Sunday, June 28, 2009

Double Factor Fraud

This scam is designed for a merchant to rip off its factor. Amazingly simple, incredibly effective.

Narrative:
  1. Merchant creates a factoring agreement to sell & its accounts receivable to a factoring house (a form of financing).
  2. The factor records a UCC-1 financing statement to secure its position as holding the primary claim on all accounts receivable of the Merchant.
  3. Merchant sells receivabes to factor, receiving cash up front. Factor bills the customers.
  4. Suddenly, the Factor stops receiving payments on the invoices.
  5. Factors contacts invoiced customers to attempt to collect, finding that they claim to have already paid.

What Happened?

  1. The Merchant set up a second company, with a similar or the same name as the Factor.
  2. Merchant has the new 'fake factor' company bill his customers immediately following the real Factor's bill, as an address correction. He might even offer a discount.
  3. Customers pay the new fake factor, thinking they have paid the correct party.

Result:

Merchant has received the advance from the first factor, and the payment from the customer, getting paid 75%-80% more for each invoice, until he is found out. This is often done when the Merchant is on his way out of business.

Prevention:

Contact each customer prior to purchase. Make sure they understand that there is to be no assignment without your involvement. If you learn of one customer paying an imposter factor, the rest are too. Contact authorities and file a criminal scam report. You will likely be told to file a civil action to get an injunction.

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