We recently wrote about a large fraud case involving at least six connected companies. Each of these companies used false accounts, identity theft and fake documents to achieve large amounts of credit. When the goods arrived, they immediately vanished, but they were never paid for. The suppliers were left out of pocket, and the fraudsters disappeared with the proceeds.
Clearly, this was a very large and highly organised fraud, and 6 companies known to be involved have been liquidated. This kind of operation is unusual, but increasing in prevalence and we suspect it will only get worse as more criminals start to hear about it.
But there’s also an issue here about the credit reporting system, and the potential for suggested limits to be manipulated. Does this fraud case mean that credit reporting is essentially a broken system?
We’d argue that it isn’t – but you need to be smart about checking your clients’ credit worthiness.
A Credit Score is Not Enough
If you’ve ever checked your own company credit score, you’ll know what kind of information the agencies hold on companies registered in the UK. Businesses pay to obtain this information, so they can get a picture of a potential new customers credit history, and the likelihood of them being able to repay any credit offered.
All of the credit reference agencies have a slightly different method of scoring and it is not unusual for each credit referencing agency to give the same company a different score. But a majority of the scoring is done by computer analysis without any human intervention, whilst this may make handling large volumes of data manageable, it reduces the likelihood of fraudulent activity being detected early on.
This is an important lesson in credit reporting. A glance at a report is not enough to determine the credit worthiness of a client. Often, when you carry out a check, you’ll see a suggested limit these limits are very simplified snapshots of that customer’s financial position based in large part on the financial data these businesses supply to Companies House.
Seeing the Bigger Picture
In order to evaluate your client properly, you need to look beyond the headline and assess the bigger picture: the way the business is conducting itself, and the way it presents itself to the public.
Here are some things you should ask yourself:
Do the accounts “fit” the credit limit that has been suggested?
Your average newly incorporated company is unlikely to have significant sales or assets in the first year of trading, if the accounts look too good to be true they probably are. Fake company accounts are a key plank of this scam.
Is the company showing natural growth, or is it showing suspicious spikes in its assets or share values?
If a company was formed with a single £1 share on Monday it is, in our opinion, very unlikely to increase that share capital by thousands of pounds the very next day.
Does the company have a reasonable number of directors or shareholders for the growth it is showing in its accounts?
“One man band” limited companies with a single shareholder may be common amongst SMEs, but they are rare when dealing with ostensibly larger businesses.
Is the company making remarkable profits that you can’t back up with evidence?
If a company is legitimately making hundreds of thousands of pounds a year then you can be sure it’s customers can find it. Check to see if your new client has a working website with an easily identifiable trading address and contact details that work.
When you investigate the directors, do you see any circular references?
It’s common for directors to be involved with more than one firm, but signs of a ‘network’ of businesses can be suspect. It is always worth being on guard for “friendly” references from companies that may be linked to a new customer. If possible credit check the referees as you would any new client and make sure the details match your expectations.
Does the company have a good social media presence, a good quality website, and a good standard of spelling and grammar on its marketing material?
Any company worth its salt will have both a professional looking website and healthy social media presence. If the only details you can find about your new client are entries from Companies House then something isn’t right.
- Can you easily trace its directors on social networks like LinkedIn?
- Does it clearly advertise its address and contact number?
A credit score is a very good indicator of a company’s ability to pay, in the vast majority of cases. But when we’re dealing with business debts, it’s not uncommon to see these tell tale signs. Learning to spot unusual activity is key to offering appropriate credit and avoiding bad debts, with the credit reports you’re using forming just one piece of a larger puzzle.
Protecting Your Business Against Fraud
When we heard about this scam involving a ring of connected companies, we had a look at the credit reports and limited company profiles for each one. Immediately, we found a connected company that is still trading, despite the fact that the Insolvency Service has closed down many of the other companies in the network.
It’s situations like this that cause criticism of the limited company system, and make directors of legitimate companies nervous about extending credit. It’s certainly wise to be cautious whenever you take on a new customer, and we always recommend that businesses act quickly if an invoice goes unpaid.
The credit reporting system is still a very useful tool, providing you can apply your own judgement and a little reasoning to the results you see when you search. If you do experience issues with a non-paying client, come to us as soon as you spot the problem as the sooner we act, the more chance you have of being paid what you’re owed.