Fortunately, and largely owing to the acceleration of digititalisation, there are a wide range of effective measures and methods which lenders can implement to protect themselves from instances of fraud in factoring or invoice finance. From reduced risk of human error to increased visibility and transparency around customers, automation tools are providing a critical first line of defence for lenders.
It’s vital for lenders to understand the types of fraud they can fall prey to. “Circumstantial” and “premeditated” are the two main categories under which instances of invoice finance fraud fall under. The fundamental difference between the two is that while circumstantial fraud usually involves an under pressure business owner attempting to solve liquidity issues in the short-term, premeditated fraud indicates criminal intent and is usually carried out by organised criminals deliberately targeting invoice financiers.
Many businesses are struggling with liquidity and cashflow problems due to the impact of the pandemic, and soan increase in circumstantial invoice finance fraud is expected. Challenging economic conditions also mean more business owners with existing invoice finance facilities are likely to opportunistically raise invoices earlier than usual for advances, a technique called “pre-invoicing”. Unfortunately, this technique often deteriorates into “fresh air” invoicing, where the debt is completely falsified.
Although the frequency of premeditated fraud may be largely unaffected by the pandemic, fraudsters will nonetheless continue to create sham, cash-limited businesses and corresponding invoices to extract advances from lenders. To masquerade as legitimate businesses, criminals frequently create customers for the fabricated supplier and then recycle the money they extract from lenders through the business cycles, creating the illusion of real cashflows. Once these fraudsters are satisfied with the size of the advance they have extracted, they will cease operations and disappear.
Detecting and interpreting the signs of fraud is relatively straightforward on a case-by-case basis, so long as if invoice financiers have the right staff, processes and technology in place. However, as the volume of customers and transactions increases, more sophisticated solutions are needed to do the heavy lifting required to prevent and detect incidents fraud.
Reducing staff burden
Invoice finance was once a wholly paper-based industry, relying on a significant number of back office staff to manually audit borrowers, physically verify invoices on active facilities and conduct the due diligence processes necessary to securely onboard new borrowers and verify the viability of existing ones. However, this approach was not only resource intensive, but it was also an ineffective way to protect against fraud – the weakest link in fraud prevention often being the human element.
Fortunately, invoice finance technology has improved with each new iteration to support lenders by significantly reducing the burden of fraud prevention procedures on staff. Established processes like the telephone verification of invoices is now augmented to finetune manual best practice alongside automated efficiency. Meanwhile, collateral risk scores can now be extracted instantaneously from the data collected from each borrower, offering lenders a reliable way to monitor existing facilities and quickly assess prospective customers. And automatic alerts can be set up to ensure that staff are made aware of any material increases in risk.
Data transparency offers protection
A lack of transparency around customers and indeed customers’ customers has been a further hurdle for lenders in the invoice finance space looking to manage risk exposure. However, today’s invoice finance platforms can navigate this risk by providing a single view of their customer data and activity. At the same time, these platforms enable lenders to optimise buyer-centric programs by digitally engaging buyers and their supply chains with rapid onboarding and self-service access for uploading receivables and requesting funds. All these measures help improve the accuracy with which lenders can conduct the data collection and trend analysis essential for continuous risk monitoring.
Due to the rise of open accounting, riskier confidential invoice finance, where verification of debt can be challenging, is better supported. Shadow ledgers can be established, providing the data granularity needed to facilitate an accurate sampling approach. Applying Benford’s Law and related algorithmic techniques can then expose anomalies in the data that require investigation and third parties can be used to contact debtors to verify that the debt is genuine. Confidential invoice discounters can provide factoring-like controls, provided they have the data and the resources available.
Time for tech
Understanding the signs and reducing the risk of invoice finance fraud going undetected are vital, but technology platforms have become the critical line of defence which invoice finance providers cannot overlook.
By increasing reliance on digital verification and processing, lenders can significantly reduce the chance of errors or oversight, while increased transparency around customers can radically enhance the due diligence and onboarding processes with less risk exposure. Investing in digital solutions now will be a critical step in helping to minimise the risk of major losses to lenders and combatting the fraudulent activity that costs the global economy so much each year.