How can Invoice Lenders get match fit to minimise future risk?

  • Aaron Hughes , Managing Director at Equiniti Riskfactor

  • 02.10.2019 11:45 am
  • risk management

Hardly a day passes without there being a new report on shrinking manufacturing output, increasing costs to business and fears of an emerging global recession. UK manufacturing activity is at its lowest level since July 2012; sales to the EU have dipped as European purchasing managers look closer to home in Brexit uncertainty; and US and Asian orders are falling, too, as signs of a global slow-down emerge.

The impact of these macro events flow down the supply chain to businesses across all UK SME sectors.

Cash flow pressures hit Invoice Finance (IF) users quickly. A fall in sales or a bad debt has an immediate impact and a business can quickly run out of cash. Some will resort to manipulation of the IF facility to plug the gap.

At Equiniti Riskfactor, we provide risk management solutions to 90% of the invoice finance market in the UK.  Our clients are telling us they are seeing deteriorating trends and a rise in fraud events – so what is going wrong?

All invoice finance providers we work with have well established processes and controls – aside from the EQ Riskfactor software. Many have detailed Operational Risk policies, with fraud controls that are stress-tested and continually improved.

These include preventative controls at the outset such as KYC (Know-Your-Customer) and AML (Anti Money Laundering) processes, credit policies that weed out higher risk customers, pre-lend due diligence surveys and debt verification.

Deterrent controls aim to stop a fraudster by making a fraud harder to perpetrate and increasing the likelihood of the fraudster being caught. These include Directors’ personal guarantees and random spot checks on invoices and audits, while detective controls - of which EQ Riskfactor is a key component - operate to identify the first signs of facility misuse.

But we are beginning to see an increase in facility misuse and attempted frauds, even with lenders who have well established fraud controls.

We have recently carried out a number of independent reviews to find out how a fraud occurred, what went wrong with the controls and what needs to be done to stop it happening again.

While the businesses involved and the nature of the frauds differ in each case, there are some striking similarities emerging. 

There was nothing unique about any of the mechanisms used in the frauds, no clever new way of getting around the usual controls. Typically, the fraud took the usual forms – fictitious sales, collections diverted away from the lender to another account, credit notes suppressed, invoices being re-aged, and advances recycled as collections against false invoicing.

Generally, our reviews have identified common themes such as the lender not acting on warning signs fast enough or not using the tools at their disposal effectively.

We have seen examples where individuals – or whole teams - are perhaps not confident enough in using EQ Riskfactor to appreciate what the metrics are saying. Plus, we recognise the importance of training employees new to the industry and we are increasing our consultancy capabilities to work with clients to spot process weaknesses and training gaps.  

When used effectively, EQ Riskfactor brings enormous risk management benefits, however where knowledge is lost or not fully embedded in the first place then the risk of fraud loss can increase.  

Apart from the many efficiency gains that EQ Riskfactor can bring - for example, automated reconciliation and disapproval calculations, and reduced audit requirements - it is a vital control against potential fraud losses.

To make the most of it, users need to be confident in understanding how the system works, and what the risk metrics mean.

With client failure and fraud risk set to increase over the coming months, is your team match fit and ready for the challenges ahead?

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