'tis the season to be ready…
As we approach the end of another year, with thoughts of
relaxing with family over the festive season, this year more than
others may be the year to be most vigilant with your clients.
The continuing uncertainty of a flat economy, another round of
bank holidays and the disruption to businesses from customer
shut-downs, short weeks and staff holidays put additional pressure
on the cash flow of clients. The need of clients to pay its own
staff, its suppliers, its fixed overheads and indeed the desire of
owners to pay for their own Christmas can all add to the pressure
on business owners to draw cash from their businesses while its
income is stretched.
The source of that cash may well be your facility.
The temptation to raise a few invoices that are supported by
nothing more than fresh air and submit them to you may be too great
to bear, even if the intention is to repay you in the New Year.
The problem is that the cash to repay those fictitious debts
will never come from a customer and if trading in the New Year does
not produce sufficient margins to repay you then in order to cover
the repayment of these invoices further or other fictitious
invoices need to be raised. Then, what began as an opportunistic
way to obtain a small amount of cash may become a habit or endemic
within your facility.
Depending on the type of facility and the skill of your client,
your ability to detect this type of fraud may be limited and in any
case will always be after the event.
possible signs - what to look for*
- New customers appearing on the ledger at an unusual time.
- Higher than normal levels of trade from existing
customers.
- Out of season trading (such as stocks of Christmas cards
ordered or delivered too late to be sold for Christmas).
- An increase in number of customer accounts whose debts sit just
under a reporting threshold.
- Customer addresses that look like they are not business
premises or whose contact details are mobile phones (ie 17A may be
a flat rather than a business unit).
- Disparity between the bought ledger and the sales ledger of
your client for example it had not bought sufficient stock to meet
the demand that is being reported to you as debts. This could
equally be seen from a lack of staff of your client to fulfil the
level of services it purports to have supplied to its
customers.
- Customer payments coming through or from your clients bank
accounts.
- Client's setting up or trading companies of a similar name to
your client.
- Ambiguous orders or orders in a trading style that could as
easily be for another business as they could for your client's
business.
- Glitches in verification or back up documentation that is
either missing, late to arrive or conversely perfectly delivered
and totally intact where that is unusual for a client.
- Anything that raises suspicion or gives you a feeling of
uneasiness particularly if it may be too good to be true.
you have found a fraud – what now?
Firstly, don’t panic.
You will need to collate the evidence to support what it is that
aroused your suspicion. If possible you may obtain verification of
the true balance of an overstated account from the customer,
equally if funds are being diverted the customer may be able to
give you details of the account to which the client has requested
that those funds be paid.
Secondly, contact us.
You will likely need to take action to preserve whatever the
true assets of your client are and to secure the records and
evidence of your debts. Further, you will need to follow your money
and that will most likely mean
needing to obtain a freezing order (injunction) to
secure and preserve the assets of those identified as
having perpetrated the fraud. These may be directors or officers of
your client who may or may not have given personal security or
guarantees and/or indemnities in your favour but the fact they have
not undertaken any personal liability will not of itself shield
them from a freezing order if they have defrauded you.
Often the quickest way to obtain control of a client's business
and secure records, which may include evidence of the fraud, may be
to appoint an administrator over the client's assets. However, this
can only be done if you hold a floating charge over all or
substantially all of your client's assets. If you do not or if the
fraud is such that a second company is involved then the powers of
the administrator may not go as far as you will need and therefore
you may have to take action on your own account.
In any case, delay can be fatal to an application to for a
freezing order, so once the fraud is identified you need to move
with haste.
You must also bear in mind that an application for a freezing
order is usually made without notice to the target (if it were
otherwise its powers would be limited as the target would be
forewarned). But that brings with it a requirement of full and
frank disclosure, which means that if you knew abut the fraud but
did not realise it was fraud, or you had in some way allowed it,
then a freezing order may well not be allowed. Equally, if the
court gave an order but you had not divulged something that was
relevant to its decision to grant the order in the first instance
then the court may release the order and the consequences to you
could be severe in terms of both costs and damages.
Thirdly, be prepared.
The obtaining of a freezing order and/or appointment of an
administrator are just the beginning. A freezing order only
preserves assets, it is not a means of recovery in itself, this
will be by legal proceedings and the freezing order ceases on
judgement being obtained unless it is ordered to continue. The
proceedings have to be issued in tandem with the freezing order and
may take time to run their course. They may also be contended of
course but if your evidence is sound a judgement should follow.
In addition, you must know what good money you are prepared to
risk to recover what has been lost. While steps can be taken to cut
short litigation, if the fraudsters have spent the money and have
no assets to show for it then your recovery may be limited. It is
important to make an assessment of the likely return early in the
proceedings therefore.
One thing though is certain. If you have been defrauded and do
nothing you will lose money. Swift and decisive action on
discovering a fraud can make the difference between recovering all
or recovering nothing.
(* This list is by no means definitive.)
