Alas invoice finance fraud cannot be avoided. The more elaborate the fraud, the more difficult it is to spot.
In order to mitigate against the risk and potential loss resulting from fraud, invoice financiers must raise awareness of fraud with their people, processes and culture.
In The invoice financiers guide to white lies and fraud, I outlined the most common frauds that invoice financiers experience. Furthermore I discussed how the effects of fraud could be catastrophic if not quickly identified and dealt with.
This article identifies measures that can be adopted to limit the potential for fraud:
Start by reviewing existing procedures and identifying areas for improvement. Remind operational staff why comprehensive procedures need to be adopted. Communicate new procedures and the reasons behind them.
Too often procedures are written at the inception of a business and then not properly updated as the business grows and changes.
2. Risk training
Give staff regular training about the risks associated with both factoring in general and specific industry sectors. Invoice finance is a complex and ever changing environment. Invoice finance clients come from a variety of different industry sectors, so staff must to be able to adapt.
3. Learn from your mistakes
Client fraud shouldn’t be swept under the carpet. Instead it needs to analysed, dissected and discussed with operational staff.
Create an environment where operational staff are encouraged to voice concerns. A credit controller will see and hear things that a client manager may not be aware of.
5. Know your customer (KYC)
Understand your client’s business and the sector in which it operates. Compare how your client is trading against its sector in general. Watch out for abnormalities. Take a step further and set up specialist industry teams. Larger invoice financiers could also benefit from specialist management teams to manage higher risk clients.
6. Act quickly and confront the client
Make clients fully aware and accountable for the severity and consequences of breaches of invoice finance facilities. Your options include:
• Sending breach letters.
• Making changes to facility conditions (reduce advance rates or disclose the facility etc.)
• Terminate the facility.
• Appoint a receiver or administrator.
Whatever action you decide upon, swiftly implement and communicate it to the client. Client retention cannot be used as an excuse for poor risk management.
7. Audits/independent business reviews
Confirm the validity of the debt, as well as the quality of the people and processes by planning regular client audits. Be careful to ensure audits are carried out by a variety of team members to guard against the risk of complacency.
Use client visits as an opportunity to perform mini audits.
8. Perform regular in house client reviews
Get a variety of staff within an invoice finance business to review client statistics and trading performance, so that issues inadvertently overlooked by client managers are brought into the open.
In a competitive environment invoice financiers will always face pressure to provide confidential facilities. However confidential facilities restrict invoice financier’s abilities to verify the quality of the receivables. Invoice financiers need to quickly disclose if there are concerns about the quality of the security, as debtors will normally (unless there is collusion) willingly communicate any issues.
Don’t alter the criteria of an invoice finance facility to fit the prospect. Higher risk clients should be managed through invoice finance tools that suit the invoice financier.
11. Management information
Get insight into how a business is performing and what issues the business is experiencing by obtaining and analysing management information regularly.
Form relationships with your client’s staff, no matter what level they sit within the business. It is not in an employee’s interest to want to cover up unethical behaviour.
13. Professional scepticism
Never ignore the instincts of operational staff. From experience I can tell you that fraud is often discovered as the result of the gut feel of an employee.
In summary, fraud is difficult to spot and unfortunately every invoice financier will experience it at some point. There is no exact science to identifying and managing fraud. However, invoice finance companies can limit the extent of fraud by raising awareness of it with its people, processes and culture.
Author: Simon Belton: Simon has worked in all areas of the invoice finance sector. He is experienced in business development, risk and client relationship management.
Get in touch for details about Simon’s invoice finance training and consultancy services.