You Think Fraudsters Only Affect a Small Number of People – Think Again!
We have 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 take foreclosure action.
Similarly, the commercial sector has seen it fair share of fraud and scam artists. This includes phony leases, security pledged for loans not owned by the company, same security pledged for loans in different companies, false financial statements and purposefully 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 it tars everyone. If a business person wonders why it takes so long to get an answer from a bank or lending institution, we outline all the steps now in place to help guard against this menace.
The banks have a “know your client” policy which impacts every client in the bank. If you have dealt with the bank, you know now that identification has to be presented including copies of your passport, driver’s license or other recognizable approved sources of identification. The identification maybe requested again for follow-up 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 outlined in the financial statements provided in the loan application. This not only includes verification of selected information including revenues, profit and balance sheet items but also includes information on notes. Fraudsters have been very creative in preparing real looking financial statements which 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, credit checks, corporate and personal, 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, as well, on all shareholders.
Visits to sites and pictures of the assets with dates have to be made and checks with the serial numbers to verify that this is the equipment being pledged for security matches the bill of sale. Checks are also made with the landlord and leases reviewed to ensure there is a valid lease. Without getting too deep, there have been store fronts 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 a deal to complete. And of course, 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, the bank Account mangers and all trying to get a deal or financing completed.
The pendulum never swings back to the center and as such, there will remain significant checks to be completed as part of the financing process due to the amount of fraud that has been attempted! As can be seen, fraud has deeply impacted the way transactions are completed and we are all now paying for the actions of a few.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile is a mid market mergers & acquisitions brokerage firm. You can contact Mark at