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Leasing Frauds

What is Third Party Fraud?

This is a fraud committed against someone or some business by people other than their employees. They can be committed against individuals, businesses, companies, governments etc. Third party frauds are not as common as occupational frauds, but on average each fraud is for a larger amount.

Some third party frauds are not meant to remain hidden forever. Some only remain hidden long enough for the fraudster to get away. The fraudster may not care if the fraud is eventually discovered as there is no continuing relationship with the victim and they have made their getaway.

What is leasing fraud?

This is fraud committed against finance companies by falsifying application lease documentation to obtain finance for an item under false pretences. These frauds are not limited to leases, but the fraud is explained using leases in this Fact Sheet.

Does this fraud remain hidden?

Leasing fraud is meant to remain undetected and, if continued to the conclusion, no one will have actually suffered a monetary lost. But, the financier's security position is compromised for the duration of the fraud. If the fraud does not continue to its conclusion, the victim finance company will suffer a loss.

Who are the parties involved?

There are at least two parties in these frauds:

1. The finance company is the victim of the fraud. A series of these frauds may be done at the same time, so there can be more than one victim.

2. The customer business (or the people behind the business) is the fraudster. This fraudster may act in collusion with another party posing as an innocent supplier of goods, but does not need to do so.

There is usually an innocent third party supplier of the leased item. They will have no knowledge of the fraud and their involvement ends usually when the item is initially supplied.

Why choose a third party finance company?

Leases are used to finance the 'purchase' or use of assets. In effect the finance company buys the asset from the supplier and rents it to the customer. Leases can be provided by the supplier of the asset or a third party leasing company. Generally the initial lease of the asset will be legitimate and, if so, it does not matter who supplies the finance. The important part is that the leasing company pays the supplier for the goods and then rents them to the customer.

Generally possession of the item passes from the supplier directly to the customer, without the finance company ever seeing the equipment. Fraudsters will target a third party leasing company for a false lease, as the fraudster wants a distance of knowledge between the financier and the item leased. The fraud is based on financing equipment that is owned by other people (commonly another finance company) and this is not possible when obtaining finance from the supplier of the assets.

How is the fraud done?

There are a number of steps to the fraud:

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 can be entirely legitimate.

2. Creating new paperwork

The fraudster has obtained the equipment and the related paperwork from the supplier. He can now create a false set of invoices complete with serial numbers from the equipment. These false invoices need to be from the entity that will receive the payment from the victim finance company, so the fraudster needs to control the false supplier.

3. The fraudster commits the fraud

The fraudster submits a lease application to a new financier. This application is for the same equipment obtained from the real supplier under a legitimate lease, but now being sold under the false documents. The victim financier receives the finance application, full details of the equipment, a draft invoice for the sale of the equipment and processes the application. It 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 from the second lease.

4. Ownership of the equipment

The second 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 payments are not made.

5. One more time

There is nothing stopping the fraudster from doing the same fraud again (a third and fourth lease) on another finance company for the same equipment.

What assets are targeted?

This fraud is easiest when the financed assets are common and where ownership or security does not require registration. Both land and motor vehicles are not good for this purpose as both assets have accessible registers for checking ownership and security.

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 doe not raise suspicion.

FOR EXAMPLE

The perpetrator ran a business through company A, and decided to lease some expensive computer equipment. He contacted a supplier and made an application to a leasing company for finance (Financier 1). The finance was provided and he obtained possession of the assets.

The perpetrator got the idea for the fraud. He incorporated company B and made an application to Financier 2 to purchase the same equipment from company A and lease it to company B. The documentation from the original supplier was copied on to new letterhead and the lease finance was approved. Financier 2 paid company A (the fraudster's company) for the equipment.

Company C was then incorporated and an application was made to Financier 3 to purchase the same equipment from company A and to lease to company C. Same method and same result. At this stage the same equipment had been financed three times, twice improperly, and ownership still vested with the Financier 1 (under the real lease). Significant funds were raised from the two false transactions and these were partially used to make the payments under the leases.

LESSONS TO BE LEARNED

These frauds usually involve a range of different financiers and different false suppliers and false customers. There is little opportunity for any one financier to see a pattern in the transactions.

Stricter vigilance in checking the parties to the transaction, particularly suppliers, may raise some suspicion. If the finance company is the same; or the same company is used to perpetrate the frauds, searches may raise some common names. Using different finance companies and different entities makes this difficult.

All businesses try to streamline processes and make their services easier for customers. Those efforts assist these frauds as streamlining procedures may limit the checks performed on new applications for finance.

It is impossible to stop false applications. Detailed checking of the identity of the suppliers (to ensure that they are genuine) and customers (to ensure that they are substantial) and the equipment (to ensure it exists) may find some false applications, but will add to the cost of the process.

The fraud will usually include a false supplier, as it is the supplier that receives the payment for the goods from the financier. If the identity of the supplier was checked, it might have uncovered that the supplier was not a genuine supplier of such goods and the application rejected.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

Acknowledgment
The material in this Fact Sheet was sourced from various publications including those listed in the Reading List on the Fraud Awareness page on this website.

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Last Updated: 2.4.2008