The Insolvency Service has just completed an investigation into a network of fraudulent companies in the UK. The implications of this investigation should act as a cautionary tale for anyone that offers credit to their customers.
In this case, scammers used fake financial accounts to acquire goods on credit with suppliers, using fake details and false documents to elevate credit limits artificially. As the scam progressed, these companies acquired goods they had no intention of paying for and unwary suppliers continued to offer credit, because all of the companies looked profitable on paper.
Companies House refers to these fraudulent companies as ‘phantoms’. Each one of the 6 companies identified in this case submitted false financial information and phoney accounts to Companies House in an effort to artificially increase their apparent credit worthiness.
Alongside this, there was evidence of false information, identity theft and online content plagiarism that masked the real operations going on behind the scenes. Sadly, this is not the only case of its kind and it would appear that not all the companies involved have as yet been wound up by the court, meaning further suppliers could still lose money.
In March 2016, the High Court ordered 6 phantom companies in this case be put into liquidation for the public good. When the matter was brought to court, the combined value of this group of fictitious companies was claimed to be more than £13 million, in reality these companies never really existed at all.
By submitting fraudulent financials, the directors – if they exist - had claimed that the companies shared £1.6 million in cash, and achieved fantastic results backed up with authentic looking credit references.
As soon as Companies House noticed that documents were late, the fraud began to unravel. Investigators realised that an individual, Jade Evans, formed all of the companies, except one. Ms Evans – if she also ever existed - ran a company called ABN Company Formations Ltd. It has now been dissolved, but the court learned that the same agent was used to create 50 additional companies.
All of these companies could potentially have been used in a network to support the scam as it unfolded, or worse still, could yet be revived now by the same scammers looking to pull the same trick on more UK businesses.
How the Fraud Worked
Battle Business Services Ltd, which was formed in May 2013 provided fake credit references for the other companies in the network, yet it failed to file accounts on time. Around it sat dozens of other companies, with directors that were sometimes the same, and sometimes different.
A second company in the network, Hydro Serv Ltd, announced a massive increase in share capital of £80,000, seemingly overnight. All of these shares were held by one person. It reported massive profits that allowed it to obtain high credit limits and source £11,000 worth of goods, which it had no means to pay for. However, due to the way its accounts had been put together, it had achieved the high credit limits it needed to pull off the fraud.
Other companies involved in the ring of deception were Creative Communications (UK) Ltd, Midas People Ltd, Winnington Marketing Ltd, Unique Wholesale Ltd, Zen IT Ltd and 3D Media Ltd. All of these companies were using false addresses; some actually shared the same address.
All of the companies ordered similar goods, with a combined value well in excess of £300,000 and had them delivered to premises in Milton Keynes and Essex. These goods then seemingly disappeared into thin air, and are presumed to have been sold through the back door soon after arriving.
When the goods were not paid for, one of the suppliers for the phantom companies came close to folding because it could not sustain its own cashflow. Several builders’ merchants were targeted, and all of them lost money as a result.
Welcoming the Court’s winding up decisions, Chris Mayhew, Company Investigations Supervisor at the Insolvency Service, said:
“The accounts and information presented by these companies reporting them as substantial and credit-worthy businesses trading profitably for a number of years was as false as the artificial grass supplied to one of them.
Each company was part of an organised operation and the goods delivered to them without payment were swiftly collected and put beyond reach for the benefit of those behind the companies and those who ultimately utilised the goods stolen.
Typically this type of fraud can inflict losses on legitimate business of hundreds of thousands of pounds and in this instance nearly caused a small supplier to go out of business himself because of the loss inflicted.
We work closely with a number of partners such as Companies House to prevent the abuse of the corporate regime by such lack of transparency and the Insolvency Service will investigate and bring to a halt companies harming or about to harm legitimate business by operating in this way.”
Is It Still Worth Credit Checking Customers?
The impact of this fraud is a good example of why small businesses are constantly vulnerable to non-payment and outright fraud, and why credit checking is so important in managing risk. But it’s also a reminder that credit reports are not a magic bullet , and businesses need to get wise to the people they’re extending credit to.
On this occasion, the companies involved gamed the system, using the credit reference system as the driving force for the fraud. The companies were able to submit fanciful accounts to fool the computer system that generates credit scores to bump up the limits they were being offered.
Does this make a mockery of the measures we all use to credit check? And does it mean that companies that carry out due diligence on their customers could still be subject to massive unpaid debts?
The short answer is no, but it does show the need for companies to independently verify what their credit checking software tells them. In each of these cases a cursory glance at the financial data submitted to Companies House would have given the game away. Providing credit to customers is always a risk and that risk will never go away, but there are things you can do to protect your business.
If you are in any doubt as to the validity of a potential client, then please get in touch with the team and we will happily review credit references and Companies House records completely free of charge.
Companies House deals with complaints about companies that fail to file documents like annual accounts or returns, or file fraudulent documents. If you suspect a company of breaking the law on the filing of documents, email the details to