Collusion Frauds in Factoring

Here's a breakdown of common collusion schemes in factoring, their warning signs, and how to combat them.

Types of Collusion Frauds:

Fake Invoices: Clients and debtors team up to create invoices for goods never shipped or services never provided. The factor advances money to the client on such non-existent/fictitious/fake invoices.

Price Manipulation: Clients and debtors agree to artificially inflate prices in invoices. The factor pays more than the fair value.

Double Financing: Clients sell the same invoice to multiple factors. This lets them collect way more than once for the same goods or services.

Circular Trading: Clients set up multiple shell companies as "debtors." Goods are passed around on paper, invoices are generated, and the factor pays out funds that end up back in the client's hands.

Fictitious Credit Notes: Clients and debtors claim goods were returned, issuing a credit note to reduce the client's debt to the factor. In reality, no return took place.

Inflated Credit Notes: Goods are partially returned, but the credit note massively overstates the returned value, reducing the client's financial obligation without justification.

Disputes: Clients and debtors collaborate to create fake complaints about goods, leading to unjustified credit notes.

False Chargeback Claims: Debtors dispute legitimate charges by claiming goods were damaged or not received, or services were substandard. The factor loses money via the chargeback process, even though the transaction was valid.

Friendly Fraud Chargebacks: Debtors claim they didn't authorize a purchase and initiate chargebacks, receiving goods or services for free.

Early Warning Signs

New Relationships: Unusually rapid growth with one or few new debtors should be a red flag.

Suspicious Connections: Shared addresses, phone numbers, owners, or family ties between clients and debtors suggest they're not acting independently.

Abrupt Turnover Growth: If a debtor's business explodes overnight with clients, treat that as a red flag.

Price Oddities: Unusually high or fluctuating prices, especially if they defy market trends, initiate a field audit.

Odd Shipping Patterns: Goods are sent nowhere, routed through multiple places, or being shipped in ways that don't make business sense.

Missing Documentation: Red flag if invoices lack supporting details (e.g. shipping documents, purchase orders, etc.).

Mitigation Strategies

Know Your Customer (KYC) Deeply: Verify business licenses, ownership, physical addresses, etc. Run background checks on key personnel of both client and debtor. Understand both businesses to gauge if the relationship makes sense.

Debtor Verification: Contact debtors directly to confirm invoices and transactions. Use third-party credit reports to assess the debtor's financial health. Consider on-site visits for suspicious or large-scale transactions.

Invoice Scrutiny: Look for discrepancies, inconsistencies, or missing details. Cross-check pricing against market rates and historical trends. Trace shipping routes and verify delivery confirmation.

Credit Note & Chargeback Vigilance: Don't accept credit notes at face value. Require proof of return. Analyze chargeback reasons and vigorously dispute fraudulent ones.

Ongoing Monitoring: Monitor patterns in factoring volumes or invoice values. Watch for suspicious changes in client or debtor behavior. Regularly review client and debtor financials. Be weary of high dilutions.

Technology Tools: Use data analytics software to detect anomalies and inconsistencies. Consider tools that help verify business legitimacy.

Staff Training: Train your team to recognize fraud red flags. Encourage reporting any suspicious activity.

Important Note: Even with vigilance, as factoring carries inherent risks, set limits, factor selectively, monitor transactions, and maintain reserves to absorb some losses.