What is Third Party Fraud?
This is a fraud committed by people outside an employee employer relationship. They can be committed against individuals, businesses, companies, the government or any other entity. Third party frauds are not as common as occupational frauds, but on average each fraud is for a larger amount.
Some third party frauds are not meant to remain hidden forever. Some only remain hidden long enough for the fraudster to make their get-away. The fraudster may not care if the fraud is eventually discovered as they do not have a continuing relationship with the victim and they cannot be found.
What is Asset Leasing Fraud?
Asset leasing fraud is fraud committed against a finance company by one of its customers, done by improperly obtaining money from using fictitious leases or other finance arrangements. This fraud is meant to remain hidden for the long term – at least as long as the business relationship between the parties so must be maintained during its life.
If the fraud reaches its conclusion, being the repayment of the false lease agreement in full, no-one would have actually incurred a monetary loss – but this outcome is highly unlikely. Even if everyone is paid back, the initial money was obtained by false pretenses and that action was a fraud.
Description of Leasing Fraud
Lessons to be Learned
Description of Leasing Fraud
These frauds involve the production of false documentation to purchase assets (whether the assets actually exist or not) and financing the purchases with monies obtained under falsified finance application documents. For convenience, we will describe the fraud in the context of a lease, but the fraud could be committed using any type of finance arrangement.
In very general terms, leases are used to finance the purchase, or more correctly, the use of assets. Leases can be provided by the supplier of the asset (vendor finance) or by a third party financier (a leasing company). A third party financier is necessary to commit this type of fraud as there is no real purchase of the asset. A false underlying transaction is necessary as it is the purchase price that is stolen, and the fraudster has to receive that money through a false supplier. The fraudster effectively sells an asset he does not own (or may not even exist) to himself and finances the sale with someone else’s money.
The fraud is possible when the finance company only does limited verification of the application for finance. If they do not verify the physical existence of the asset being acquired or the legitimacy of the supplier selling the asset, a false application for finance may be authorized.
Verification of the application may be limited as the fraudster may have been a customer for some years and have other (legitimate) leases that have been kept within their contractual terms. This history may cause the finance company to make fewer checks on the current application, and this will make the fraud easier to commit.
It may be argued that there is no real loss to the finance company if the fraudster makes all of the payments under the lease. This is a big if and is not the point. The initial purchase of the asset and the finance application was false and the money were obtained by deception. The finance company does not obtain the security (ownership of the asset) that it should have obtained during the term of the lease.
How are these frauds done?
The fraud is done by having the finance company pay money to a false supplier for a purchase of a fictitious asset. The fraudster will need three things:
(i) A fake supplier. This is the entity that receives the money from the finance company, so it must be controlled by the fraudster.
(ii) A fake asset. The asset itself may be real, but it is not owned by the supplier making the application. It is fake in terms of a fictitious sale and financing of the asset. The asset will not be owned by the fraudster (the supplier in the application), otherwise the transaction would be a simple sale and lease-back arrangement.
(iii) A customer or purchaser of the asset. The fraudster must also control the purchaser of the asset in order to make the application for finance.
There are a number of steps in the process.
1. Determining which assets to use in the fraud. The fraudster needs an asset to be the subject of the finance application. Commonly they have previously acquired the asset from a legitimate supplier and financed it under a legitimate lease. The fraudster has full details of the asset as they were obtained from the supplier and sent to the initial finance company. It is not absolutely necessary to have a real asset, but it is desirable in case a later finance company wishes to inspect it.2. Creating the false application. If the fraudster obtained the asset from a real supplier, they would have the original paperwork with full details of the asset and everything required to apply for lease finance. They now can use this information to manufacture documents under the false supplier’s name. These documents will include an invoice from the fictitious supplier to the new customer. The fraudster must control the new (false) supplier, as the finance company will pay the money to that supplier. They will also need to control the new purchaser that makes the false finance application.
3. Making the fraudulent application. The false supplier produces an invoice selling the asset to the purchaser, and the purchaser makes a false application to lease the equipment. If the finance company approves the application, the money will be paid to the supplier entity and the first stage of the fraud is complete.
The fraud can be repeated targeting another financier using the same information with some minor modification. Using a number of false suppliers and different finance companies will lessen the chances of any one finance company being able to see a pattern in the continual sale and finance of the asset.
The finance company does not get ownership of the asset
These finance companies that enter into false finance arrangements do not get legal title to (or security over) the asset through the false purchase. Legal title will remain with the original financier or owner. The other finance companies have entered into finance contracts and paid money to a supplier due to a deception, and without the seller being able to pass title. These later financiers will have no recourse to the asset if lease payments are not made. Their security position has been compromised.
These frauds are usually committed using assets that are common in business so the applications will not raise suspicion. They are generally assets that do not require registration, so there are less places to verify the asset and its history. Land and motor vehicles are not the best assets to use in these frauds as both have accessible registers for ownership and security verification. Computer equipment is used as it is usually of high value and has serial numbers that can be verified if the finance company wishes to do so, but no register of ownership.
The fraudster ran a business through a company A that required computer equipment. He leased that equipment from financier 1 under a legitimate lease. All the paperwork was produced detailing the equipment and the values. The finance was provided, and the fraudster had copies of all of the application material.
The ease of the transaction gave him the idea for the fraud. He incorporated company B and that company made an application to financier 2 to purchase the same equipment from company A. The documentation from the original supplier was copied onto letterhead of company A and used in that application. The lease was approved. Financier 2 paid company A the price of the assets. Title of the goods did not pass to financier 2, as the seller (the fraudster acting through company A) did not have legal title to pass. Title rested with financier 1.
That transaction was so easy that company C was incorporated to purchase the equipment from company B and financed through financier 3. The same method was used to prepare the documentation and the same result was achieved. By this stage, the fraudster had received the value of the assets in cash twice and now had three lease commitments. The funds raised from the two false transactions were partially used to make the payments under the three leases.
The same equipment had been financed twice improperly but ownership still vested with the financier 1.
Lessons to be Learned
1. Any finance provided by a third party financer that is secured against or for the purchase of assets has the risk of being targeted in a fraud.
2. A fictitious seller is used as the finance company will issue the payment to the supplier. Verifying the identity of the supplier and their history may disclose a suspicious supplier.
3. If a number of different supplier and purchaser names are used and different financiers are targeted as victims, there will be little opportunity for any one finance company to see a pattern in the transactions.
4. Efforts by finance companies to streamline the application and approval processes may assist the fraudsters in committing the fraud as it may limit the amount of checks performed on applications, particularly from current customers.
Some detection techniques:
(a) Checking of the identity of the suppliers to ensure that they are genuine suppliers of the goods. These include checks of their physical address, their listing in phone books, trade registers, whether you have dealt with them in the past, etc.(b) Checking the identity of the customers is usually carried out by prudent finance companies, especially if they are new customers.
(c) Checking the existence of the asset and obtaining proof of ownership may raise suspicions. The seller of the asset should be able to show that they own the asset and can give security or title to that asset.