6 Signs of Business Loan FraudExpert: 'An Institution Can Never do Enough Due Diligence' Business loan fraud is still hitting financial institutions despite tightened reins on lending, says one fraud expert.
One example is the recent case of an Australian man arrested in Las Vegas after laundering $500 million through several banks via ACH transactions made to the shell companies.
This case serves as a lesson for all institutions, says Debra Geister, Senior Director, AML and Compliance Services at LexisNexis Risk Solution. Even in good economic times, there is the propensity for business loan fraud, but as the economic conditions remain low, regular consumers who don't have very good credit ratings are turning to this type of fraud -- mainly because they've found that it's very easy to set up a business entity and hide behind it.
"As a criminal posing as a business, I can just set up a new profile and begin a new business," she says. Three states (Wyoming, Nevada and Delaware) do not require any proof of identification to set up a business. Another 26 states allow a limited liability corporation (LLC) to be set up without showing beneficial ownership.
"When banks try to cross-reference within their own business customers, they'll find the connection," she says. "But when they distribute it across several banks, it's not clearly visible. It's hard to do pattern relationships because banks don't compare notes, so that's how [the fraudsters] dilute and avoid detection."
Geister is aware of at least one Las Vegas organization offering to lease clients its location, phone and staff in order to look like a legitimate company. "Even using the UPS store's mail drop service will let a criminal who wants to set up a shell company use their address to set up sham business," she says.
It's hard for a financial institution to track back and find who is behind some of these businesses, she notes, because these criminals will run from bank to bank. "You'll tend to see a trail of businesses in multiple states, where they jump from bank to bank, so they don't show a pattern within one bank," Geister says.
Red flag indicators that Geister says may indicate a business loan fraud scheme include:
1. Multiple Businesses Associated With One Person
In one example, a person who was based in the midwest had businesses set up in Wyoming, Las Vegas, Wisconsin and New Orleans. It didn't make sense to Geister because none of the businesses was posting much income, which is another red flag that indicates there is something to investigate.
2. No Physical Presence for Business
Businesses that don't seem to have a physical presence but instead are run by a Corporate Service Company (CSC) should draw suspicion. "These CSCs operate like the one in Las Vegas that helped the Australian money launderer," Geister says. "Institutions need to ask a lot of questions: How many employees at the location, do they do real work at the location, production on site, or is it just a mail drop?"
3. Is There a Business Plan?
Understand what your customer is doing, Geister says. "If they have set up a lot of businesses, why did they do it? What is their overall business strategy?" Geister tells her clients to make sure they know what the business should look like. If an institution has 10,000 business customers, it won't be easy, but they need to keep up with all of it, looking at the risk. "A new business is always going to have more risk," she says.
4. Are There References?
It's important to ask for references - has the business owner done business with other banks or organizations in the past? "Nothing wrong with asking for references, and asking them for past histories and other things they own," Geister says. "From an asset perspective, it needs to make sense. If a person owns 15 companies and the only asset he has is a '74 Chevy Nova, then there are more questions to be asked."
5. Watch For Inflated Earnings
From a lending perspective, Geister says she's seen where a business inflates what its income appears to be. One example she points to is the Minnesota case of businessman Tom Petters, who got loans from banks from his "cooked books" that showed his company was making much more money than it actually was. Found guilty of creating a $3.65 million Ponzi scheme in April 2010, Petters is now serving 50 years for fraud.
6. Are There Audited Financials?
Geister recommends not taking the applicant's word on the financial health of the company, but insist on an audited financial statement from a reputable firm. "Make sure you have solid data to rely on, because it is easy to fabricate financials," she adds. If it doesn't make sense, question it. "In my opinion, an institution can never do enough due diligence."