Whenever I get appointed to a business that has numerous items leased or financed through a range of different finance companies, I start to wonder whether the owners have committed a leasing fraud on some of these financiers. I have just been appointed to such a business and am currently collating the information from the finance companies. The owners of this particular business may or may not have committed any fraud, but I thought it worthwhile summarising one of the Fact Sheets from our website that explains this type of fraud.
Leasing fraud is fraud committed against a finance company by falsifying the documentation used to obtain lease finance. These frauds are not limited to leases, but I have used leases to explain the fraud in this article.
Leasing fraud is meant to remain undetected and, if it ever reaches its conclusion, no one will have suffered a monetary lost. But, during the life of the fraud, the financier’s security position is compromised. If, as is usual, the fraud does not continue to its conclusion, one or more victim finance companies will suffer a loss.
The idea of the fraud is to obtain the money generated from leasing an asset that you do not own by selling it to a leasing company and pocketing the money.
The parties involved
There are at least two parties in these frauds, and possibly three:
1. The third party finance company is the victim of the fraud. They finance the lease under false documentation. This fraud does not work with ‘vendor financing’. The money paid by the leasing company to the supplier is the target of the fraud. A third party financer is necessary to have that payment generated.
2. The business (or the people behind the business) is the fraudster. This fraudster entity may also be the supplier of goods involved in the fraud – in a sale and lease back agreement – but there may be another ‘supplier’.
3. There may be a separate ‘supplier’ of the goods to be leased. To make this fraud work, this supplier is not the owner of the asset. Also, this supplier will have to be controlled by the fraudster, as it is the entity that receives the money from the financier. This supplier will usually just be a front set up simply to receive the money.
The important point is that the third party finance company pays the supplier for the goods and then rents them to the customer. The money paid by the leasing company to the supplier is the target of the fraud. A third party financer is necessary to have that payment generated. Leasing directly from the supplier effectively sees that supplier pay them self. The money is not accessible to the fraudster.
Why is an associated supplier necessary?
An associated supplier is necessary as the third party finance company pays the money to the ‘supplier’ of the asset. The fraudster needs access to that money. Using a legitimate third party supplier will see the money paid to that real supplier – not the fraudster.
How is the fraud done?
1. Obtaining the equipment through the initial lease
The fraudster acquires an asset from a legitimate supplier and may finance it through a leasing company under commercial terms. The first lease entered into may be entirely legitimate. This gives the fraudster the asset to use in his fraudulent lease applications. Regardless of how this is done the fraudster wants an asset that he has not paid for so that he can sell it to the leasing company.
Of course, the fraudster may decide to conduct the fraud without any real asset, so this step may not be taken.
2. Creating new (false) paperwork
The fraudster has obtained the equipment and the related (legitimate) paperwork from the supplier. He can now create a false set of documents complete with serial numbers and other information. These false documents are from the false supplier entity that will receive the payment from the victim finance company.
3. The fraudster commits the fraud
The fraudster submits the false lease application to a new financier but now purports to be sold by the false supplier. The victim financier may accept or reject that application. If accepted, the financier pays the financed amount to the false supplier and expects to receive lease payments each month.
The fraudster has now leased the equipment through two different finance companies and has pocketed the money paid under the second lease agreement. They are also committed to two lease obligations. There is nothing stopping the fraudster from doing the same fraud a second, third or fourth time using the same equipment and targeting other finance companies.
Ownership of the equipment
The second or any subsequent financier does not get legal title to the equipment, as that has always vested in the original financier. They have no security or right of repossession if the monthly lease payments are not made. For the fraud to have any real commercial value to the fraudster, he cannot make all of the lease payments. At some stage he must default and disappear.
What assets are used in these frauds?
This fraud is easiest done when the assets are common and where ownership or security does not require registration. Both land and motor vehicles are generally not good for this purpose as both assets have accessible registers for checking ownership and security. That is not to say that the finance company will actually conduct those checks, but they have the option of doing so.
The assets are usually of high dollar value – why commit a small fraud when a large one is just as easy. The assets should be able to be easily identified by serial number etc to give the finance company some comfort when considering the application. The victim will feel assured when receiving an application complete with all identifying numbers.
Fraudsters generally use assets that can be obtained from many suppliers (like computer equipment) so that the false supplier used in the frauds does not raise suspicion.