Consulting » FRAUD – Credit control where it’s due.

Consider this tale of low cunning. Your company receives a credit application from a company that wants to place an immediate order for #250,000 of product. Naturally, you’re suspicious as first orders of this size from a new customer are rare. Your credit people check out the company and warning bells ring. Never mind, says the prospective customer, we’ll pay in advance. They ask for your bank details and on Friday pay a cheque to your company’s account for a quarter of a million. On Tuesday the following week they tell you the money is in your account and can they, please, have the goods?

You call your bank to confirm this and the bank tells you there is, indeed, a cheque credit to your account for the stated sum. You’re about to release the goods when you remember that a cheque credit is not confirmation of cleared funds. You pull the order just in time – and later discover the cheque was from a book stolen in a Birmingham club.

Commercial fraud is now rising faster than ever before in the UK. Frauds logged by CIFAS, the fraud avoidance organisation, on behalf of its 237 member companies, rose by 36% between January and October 2000, compared with the same period the previous year. False identity frauds, where people invent an identity or pretend to be somebody else, rose an astonishing 456%.

With figures such as these, it’s hardly surprising that the tale above is true. The smart credit services manager who spotted the fraud was Eddie Pacey of computer component distributor Ideal Hardware. But, before he saw through the scam, other less prudent companies had allowed the fraudsters to make off with #1.3m worth of product.

Fraudsters are becoming more sophisticated in practising old scams, such as advanced fee fraud, and they’re also moving onto the internet. But there is plenty that can be done to minimise the risk of being defrauded. Partly, it’s time for FDs to look again at their credit control processes and departments (for internet specific advice, see panel, page 54).

Peter Hurst, CIFAS executive director, believes his organisation is becoming better at spotting frauds before they’re perpetrated. He says the amount CIFAS has saved from the fraudsters is likely to be close to #200m in 2000, compared with #165m in 1999. Significantly, CIFAS is beginning to make headway in tackling major organised frauds.

This progress is vital if rumours that overseas fraud gangs are targeting the UK are true. Some countries – Nigeria is mentioned most often – are even said to have schools which teach how to scam British firms.

“It’s a major concern that London is attracting the best fraudsters from around the world,” says detective superintendent Ken Farrow from the City of London Police fraud squad. Farrow, who is also chairman of the National Fraud Working Group of the Association of Chief Police Officers, says overseas fraudsters are attracted because Britain has a buoyant economy and banking system. “They are hoping people will be too busy to check things thoroughly,” he says.

In one case, overseas fraudsters obtained satisfactory financial statements from a respectable firm but changed the name on the documents to that of an off-the-shelf company they’d bought and registered with #2 issued share capital. The respectable firm’s statements were then filed at Companies House under the off-the-shelf name as its first year’s report and accounts, with fictitious directors’ names and addresses appended. After a delay to allay suspicions, the gang applied for credit from dozens of suppliers. They were granted not only lines of credit but, in some cases, insured credit. Nobody is certain how much the gang ripped off.

This fraud, and others, are made simple because companies house does not have a remit to check the accuracy of information filed with it. For example, it can’t spot “phoenix companies” – where the assets and directors of a failed enterprise appear under a new trading name, leaving creditors of the insolvent company high and dry.

An in-depth study by the Official Receiver of 1,412 liquidations revealed that 3% of failures were attributable to fraud. Across the average of 5,200 compulsory liquidations in England and Wales each year, that adds up to something like 156 fraudulent companies.

The National Audit Office has estimated that when a company fails with an unfit director, creditors lose an average of #150,000. So the cost to creditors of failed fraudulent companies is at least #23.4m a year. Most probably, the figure is much higher because many frauds go undetected.

Competition and consumer affairs minister Dr Kim Howells has argued that provisions in the new Insolvency Act, which gained royal assent in December, should make disqualifying rogue directors more efficient. The act introduced an administrative procedure for disqualification, through which, if creditors and debtor agree, the debtor can be disqualified without recourse to the courts. In addition, liquidators must now report suspicious or criminal misconduct directly to the Department of Trade and Industry rather than to the Director of Public Prosecutions. This new approach also takes account of a two-year-old ruling by the European Court of Justice that disqualifications must be treated as civil rather than criminal proceedings.

Egan Brooks, chairman of the Law Society’s insolvency law sub-committee, and head of corporate recovery at Addleshaw Booth & Co, says: “I think the new act will be useful against the straightforward honest guy who will hold his hands up. The veteran rogue director is probably going to take it all the way because he thinks he can negotiate a better deal at the door of the court.”

It is also difficult to see the changes making any difference to the law on phoenix companies enshrined in section 216 of the 1986 Insolvency Act. This prevents rogue directors starting a phoenix company with substantially the same name as the bankrupt company, but it isn’t much use against fraudsters who divert assets into parallel companies.

Long firm fraud, in which a fraudster seeks to build a reliable credit history by buying and paying for small orders, before placing a large order and disappearing with the unpaid goods, is another crime on the increase.

But there are signs that the police are willing to take the fight to the fraudsters. Last year, officers from fraud squads around the country toured the giant Autumn Fair at Birmingham’s NEC. The household and fancy goods manufacturers and wholesalers who frequent the fair are a particular target for long firm fraudsters, partly because their products are easily shifted for cash.

