A recent survey into levels of corporate fraud in British business has sparked much debate in the channel and in the credit management industry in particular.
The survey, conducted by credit specialist Graydon and carried out among credit managers, came up with some alarming results. It found a third of respondents had received credit applications from businesses trying to fraudulently obtain goods and services.
The same percentage of business respondents believed fraud was getting worse compared with the previous year. Only 6 per cent indicated that they believed the problem was reducing. It is estimated that economic crime cost UK businesses more than £40bn in 2006. £32bn of that came from frauds, embezzlement, corruption and money laundering, and the other £8bn was spent trying to combat the problem.
Most criminals are opportunists who think they won’t get caught. Corporate fraud is not high on the police agenda when there are so many higher profile areas of criminality to tackle with limited resources. Additionally, there is a commonly held belief that convictions for fraud are notoriously difficult to obtain.
If other factors exist that make fraudsters’ lives easier, they will use the opportunity. As an example, disclaimers on the Companies House website explaining that documents lodged there are accepted by the Registry in good faith and “are not verified or validated in any way” may entice criminals to file fictitious documents for illicit gain.
There are other reasons why corporate fraud happens. Losses caused by corporate fraud are often viewed by victim companies as commercial debt and not fraud. Fraudsters believe few companies will pursue them but simply write off corporate fraud losses as bad debt. Secondly, if fraudsters obtain goods from unwitting suppliers by deception, they have to have a ready market for them. Therefore, they tend to target certain product lines that are easy to sell for cash in pub car parks, markets and so on.
But perhaps the biggest reason why fraud happens is that orders for goods on credit are not properly vetted by suppliers. Smaller businesses are often viewed as soft targets by fraudsters because they are too small to employ professional credit managers.
How fraud works
Fraudsters use genuine company details for dishonest purposes. This has become known as identity fraud.
Signatures are forged to have goods delivered to an address not associated with the original bona fide firm whose identity has been stolen. Also, fraudsters are filing false documents such as fictitious balance sheets at Companies House to generate good credit ratings with the information agencies. On top of this, fraudsters are filing false director appointments and registered office changes.
Perhaps most importantly, frauds can only be perpetrated when existing credit control procedures at the supplier end are insufficient, either through ignorance about what to look out for, or lack of will to introduce adequate checks to stop this from happening.
The good news for businesses is that procedures can be put in place to tackle this, and tips can be taken on board to protect a company’s best interests and profitability.
Steps to counter fraud
Firstly, like consumers, businesses should be very careful as to how they dispose of their ‘rubbish’.
Small businesses in particular should never throw away paperwork such as utility bills, credit card statements, bank statements and so on without shredding them first. Identity thieves are known to rummage through garbage bins outside commercial properties.
Before giving the green light to deliver goods or services to a client, the following steps should be taken:
- Always obtain a credit report;
- Never set up an account until the application has been fully processed;
- Check the credit application for quality and completeness;
- Always check the trading and registered office address;
- Be wary of mobile phone numbers and non-business email addresses such as hotmail or yahoo;
- Most companies will pay bills by completing a purchase order from their accounts department, so obtain a copy of this.
- For non-incorporated businesses, request original copies of utility bills quoting the delivery address
- Double check all delivery addresses, keeping an eye on what looks like residential addresses.
- Check for valid VAT numbers.
Warning signs
It is important to flag certain events and details that seem out of the ordinary. Here are some examples:
- Is there a sudden change of delivery address?
- Is there a last minute call to collect the goods rather than have them despatched to the quoted delivery address?
- Is the delivery address given by the client shown on the credit report you obtained from your agency?
- Are the telephone numbers fixed line or non-geographic eg 0800?
- Have you received an order on the last afternoon of the month? (fraudsters, like credit managers, understand the pressure from the sales department);
- Look out for unusually large orders placed at the start of a month, where the fraudster anticipates he has the longest time before you chase for payment.
- Have you received a large first-time order on a credit card?
Businesses have a choice when it comes to fighting commercial fraud. They can keep their fingers crossed and hope it never happens to them, much like the house owner who refuses to invest in a burglar alarm system when all his neighbours have done so. Or, they should fully recognise that commercial fraud is here to stay, but appreciate that if proper controls are put in place, the opportunist criminal will move on down the commercial street and target someone else who looks easier to take on.
