused in one (often charismatic) person or members of the same family.
  • Unlikely trading addresses of debtors eg, in residential areas, different debtors at the same address or only mobile phone numbers to verify debts.
  • Individual debtor credit limits fully utilised.
  • Accounts and other financial information are not forthcoming when requested.

Whilst good business relations are built on trust, it pays to apply a little healthy scepticism and critical analysis to the information supplied by the client. If a significant number of these signs appear on your client’s ledger, hear the alarm bells ringing and investigate them.

Bigger is not always better

In many aspects of business ‘being the biggest’ or ‘having the largest’ is a desirable selling point. As the victim of a fraud this is not the case. The losses can be substantial and have been known to be the end of the financier’s business. Recoveries are difficult and can be expensive, protracted and incomplete. Nor is it any better to suffer the constant attrition of numerous small frauds. The losses accumulate, damage a financier’s reputation increasing vulnerability to experienced fraudsters and dealing with each incident is a substantial drain on a financier’s resources.

Prevention is always better than cure.

To effectively fight fraud, financiers must have effective and rigorously applied audit and verification processes and well-trained staff who understand how frauds are operated and can recognise and respond to the signs.