The majority of leases run smoothly, but in some cases they do not. Gateley partner James Baird examines the reasons why some agreements fail, and offers advice on how to spot those that will before they do.
Asset fnance is a relatively simple funding structure, based upon splitting rights to possession from ownership rights during the currency of the agreement.
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The giving of possession is based on trust that the lessee or hirer will comply with the terms and conditions, keep possession of the equipment and return it at the end of the lease.
Recognising those customers that either have no intention of complying from the outset with the lease terms, or did intend to but changed their mind mid-term, in a lease is not an easy task.
Determined fraudsters go to elaborate lengths to create the illusion of intending to comply, and are skilled at defecting enquiry into their true intentions. They provide many, yet plausible, excuses for their failure to comply in order to delay proper enquiry. Delaying recognition of a fraud is the initial goal. So what are the signs?
• The asset is ‘shiny’ – it can move easily and is desirable across the globe as a fashion
status symbol and, crucially, is tradeable as a commodity. These assets can be luxury
cars, art, watches;
• The asset is not delivered, the wrong one is delivered, or it is delivered late or to the wrong place or person;
• The customer denies any knowledge of the agreement;
• The customer misses the first payment;
• The direct debit fails or the customer changes bank accounts – again;
• A third party is in possession of the asset;
• A third party wants to pay the rentals;
• Payment is offered by credit card;
• You cannot contact the customer;
• Tere are no serial numbers on the invoice, or there discrepancies in serial numbers;
• Sale and lease-back or sub-hire is permitted;
• There is title risk on hire purchase and/or conditional sales;
• Parties in the factual matrix are related;
• Parties allow contras and/or set offs.
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By GlobalDataThe above menu lists some of the signs to look out for. One hit on its own might not mean the agreement is a fraud, but the more hits there are from the menu the more ingredients there are to bake in a fraud.
Fraud flags
It is crucial to recognise the possibility of fraud. Funders and their credit and collection teams should constantly monitor agreements during their term to be vigilant against fraud flags.
Once a funder recognises a fraud has or might have occurred, the next step is to react
in some way to that possibility. This often means investigating the case and examining in forensic detail the structure of the agreement and its genus. Each case is different, but it is essential to determine the true facts of what has actually, in reality, occurred – not what the fraudster has conjured.
Recovery is the next essential step; it may be possible to recover the position. Here, time
is the funder’s enemy. It is essential that steps to recovery are taken quickly so as to try and preserve assets or funds before they are moved or spent. Options here might be repossession of the asset if traced, or legal action.
Often in fraud cases, the normal litigation targets of customers, guarantors, dealers and assets either do not exist, are out of the jurisdiction, or are not viable commercial targets. Often, however, other targets such as handlers, sub-sellers, auction houses, insurers, bankers and controllers can be targeted. It may be, however, that no viable targets are identifed. While it may be unpalatable to contemplate, sometimes the right reaction is not to pursue any recovery options if none are assessed as commercially viable – giving truth to the old adage the first loss is the best loss.
Reviewing the case is the next step in the fraud journey. It is important to ‘get the drains up’ and understand how, from a systems and control perspective, the fraud entered the organisation and matured to pay out, and then concealed. Fraudsters are the best systems analysts you will never pay for. Welcome their skill set and learn from them.
Plug the holes in your systems they discover. If you do not, they will target the same vulnerabilities until you do.
Finally report the event both internally and externally to credit agencies, the police and other agencies. The police have other priorities and often see finance fraud as a civil issue, and will try hard not to take the matter on as a crime. However, the police will assist, especially if the fraudster is known to them and can be useful players in fraud recoveries.
So, have you funded a unicorn? Are you absolutely sure?
