The Equipment Leasing and Finance Association recently held a webinar covering types of fraud common in the equipment finance industry, ways to identify fraud and solutions to prevent and mitigate it. Debbie Devassy Babu, shareholder at Darcy & Devassy; Kristian Dolan, CLFP, CEO at Northteq; and Jeffry Elliott, CLFP, president of Huntington Equipment Finance presented the session, sharing best practices for processes and technologies to combat fraud.
More than 175 industry professionals participated in the March 8 event, which spanned high-tech solutions to common sense “gut checks.” The following are among the webinar highlights:
- Borrower frauds. One of the most common frauds consists of the borrower entering into the transaction with no intention of making payments and vanishing once they have the equipment or loan proceeds. Equipment that is valuable and mobile, such as trucking equipment, is particularly susceptible. Another common fraud is the use of shell corporations so that assets aren’t in the borrower’s name, or to transfer assets to another entity once the borrower has passed a credit check and obtained the equipment. In some instances, a borrower will purchase an established company to exploit its good reputation to commit fraud. Another typical fraud involves titled vehicles where the borrower refuses to list the lender’s lien on the title.
- Vendor frauds. One of the most common vendor frauds involves sham vendors that operate solely to commit fraud. They accept payment from the lender, then don’t deliver the equipment to the borrower and vanish. Another is a vendor that colludes with a borrower to falsify transactions or forges signatures of legitimate borrowers. When the borrower is complicit they may receive a kickback from the vendor for going along with the sham. A more difficult fraud to spot is a once-reputable vendor that commits fraud due to financial straits or other issues. In such cases they may create fictitious borrowers, or use existing borrower information to defraud the lender.
- Fraud during transaction. Payments by existing accounts can be exploited to be “paid away” to a fraudulent party. This type of fraud can target both lenders and borrowers through online phishing, system hacking or stealing emails and using identity theft to disguise emails to redirect payments. Companies of all sizes that don’t have systems in place to secure its communications can be vulnerable. To combat these and other cyber threats, lenders should consider cyber insurance which requires multifactor authentication, and using manual as well as automated process controls.
- Fraud red flags. Among the key warning signs of fraud lenders should look for are the number of Uniform Commercial Code (UCC) filings against a borrower, to determine whether they make sense for the size of the borrower. Also look at factors such as whether the type of equipment, the dollar amount of the transaction and the geographic proximity of the borrower to the vendor are reasonable and make sense for the borrower. Assess the vendor’s reputation and years in business, and call them directly to verify they are legitimate. For more expensive equipment, a physical inspection should be considered to verify the equipment exists.
- Fraud mitigation and prevention. Fraud can be mitigated by detection technology through third-party applications and software service providers. A recent study by the Equipment Leasing & Finance Foundation, “Specialized Apps, Software and Information Services for the Equipment Leasing & Finance Industry,” includes a guide to companies offering fraud risk management capabilities. Solutions include UCC filing searches that can reveal abnormal amounts of activity, device and IP checks of the originating party, email and address verification, proprietary network scores of borrower companies, document validation and secretary of state business verification.
