Fraud has existed since mankind developed the ability to form intent and deceive their fellow man. Surprisingly, until 2006 there was no definition or specific offence of fraud; it existed in a myriad of other offences which were repealed in 2006 and replaced with the Fraud Act making the offence of fraud much more clearly defined and thereby easier to prove. Common place among frauds that have been perpetrated both before and since the changes include what is commonly referred to a “Long Firm Fraud”.
Criminal enterprises, such as the Kray twins existed from preying on other businesses or firms through perpetrating fraud. They were synonymous throughout the East end of London in the 1960s and took advantage of this. They were known then as they are now as the “Firm”.
As the name suggests, it was started by the Krays, the “firm”. The modus operandi of the scam was in developing trust with customers and suppliers over a long protracted period of time. From this, as the name suggests, came what is known as “Long Firm Fraud” and continues today.
A more recent example includes the case of Arena Television suspected of this type of fraud*. In short, it is reported that more than 55 lenders were caught up in this alleged scam. Arena were suspected of inventing thousands of fake assets and obtaining multiple asset finance facilities across multiple providers on assets that didn’t exist. The more finance they obtained, the more creditworthy they appeared together with the appearance and security of their assets and trade. It is alleged this culminated in more than £282 million of loans on assets that likely don’t actually exist.
The scale of the problem is only growing, despite the efforts of the banking and finance industry. UK Finance reported that in the first half of 2021, criminals stole a total of £753.9 million through fraud, an increase of over a quarter (30 per cent) compared to H1 2020. A further indication of the issue is the estimated 4,000 plus suspicious phoenix businesses have been formed since government support commenced in April 2020.
The impact upon lenders and brokers is considerable. Financial loss for both; bad debts and write offs for the lenders, commission debit backs for the brokers. And then there is the potential for reputational damage, the fraudsters having no qualms about the collateral damage to innocent third parties. Whilst there has been no sign of any lender removing themselves from the market on the back of the current Arena Television situation, that’s not to say it won’t happen. In previous similar situations, this has been an unfortunate consequence. For sure though, lenders affected will naturally revise their outlook in underwriting, inevitably leading to a restriction in appetite.
Across the industry we are employing a raft of tech-based systems and processes in an ongoing attempt to combat the fraudsters. From our own experience at Ultimate Finance, we know that this has enabled us to side step a number of frauds and we know this is the case for many other lenders too. However, technology and systems are not the only lines of defence.
The industry has developed a robust and systematic approach to detecting, managing and sharing information through the co-operation of lenders as members of CIFAS for example.
One of the goals for our industry in the last few years has been to deliver faster turnarounds on finance, with the key aspect of this being the speed of decision. The race to provide a quick acceptance does potentially come at a cost though as the level of information provided becomes one of the casualties of the concept. This line of least resistance in credit decisions becomes a fault line that fraudsters can exploit. Asking the difficult questions and requesting documents to back up answers should not be shied away from – by lenders or brokers. Whilst we can utilise technology to speed up the searches and checks, maybe it’s time for an industry standard minimum fact find.
Sharing information with the broker community is essential. In many cases they are the front line of defence and as an industry we should do all we can to equip them to fulfil this role. At Ultimate Finance we develop long term relationships with our introducers and brokers, so they can gain more insight and knowledge of how we can help them to combat fraud in their own business as well as the business they introduce to us.
We are in the business of lending money and will continue to support business ambitions using our combination of products from Asset Finance to Working Capital and Bridging Loans, mitigating risk is a key part of the business, something we are very good at too!