How Improved Technology Can Help Avoid Fraud in Factoring

Fraud risk is something every factor must deal with, particularly those that work within the trucking industry. Using a cautionary true tale of factoring fraud, Spencer Mitchell of TruckerCloud explains how technology can help protect against even the most advanced schemes.

Fraud risk is something every factor must deal with, particularly those that work within the trucking industry. Using a cautionary true tale of factoring fraud, Spencer Mitchell of TruckerCloud explains how technology can help protect against even the most advanced schemes.

This is a true story about how a factoring company lost $500,000 to fraudsters and how it could have been prevented. No matter how thorough an underwriting process may be, smart criminals are adept at circumventing many of a factoring company’s checks and balances. In this article, I’ll outline exactly how a real factor was defrauded and how the deception came to light. In addition, I’ll describe how new technology solutions would have prevented this loss from occurring. Names have been changed to protect the innocent (as well as the guilty).

The Setup

A few years ago, a factoring company took on a trucking company as a new client. As it usually did with new clients, the factor put the trucking company through its typical underwriting process, which included (but was not limited to):

  • Checking the trucking company’s Secretary of State registration, which confirmed it was a business registered in its state.
  • Reviewing the company’s Federal Motor Carrier Safety Administration (FMCSA) registration to ensure the carrier was authorized for transport and in good standing.
  • Confirming the company’s motor carrier (MC) number to check the legality of the company hauling cargo.
  • Viewing the company’s general liability insurance policy, as well as its policies for carrying cargo and covering bodily injury liability.
  • Verifying the buyout from the company’s previous factoring company. The carrier had only been with the previous factor for about six months, which would normally be a bit of a red flag, but everything else passed with flying colors.

About half of the trucking company’s portfolio was concentrated with one debtor, which we’ll call Modern Manufacturer. The factoring company checked the debtor’s credit, finding it had a high credit score. So, the factor began providing advances on the debtor’s invoices to the trucking company.

For about six months, everything proceeded smoothly, with the factor purchasing invoices from the carrier while being paid by the debtor. However, then the trucking company began urgently requesting credit increases on the debtor.

Red Flags

When the factor’s underwriter initiated a formal review process, several red flags appeared:

  • The factoring company contacted the debtor and found that the trucking company was not a vendor on its books, nor was the factor a payee in its system.
  • Then the factor called the debtor’s accounts payable clerk with whom they had been in communication. Let’s call him John Doe. Doe was short on the call, requested that questions be sent to him via email at his address that used the domain modernmfg.com and hung up quickly.
  • Next, the factor contacted the debtor’s human resources department and found that Doe was not an employee. It also found that Modern Manufacturer only had one email domain: modernmanufacturer.com.
  • The factoring company determined that the modernmfg.com domain was purchased by Bad Feller, the same person that had signed the original factoring agreement on behalf of the trucking company.
  • The checks that had been received for six months were from Modern Manufacturer, LLC, but the true Modern Manufacturer was a corporation. The checks displayed the real street address of the corporation but used the bank account number of the fraudulent LLC.

The trucking company owned by Feller was a legitimate company that had a small fleet of five trucks, but Feller had created a fake company, Modern Manufacturer, LLC, to pretend to be Modern Manufacturer and defraud the factoring company. Feller committed fraud over six months to the tune of $500 million, as there were no actual shipments of goods and all transactions were falsified.

Prevention Strategies

How could this have been prevented? The factoring company’s original underwriting process was thorough. The only traditional step it didn’t take was to independently verify that the AP contact, Doe, truly worked for the debtor. In reality, Doe was in cahoots with Feller. As this illustrates, unfortunately, even with rigorous underwriting, good fraudsters can slip through the cracks.

Technology can help mitigate fraud, particularly for transportation factors. Freight visibility software now exists that can allow factors to view, in real-time or retroactively, where a client’s trucks are or have been in the past. The data is pulled directly from the trucks’ electronic logging devices (ELDs), so it can’t be faked. Factors can therefore see exactly where a truck is using a breadcrumb trail on a map or by checking the latitude/longitude coordinates of pickup and drop-off locations.

Had the factor used this technology, it would have seen that the carrier’s trucks were not moving, or at least not moving between the pickup and drop-off locations specified on the invoices that were purchased.

The loss in this example could have been prevented. While freight visibility software was originally developed for the use of shippers, brokers/third-party logistic providers and carriers, it can be surprisingly beneficial to the factoring industry as well. Being able to view where a customer’s trucks are is a boon to factors in several ways outlined below:

  • When factors can view where a truck is or has been, it can ensure that a transaction is legitimate prior to funding.
  • Confirming legitimacy of a transaction reduces or eliminates the need for check calls. Not only is ELD-based data more accurate than a phone conversation with a driver, it saves costly overhead time because factoring staff no longer need to make verification calls.
  • Factors can use freight visibility software to verify fleet sizes in advance and on an ongoing basis. If a new client claims to have 10 trucks, the software can confirm that there are actually 10 ELDs to track. If the client asks for either a higher volume interest rate or a credit increase because it is about to buy 10 more trucks, the factor can see that those trucks have, in fact, been added to the fleet.
  • Alternatively, freight visibility software can allow factors to see when a fleet size decreases, which may be a sign a client is liquidating assets. This could lead to financial instability. Without this technology, a factor may not discover a client is in trouble for months.
  • If a client requests a fuel advance or other over-advance, a factor can view, in real-time, exactly where the truck is. This ensures that the truck and driver are where they’re supposed to be according to the transaction’s parameters. In some systems, a factor can even toggle over to satellite view to see an overhead image of the location so it can verify that it looks like a warehouse with a loading dock.
  • Double brokering is, unfortunately, increasing. This occurs when a client claims it hauled a load but actually got a different carrier to do the work. You, as the factor, advance funds to your client, but it may fail to pay the carrier friend. In that case, the carrier can demand payment from the debtor, and the factor may be left holding the bag. By using ELD-based technology, a factor can verify that the carrier it is advancing funds to is the same carrier hauling the load.

What about the factor and the fraudster in the tragic tale in this article? This situation was discovered several years ago, and while the FBI is involved, the perpetrators are still at large and the money has not yet been recovered. Needless to say, losing $500,000 can have a devastating effect on any factor. Fortunately, new technological developments mean that factors can mitigate risks and protect themselves from fraud and loss.

Spencer Mitchell is CEO of TruckerCloud, a real-time freight visibility software platform that helps transportation factors ensure loads have been delivered prior to releasing funds. Mitchell  is an entrepreneur that has previously served in consulting and business development roles. He can be reached at 888-339-5393 or spencer@truckercloud.com.