Factor fraud is tempting but always detected

Mar 25 2009 by Tom Scotney, Birmingham Post

There are two types of factoring – open and hidden. In open factoring, the company does not mind if customers know they are using a factor. The debtor is sent invoices by the factor to recover the face value of the invoices.

If a company has decided to factor invoices to improve cash flow, it may wish to keep this from its customers. In these circumstances closed factoring is used, which involves the debtor being invoiced by the company, not the factor, who is sent the invoice and then pays a percentage. When the debtor pays the invoice, the sum due to the factor is paid.

The fraud is sometimes not internal but purely perpetrated to cause loss to the factor. One example of this was uncovered in 2008 where the directors of a Manchester-based computer firm, Ravelle, were convicted in a £3.25million fraud upon its creditors.

The fraud was centred on false sales documents and a web of inter-company transactions designed to deceive factoring companies into providing finance to the Ravelle Group. This is a prime example of collusion, one prerequisite for factoring fraud.

Many types of fraud are only possible if collusion exists. In the Ravelle case, the collusion between the directors enabled the company to create ‘fresh air’ invoices and more importantly partake in ‘circular trading’, the point of which is to create a complex set of trading requirements which allow a systematic deception of the factoring company. The schemes that keep companies running could not have been implemented without the continued input of the parties at Ravelle and one of the directors was a qualified accountant.

n Arun Chauhan is a member of the fraud and asset recovery team at Challinors in Birmingham.