Festive Season Increase - Fraud will Cost Short-Term Insurance Industry R2-Billion Annually

The risk of business fraud is very real in South Africa. Fraud is expected to cost the SA short term insurance industry around R2-billion per annum, with the prevalence of fraudulent claims on the increase.

Coface operations manager Jacqui Jooste says businesses are not doing enough to prevent fraud. “We believe that companies have no option but to treat fraud as one of the most significant business risks facing their organisations, especially considering today’s economic environment,” says Jooste.

“The topic of fraud is diverse and large and can include fraud by employees, policy holders and syndicates,” she says.

“The current South African economic environment lends itself to increased incidences of fraud and fraudulent schemes which are becoming increasingly more sophisticated,” says Jooste.

As individuals and businesses come under more pressure because of higher interest rates and inflation, incidences of fraud are likely to increase.

Types of fraudulent activity
First-party fraud is where a customer applies for and accepts credit with no intention of repayment.

Third-party fraud or ID fraud occurs when the criminal uses another person’s identifying information. “In our experience, there has been a steep increase in this type of fraud in the last six months,” says Jooste.

People fraudulently obtain credit limits on behalf of large and reputable companies where they act as representatives of that company using false company letterheads and contact details.

Accounts are then opened in the name of the reputable company and goods are sold, and often collected, by the person pretending to represent that company.

“Historically, the incidence of these activities has always increased around the festive season, as well as around the Easter holidays. These are the times when credit departments are under pressure from increased sales and often have limited staff contingencies,” says Jooste.

It appears as if the syndicates have contacts in various institutions and they obtain copies of confidential documents such as letterheads, VAT registration numbers, banking details and cancelled cheques, which they then provide to the credit department of the companies they target.
“In our experience, they identify established companies which can easily obtain large credit limits,” she says.

“The key is to remain vigilant,” says Jooste. “If you receive a credit application, and the only contact number given is a cell number, see this as a warning sign. Fraudsters rely on the fact that you are busy and will not have time to check the registration number and contact number to confirm the order and credit application.

Other fraudulent activities include:
•Creative accounting (hiding the true state of the business to stakeholders). In a survey into factors contributing to the collapse of organisations (liquidation), 28% of respondents believed that fraud played a role in the liquidation of the sample companies.

•As a credit insurer, we have been subject to planned schemes arranged by “debtors” to defraud our policy holders of vast sums of money. In the past seven years, we were on risk for at least 11 buyers, who appear to have started the “business” for the sole purpose of defrauding their creditors.

•There have also been examples of companies who have expropriated assets as their business started to deteriorate; leaving nothing for creditors, once liquidated.

•The latest type of scam relates to changing banking details for electronic transfer of payments (EFT’s).
oThe criminals send faxes on the letterheads of often big well known suppliers, advising of a change in banking details (their bank account) for electronic payment.
oLetterhead and contact details appear to be correct and it appears to be legitimate communication.
oBy the time the error is identified, the fraudulent account has been cleared of all funds and closed.
oWe are advising our clients not to accept any form of communication of this nature without contacting the company’s financial director directly to confirm a change in banking details.

Measures to prevent potential fraud:
•Good corporate governance – strategies and policies to ensure that the potential threat is being addressed.
•Training of staff members – detect suspicious transactions.
•Get your credit decision right the first time. Know your customers – collect information enabling you to identify and know the activity of the legal entities with which you want to establish a commercial relationship with.
•Share information about potentially dishonest buyers in the industry you operate in.

Based on our experience, these are some of the possible warning bells when assessing your customers:
• Shelf company names.
• High variance in financial figures year on year.
• Certain high risk industries (low start up / capital costs).
• Trade references:
• Unknown company
• Cellular phone numbers provided
• Association between the company who is provided as a trade reference, and the members / directors on the credit application form.
• High risk legal entities (obviously in combination with other factors Close corporations for example).
• Unknown auditors.
• Newly registered company or start date substantially differs to registration number.
• Vague or strange business address e.g., “opposite the Spar”.
• Age of the members / directors etc. - very young or newly taken over.
• Immense pressure from the buyer to grant the limit.
• Urgent request on a Friday afternoon or just before holiday periods eg, Easter weekend and during December.
• Good trade history for 2 - 3 years and then a sudden influx of lots of small (+- R 50 000) requests across all policy holders holding cover + new policy holders (in our experience is a strong "scam" indicator).
• Excessive (above average) information available on a small business e.g., financial statements ready shortly after year end, packs of business plans etc.
• Figures reflected are too good to be true, usually are.