HOW TO DETECT LEASING FRAUD

By:Robert B. Liddell, Esq.

In this age of information and technology, you might expect to learn a new, high-tech formula for detecting fraud. In fact, the same automation that creates a streamlined and efficient process can be one of the contributing factors to leasing fraud. The best ways to detect fraud still involve the simple, back to basics methods that have been proven effective and relied upon for years.

In equipment leasing, most fraud occurs when new leases are being originated. Leasing fraud typically involves a fake supplier, a fake asset, or a fake customer. Leasing fraud can range from identity theft of an existing business, to the non-existence of actual leasing equipment, to a lease applicant misrepresenting its financial strength. According to a credit analyst with a major equipment finance company, their greatest current concerns are with small customers and small equipment, both of which “can easily disappear.”

Most equipment lessors utilize an automated underwriting process when originating a new lease and cannot effectively compete in the industry by utilizing a manual review process on all lease applications. However, this leaves a leasing company vulnerable to the misrepresentations at the core of any fraud scam. To ensure that the company is on the level, it is advisable to do some homework, such as checking references and verifying bank accounts. Contacting the Secretary of State, for example, will tell you if the company is indeed an LLC actually in business or a corporation in good standing.

A quick call to the Better Business Bureau can also be a worthwhile technique, as evidenced by a recent sting in California that uncovered a nationwide leasing fraud scheme. One of the defendants had already been found liable for a $9 million judgment (even though a subsequent judge eventually ruled that the award was too high). The same defendant also had a record of 55 complaints against them filed at their local Better Business Bureau. In this case, small business owners had been complaining for years about the practices of this company.

A limited manual review process that checks application information against established sources, such as state business registration and licensing data, is an indispensable tool for reducing leasing fraud. In order to detect and minimize leasing fraud, equipment lessors should establish and enforce a policy of conducting manual reviews on a certain percentage of their lease applications. The percentage of lease applications which are manually reviewed should directly correlate with the needs of the particular leasing company and the company’s past experience with fraud. When some companies detect patterns of fraud in a geographic area, they will add an extra step. Recently, in response to increased concerns in the Chicago region, a major leasing company started to personally confirm information about lessees located there.

Screening lease applications through a manual review process based upon known frauds that have occurred to the particular leasing company, as well as the leasing industry at large, is a good way to minimize leasing fraud. At a minimum, a fraud screen should include an examination of the following for an entity seeking credit:

- The consistency and validity of phone and address information

- The validity and good standing of the organization

- Recent history and frequency of the entity’s credit seeking activity

Similar checks should be done of the equipment supplier on the lease transaction. The fraud screen should be periodically reviewed and revised to incorporate the most current techniques being used to defraud leasing companies. While a manual review of lease applications represents an added cost to the origination process, leasing fraud can be an expensive component of the origination process as well.

Ironically, despite ubiquitous computerization, lessors are relying on simple, hands-on steps to afford protection against leasing fraud. Taking the time to do a little basic, front end research can help to avoid costly mistakes further down the line.


Robert B. Liddell, Esq. of New York concentrates his practice in creditors' rights, and in his twenty-year legal career has served as both in-house and outside counsel to numerous leasing and finance companies. Mr. Liddell is a co-author of the 2006 and 2008 supplements to Collections and the Enforcement of Money Judgments. He is a former adjunct professor at Syracuse University and is currently a Partner in the law firm of Hiscock & Barclay, LLP, which has offices throughout New York State.

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