Officers warned traders that fraudsters were seeking credit lines at the fair. Detective constable Graham Dowling, from the Metropolitan Police’s fraud squad, says: “When the fraudsters saw us walking around the place, they left. It gave them a bit of shock to think the old bill were there.” Following the success of the exercise, the five regional groups of ACPO’s National Fraud Working Group are being invited to draw up plans for similar operations in their areas.

Despite the efforts of the police, the first line of defence against fraud is always in a company’s own credit control function. John Moorehouse, credit manager at Newbury-based Distributed Micro Storage Technologies, says his recipe for fraud control is “a very tight credit application form and credit vetting procedure”. He says: “You need to have a good source of information, whether that be through credit circles or agencies. The days have gone when you rely purely on Companies House. Filed accounts are 18 months out of date. Current information is absolutely essential. Communication with your fellow suppliers and other people through a credit circle is also important. If anybody comes across anything that is a bit suspicious, we are pre-warned. If, for example, I had a company bounce a cheque on me, using e-mail I could warn at least 40 or 50 other companies within an hour.”

Sue Sear, head of credit collections on the commercial side at telecoms supplier NTL, also believes that front-end management is the key to controlling fraud. “We are very careful in our checking,” she says. “We work extremely closely with our sales and service teams. When we take on a new limited company, we monitor it very closely, especially in the first six months of trading with us.”

NTL has different procedures for start-up companies compared to famous names with long-established trading records. “In the first three months of a start-up’s life we monitor call spends, set credit limits and have one of our credit controllers monitoring the account,” she says. “We take guarantees from directors of newly incorporated companies because you can’t necessarily credit check them. If it is a start-up, we will ask to see where they are getting their funding and we check carefully. We will check to see when payment is due and sometimes make a courtesy call before the due date to make sure they have received the invoice. We would then carry out our normal chasing procedure. It is all about minimising our exposure.”

At the end of the day, firms that have been ripped off by fraudsters or rogue directors most of all want to get their money back. But that’s rarely easy, says Roy Streeter, managing partner at, which specialises in tracing and recovering assets. He points out that fraudsters go to extraordinary lengths to hide their ill-gotten gains and says he once spent a week driving from Manchester to Florence, stopping off at towns on the way, to serve notices on 17 banks to disclose one fraudster’s assets.

Seizing and selling off a fraudulent company’s goods is not much more productive, largely because resale values at auctions are low. “If you take the furniture and equipment from an office that’s cost #10,000 to equip, by the time you get it to the auction house, you’ll be lucky to get #750 for it,” says Streeter. “In debt recovery, if you can’t get there quickly and cheaply, it’s best to write it off and focus on making new cash.”

What’s more, it’s obvious that any company with too much dead money starts looking like a case for the graveyard itself. So the message is clear: tighten your credit procedures or risk losing your business.


Jim Lanford, president of Inc, a North Carolina internet company, first became concerned about internet fraud when his company was ripped off in a stolen credit card transaction. Now he has set up a net site – – to fight against cyberspace crime and has developed eight guidelines to combat internet credit card fraud.

– Take extra steps to validate each order. Don’t accept orders unless complete information is provided including full address and phone number. Address verification is also important.

– Avoid orders with different “bill to” and “ship to” addresses. “We now require anyone who uses a different ship-to address to send us a fax with their signature and credit card number authorising the transaction,” says Lanford.

– Be extra careful with orders from free e-mail services. If the orders come from a or number, for example, there’s a much higher chance they are fraudulent. Lanford says: “Many businesses won’t accept orders that come through free e-mail accounts any more. Check every e-mail address by typing www in front of the domain name of the e-mail address into your browser.” And he adds: “When you get an order from a free e-mail account, we recommend sending an e-mail requesting additional information before you process it. More specifically, ask for a non-free e-mail address, the name and phone number of the bank that issued the credit card, the name on the card and the exact billing address.”

– Watch out for orders that are larger than normal. A next day delivery demand may also be worrying. “Crooks don’t care what it costs, since they aren’t planning on paying for it,” says Lanford.

– Pay extra attention to international orders. “Do everything you can to validate the order before you ship your product to a different country.”

– Use the telephone to call customers to verify suspicious orders. “Believe us, it will save you a lot of time and money in the long run,” says Lanford.

– Install anti-fraud software. Companies such as TrustMarque and Real Decisions, have software which helps to identify rogue buyers.

– Contact the card issuer if your company is ripped off. This makes sure the card number is reported. The owner of the card may not even realise the number is being used fraudulently.


Insolvency lawyers from City firm Lovells warn that an economic slowdown is likely to increase the amount of fraud as companies struggle to meet forecasts, comply with covenants and stay afloat, writes Andrew Sawers.

Cary Kochberg, a partner who specialises in fraud and insolvency, says that even long-standing businesses may perpetrate frauds that affect their trading partners. “When companies started suffering in the last recession there was pretty wholesale fraud in terms of the books and records of companies to conceal their insolvency, to keep the company going,” Kochberg says.

These businesses didn’t set out to commit fraud, they just tried to buy time, but usually they just dug themselves a deeper hole.

Kochberg’s US colleague, litigation lawyer Marc Gottridge, points out that there is also a fraud risk purely and simply from the pressure that business managers will be under to meet budgets as economic conditions worsen.

“People will be under stress to keep the numbers from looking bad over the quarter. You have to be careful not to recognise revenue when it shouldn’t be recognised, and ensure that expenses are taken in the proper period,” he says.

Regulators and litigious investors take a dim view of share price collapses that occur on the back of improper accounting.