Why, Oh Why, is There So Much Fraud

Written by: Steven Troy, President, AeroPay Express

Everyone in the factoring industry knows that fraud is rampant. For some reason it seems to be more prevalent today than at any time over the past 50 years. It doesn’t matter the industry, but transportation seems to be a major target of criminal gangs. The frauds are simple and still, they are hard to catch. Most frauds we are seeing are perpetrated as some type of collusion between the buyer and seller. 

Why now? Why are we seeing more fraud now, than at any time over the past 20, 30 or 40 years? Is it the rise of artificial intelligence, AI? That could be part of it. Utilizing AI sure makes things easier to create realistic documents in volume. The problem with blaming AI is that the resulting fraud isn’t any more sophisticated than it was 20, 30 or 40 years ago. Of course, in the 1980’s, 90’s and the early part of the 2000’s, fraudsters had to rely on cut-and-paste and a photocopier. Today they can tell AI to put their picture on an Indiana driver’s license, create invoices and shipping documents and they look perfect. Heck, they can ask AI to create an artificial person for that matter. This does speed up the process and certainly allows for multiple frauds from the same team to happen at the same time. Now it becomes a numbers game for them. Five factors might catch the fraud, but a sixth might not. 

If it’s not AI, let’s examine today’s frauds and see if we might find answers as to why we are seeing more. So why are more factors and seasoned underwriters falling for the same simple fraud? Let’s explore the possibilities and the changes in the factoring business model.  

In transportation sector, there has been a big transformation over the past 10 years. That’s primarily in rates charged and yield. A decade ago, independent factoring shops did the lions share of the transportation invoice financing. Today, large financial institutions and banks have monopolized the industry with rock bottom rates. Lower rates mean there is less and less revenue to service and underwrite the invoices being financed. To combat the lower yields, large institutions have gone to great lengths to automate processes and underwriting. That might be working for large institutions with scale. However, smaller houses, without economies of scale, just cut back on procedures to compete. 

There is also the issue of the quality of vendors small shops are left to work with. If larger shops can scale with million-dollar-a-month shippers, smaller shops are left to service smaller shippers and small brokers. Simple competition from hundreds of competitors chasing the same small deals drives down quality, rates and underwriting. Let’s face it: in the factoring business, speed has always mattered. It was common in the recent past to see ads for, “Funding in 24 hours” followed by a competitor advertising “Same Day Funding”. Low rates, skeleton staffs, unknown debtors and the need for speed is a recipe to invite fraud. 

Scammers just have to take a look at internet advertising to see factoring is ripe for fraud. Fast funding, get $500k by tomorrow, no personal guarantees, you might as well advertise fraud welcome, we love a good game of Whack A Mole. 

There is another piece to this puzzle and it is not industry specific. That’s the quality of the debtors that factors of all sizes now have to work with. As Early Pay becomes more popular and used by more of the Fortune 500 to pay vendors early, factors are left with fewer invoices from recognizable household names. Walmart invoices? Gone. Amazon invoices? Never. General Motors? Nope. AT&T? Non-existent. Home Depot? Don’t count on it. The list of Fortune 500 invoices to finance that are off the market is too long to print. This is not to say that the remaining debtors are bad. There are great companies to finance in the middle market. However, to make a decent book of business, you have to go down further into the middle market to smaller and smaller companies. This is where being unfamiliar with these smaller companies and access to extensive credit information allows these fraudsters to impersonate or even coordinate with each other to commit fraud. 

There is one last point to consider, and that’s arrogance; the feeling that you have your act together. You do your background search; it’s clear. You do a debtor credit check; its good. You get a security interest in all collateral; absolutely, and you get a personal guarantee; a must. This all worked 20 years ago. Today, not so much. 

Of course the search came up clean, these people are made up. The debtor’s credit? It’s pretty easy to find a company that is struggling and open to collusion. As for your security interest, what are you going to collect if it’s fraud? Your personal guarantee? A false sense of security when you don’t know who signed it. Many company’s are even waiving them. 

Is there a solution? Yes, but you might not like the cure. First off, slow down. Speed is a thing of the past. Even verifications and estoppel letters are not safe tools anymore. Crooks will say whatever you want and sign those acknowledgment letters faster than you can print them. 

Second, you must get paid for the work you do. Rates, especially in a high-fed interest rate environment, must go up. You have to hire and train staff better and get a rate high enough to cover good salaries and inevitable losses. Third, meet your client face-to-face. If not in person, then on a web conference. People committing fraud don’t like to be seen in person. Chances are that picture on the driver’s license they sent over isn’t them. 

Fourth, and I really mean this one. Good Luck! This isn’t your father’s factoring business anymore.

The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.