The economic environment has changed. Brokers and discounters are having a difficult time sourcing customers and an even more difficult time placing average to marginal transactions with funding sources regardless of rate. Funding sources and lenders that operate with bank lines, warehouse lines or through investors are having a difficult time getting lines of credit and investors. When they do get lines of credit, the fees and/or interest that they are paying are rising. Leasing through banks is becoming more difficult because some banks no longer have the credit appetite for leasing and do not want to take the credit risk despite higher returns on leases and the ability to charge higher rates to customers that are not “bankable.”

As credit tightens, only those customers with the most pristine credit or those who are able to pledge assets with substantial equity will be approved for a new lease or loan by funding sources. In the meantime, for every uncollectible transaction the funding source has entered into or acquired, it takes many new customers who timely pay on their lease and loan obligations to simply make up the income lost from a transaction gone bad. With the foregoing as background, it is time to remind everyone of the badges of fraud when deciding whether or not to fund a new transaction.

The Equipment Leasing & Finance Association (ELFA), at its Legal Forum, has a fraud seminar every year. ELFA also recently conducted a fraud webinar discussing fraud issues and how to detect a fraudulent transaction. Leasing and lending organizations are attempting to educate members as to the signs of a fraudulent transaction because fraud can result in losses and substantial costs of both intended and unintended litigation.

For example, a lessor or lender may by an intended recipient of a lawsuit by a Bankruptcy Trustee for preferential or fraudulent transfers of assets by the fraudulent debtor because it may have received some meager payments in a Ponzi scheme where the lender or lessor has already lost millions on the transaction. Consequently, in this Risk Management and Fraud Prevention issue of the Monitor, some of the badges or indicators of a fraudulent transaction presented to the lender or lessor bear repeating once again.

Fraud’s Many Forms
Some of the types of fraudulent schemes, which we have all seen in the leasing or lending industries, include the following:

Know the Warning Signs
There are warning signs that can alert you to a fraud that may be in process. Some are obvious — the lessee won’t provide financial statements or the financial statements it provides do not make sense under the circumstances, or the financial statements are not signed or verified in some fashion or is in an unorthodox format. Other warning signs include if the lessee or debtor uses a P.O. Box instead of a street address, or perhaps the guarantors are unrelated to the business. But some of the signs are more subtle such as the following:

Even something as innocuous as always using a cell instead of a landline, or a business number that is answered by ‘hello,” or a phone number and area code that doesn’t match the address is cause for further investigation. If a job title is misspelled or seems odd, years of employment don’t add up, or if there is pressure to rush a transaction or decision by lessee, debtor or supplier, the funding source needs to be aware of a possible fraud.

A Few More Tip Offs
Beware if an advance rental check is a.) drawn on a personal account; b.) drawn on a different bank than indicated on the application; c.) does not contain bank address/branch information; d.) a counter check; e.) a cashier’s check; or f.) a money order. Also take heed if an advance rental check address matches the principal’s home address; matches the address on the principal’s bureau, current or previous address; is similar to the supplier’s address; or is a P.O. Box.

When dealing with equipment, beware of a generic, undated/numbered invoice. Also worry if you encounter resistance to providing brochures, model or serial numbers. If the equipment location is different than lessee’s address, this is a possible sign that this transaction may be fraudulent.

Beyond the clear signs — the supplier is not listed in the phone book, payment goes to an address other than what is on the invoice, the invoice is generic and unnumbered — are other signals that trouble is afoot. If the supplier does not want the leasing company to contact the lessee or has no resale number, an invalid number, or a number belonging to another business, ask the hard questions.

Fraud often occurs in small-ticket transactions because less due diligence is conducted by the lessor, lender or funding source. It also tends to occur with technologically advanced equipment that cannot easily be inspected or in which there is no established market. Another reason is that in smaller-ticket transactions, equipment may not be inspected at all and the lessor, lender or funding source relies on the execution of a Delivery and Acceptance and an oral verification of acceptance.

The bottom line is that fraud costs the leasing and lending industries millions of dollars every year. The key to preventing fraud is diligence, diligence and more diligence. We should all remember the old proverb: “An ounce of prevention is worth a pound of cure.”

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Andrew K. Alper is a partner with the law firm of Frandzel Robins Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since 1978. Alper obtained his Bachelor of Arts degree in Political Science, magna cum laude, from the University of California at Santa Barbara, and received his Juris Doctor from Loyola Marymount University School of Law making the Dean’s List. Alper’s practice emphasizes the representation of equipment lessors and funding sources in all aspects of equipment leasing including litigation, documentation, bankruptcy and transactional matters. Besides representing equipment lessors and funding sources, Alper represents banks and other financial institutions in the area of commercial litigation, insolvency, secured transactions, banking law, real estate and business litigation.