The price of fraud

You have probably seen or heard the horror stories where a fraudster has put a mortgage on a house without the homeowner’s knowledge. Only when the loan goes into arrears does the homeowner suddenly find out that the lender is ready to take action. The homeowner is left with a major problem trying to convince the lender not to foreclose.

Similarly, the commercial section has seen its fair share of fraud and scam artists. These include individuals offering phony leases, security pledged for loans not owned by the borrower, identical security pledged for loans from different companies, false financial statements and purposely inaccurate descriptions of assets. There are many more of these types but it gives you the idea of how creative the fraudsters are. Especially in the commercial sector, these scams are sometimes thought of as a victimless crime; after all, the only one hurt is a big bank or lender who has to deal with the ramifications and, more than likely, a significant loss. Well, the ramifications are wide and, unfortunately, affect everyone. If you have ever wondered why it takes so long to get an answer from a bank or lending institution, part of the answer lies in the steps now in place to help guard against this menace.

The banks have a “know your client” policy. If you have dealt with the bank, you know that now identification has to be presented for every transaction. The identification may be requested again for followup to ensure there has been no change especially if additional loans are requested.

An interesting side note: banks no longer treat bank drafts or certified cheques as cash. They now will wait five business days before crediting the account with the funds. You will see signs posted in the branches. When I asked why, the response was tersely worded: “Fraud.”

Banks and lenders are now contacting accountants to verify financial information provided in loan applications.  This includes not only verification of selected information including revenues, profit and balance sheet items, but also information on notes. Fraudsters have been very creative in preparing real-looking financial statements that bear no relation to the actual results. In addition, critical notes have been omitted or significantly changed, especially going-concern notes.

In addition to completing a signed personal net worth statement, corporate and personal credit checks are made with close attention to what is outstanding and corresponds with the statement of personal net worth. There are also criminal background checks completed on all shareholders.

Visits to sites and pictures of the assets with dates have to be made along with checks on serial numbers to verify that the equipment being pledged for security matches the bill of sale. Checks are also made with the landlord and leases are reviewed to ensure they are valid. Without getting into too much detail, there have been storefronts set up with equipment in wrapped condition in industrial parks. When the account officer follows up with a visit after disbursement, a big surprise awaits as he finds the premises vacant and equipment gone!

Real estate agents, lawyers, accountants and others in the chain now have responsibility to carry out the same type of due diligence. This, of course, lengthens the time that it takes for parties to complete a deal. And since time is money, so the costs increase.

All these procedures are over and above the standard due diligence required, including evaluating financial capability, performance, environmental compliance and source deduction verification checks. It is frustrating for all, especially the good clients and bank account managers trying to get a deal or financing completed. The pendulum never swings back to the centre and so there will remain significant checks to be completed as part of the financing process. Fraud has deeply impacted the way transactions are completed and we are all now paying for the actions of a few.