Types of Fraud
Methods of lease fraud are constantly evolving. Individuals perpetrating these frauds have studied our industry's practices and methods. Many of these frauds involve Vendors and Lessees who meet most of the screening criteria utilized by leasing companies - directory assistance listing, time in business, and even physical storefronts. Lease Police, Inc has identified the following general types of lease fraud:
- Disguised Working Capital Fraud - In
this scenario, a vendor presents himself as a legitimate seller
of equipment, however, he is nothing other than someone soliciting
for working capital loans. He will take a customer's current
equipment and disguise it as his equipment and lease it back
to the customer (the lessee). The vendor will keep 30%
to 50% of the lease proceeds and will give the remainder to
the lessee. This type of fraud can be very damaging
and hard to detect, as many of the re-liquefied lessees will
make payments for a while after funding. Most funders
will experience a default rate between 10% to 40% with these
transactions. Many of these vendors will "spread
their paper" among several sources to further conceal their
detection. Using LeasePolice.com, detecting these vendors
is easy - just take note of excessive early termination
activity.
- Overpriced Equipment Working Capital Fraud
- A vendor will overprice a piece of equipment and offer the
debtor or lessee money back. For example, a vendor will
lease a $5,000 computer for $30,000 and give the debtor or lessee
$15,000 as an inducement to enter into the lease. This
type of fraud will have higher loss rates over the portfolio
life, but because the debtor/lessee has just received a "lump
sum" from the vendor, they will make payments for a while.
Using LeasePolice.com, detecting these vendors is easy -
just take note of excessive early termination activity.
- Product Representation Fraud - In
this scenario, the vendor may offer a deal that is "too
good to be true". It may involve a 100% money back
guarantee, inflated promises on the equipment, or even a "promise
and disappear" scheme such as the recent Norvergence transactions.
These vendors appear to be tremendous engines of new leases.
They can produce hundreds of new leases per month from
the beginning of their existence. In most of these cases,
the vendor is gone after one to two years, leaving funders an
endless stream of litigation. Using LeasePolice.com,
detecting these vendors is easy - just take note of a high
number of recent inquiries for a newer vendor.
- "Broken Up" Transaction Fraud
- This type of fraud includes activity by Vendors and Debtors/Lessees
who break up a larger deal into smaller pieces to avoid financial
disclosure (without disclosing their other requests to the lenders).
In most cases, those involved are aware of the application-only
limits and apply for a large number of smaller transactions
due to poor financial information. Imagine a $350,000
deal that is achieved by "splitting the transaction into
five $70,000 transactions with five different funders. Some
of these deals are further disguised by applying for corporation-only
signatures - with no credit bureaus reviewed. In many
cases, the debtor/lessee is already in distress and they fold
under the higher debt levels. Using LeasePolice.com,
detecting these lessees is easy - just take note of a high
number of recent inquiries. Even corp-only transactions
are shown in LeasePolice.com.
- Past Due Account "Layoff"
Fraud - This is one of the oldest and least reported types
of fraud in the industry. A Vendor has an internal delinquent
open account with a customer. They usually threaten the
customer to either pay the past due balance or they will pick
up the equipment. As an option, they offer the past due
customer the option to convert their account into a lease. By
converting the delinquent customer into a lease, they get paid
by the equipment leasing company, and the leasing company gets
an almost instantaneous delinquency. Many of these deals
show up as first payment defaults. All participants are
legitimate companies and fraud is almost never suspected! Using
LeasePolice.com, detecting these Vendors is easy - just
take note of a high number of early terminations/defaults using
the LeasePolice.com system.
- General Misrepresentations By Vendors
and Lessees - This general category includes activities
such as submitting altered financial statements, hiding prior
bankruptcies, hiding ownership, false references, misrepresenting
used equipment as new, falsifying actual date of sale or delivery,
equipment being sent to other locations without disclosure,
concealing large judgments or liens, and leasing the same collateral
twice. Using LeasePolice.com, detecting these transactions is
easy. LeasePolice.com subscribers can report any suspicious activities
and they will be posted in our datafiles for future review.
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