Management of Risk, Mitigation strategies, Fraud, & Exit Strategies. Accra December2011

Transcription

1 Management of Risk, Mitigation strategies, Fraud, & Exit Strategies Accra December2011

2 Risk Management There are many aspects of risk in the factoring industry such as:- Paper Trail risk You buy debts paperwork supporting invoices you buy and finance.. Specifications, Quotation, Acceptance, Contract of Supply, Proof of Delivery, Invoice, Verification, Payment/Remittance

3 Risk Management There are many aspects of risk in the commercial finance industry such as:- Paper Trail risk Industry risk Recruitment/Staffing, Trucking, Printing, Graphic Design, Construction, Retail, Automotive Parts and many others All carry different levels of risk to you as the financier in the event of a collect out

4 Risk Management There are many aspects of risk in the commercial finance industry such as:- Paper Trail risk Industry risk Concentration risk $1,000,000 sales ledger with 1000 debtor names $1,000,000 sales ledger with 2 debtor names Which one would you prefer?

5 Risk Management There are many aspects of risk in the commercial finance industry such as:- Paper Trail risk Industry risk Concentration risk Fraud risk Fresh air invoices, fictitious debtors, recycling factors money, pre-invoicing

6 Risk Management There are many aspects of risk in the commercial finance industry such as:- Paper Trail risk Industry risk Concentration risk Fraud risk Technology risk Out-dated client systems, Constantly improving technology, inability to link systems, total reliance on technology

7 Risk Management Your clients are only valuable to you if they: Are really happy with the service you provide Do not generate excessive workloads Enjoy strong but controlled growth Never have problems with their collateral Stay with you for many years Pay you lots of service fees, discount (and other) income

8 Risk Management Now it is time to wake up, stop dreaming and face reality- we are in a global economic crisis!!!! Factoring companies traditionally support undercapitalised, financially stressed and rapidly growing clients There are lots of those about now! Outstanding Invoices are the most current security taken to support client advances Outstanding Invoices as security are dynamic and can weaken in value very quickly

9 Risk Management There are many elements to successfully managing risk in a lending portfolio Strong Field Audit Procedures Pre- and Post- Funding Verification of collateral processes Experienced people in all parts of the process Salesman, Surveyor, Take On, Input, Client Manager, Field Auditor, Collectors, Credit Managers etc. Luck!!!

10 Risk Management Q. How to Lose Money in Factoring Uncollectable invoices Client banks the cash THIS IS NOT ROCKET SCIENCE

11 Risk Management The consequences of losing money in Factoring Termination of employment End of your company

12 The Fraud Triangle Opportunity Pressure Rationalisation

13 The Fraud Triangle Opportunity The client s business is struggling: Sales slowed down Needs cash for payroll/pay creditors Factory is behind schedule on product build Delivery will be late Pressure Rationalisation

14 The Fraud Triangle Opportunity Client knows that invoices can be raised and sent to the factor at any time. Even before delivery!! Advances can be taken against the invoice. He knows it s wrong but... Pressure Rationalisation

15 The Fraud Triangle Opportunity Pressure Rationalisation The client truly believes this will only happen once. He will get the money and save his business He might even think about telling the factor

16 Two types of fraudsters Criminals who, from the very start, intend to defraud the factor Often in collusion with false debtors Often in collusion with a couple of other staff members Previously good business people who hit difficulties and turn into desperate individuals Desperate people will do desperate things A factor is the easiest type of financier to defraud!!!

17 Risk Management There are a number of ways factors can protect themselves from fraudulent actions by clients. People - there is no substitute for the knowledge, experience and vigilance of your risk managers and other staff everyone has a role to play Defined Policies and Processes - correctly followed by everyone are a key to effective risk management Information Systems providing the right information, at the right time in the right format

18 Risk Management Risk Management is all about the detection of change - and a portfolio of receivables changes every day Frauds suceed and financial losses occur because something changed and it was missed Situations can change very quickly so that

19 What begins this way. Very Nice Client Limited Copy debtor invoices for financing Fabulous Factors Limited Invoices for goods or services supplied Payments for factored invoices Payments on discounted invoices Prepayment advances against real invoices Top Quality Debtor Limited Payments on discounted invoices Quite Helpful Bank plc Prepayment advances passed back to VNC Limited

20 Sometimes turns into this Nightmare Client Limited Copy debtor invoices for financing on transactions that never happened Deceived Factors Limited Prepayment advances against fresh air invoices Client uses your money lying on a beach in the Caribbean Secret Greedy Bank (Cayman) Inc. Quite Helpful Bank plc Prepayment advances siphoned off to separate Bank account

21 Trends Given the option of tabular data or charts which is the quickest way to spot a trend?

22 Trends Month Commitment Dilution Disapproved January February March April May June July August September October November December

23 Trends

24 The Post-Mortem In almost every case where factoring advances are written off the signs were always there when viewed in hindsight Q. Why didn t you see them before the event? A1. Because you never had enough time to spend analysing your portfolio A2. Because the information you were working with was not appropriate A3. Because you chose to believe the client

25 Your best client is defrauding you now! 25

26 Answer 1 No time to analyse the portfolio Too often you spend too much of your time being confused by:- The volume of client data to analyse The number of places where the data is held Looking into every client even if you don t have to Client problems tend to be like buses in Accra, you wait for a long time, then 3 or 4 come along together

27 Answer 1 A Difficult Role Account Managers with shortage of experience are often asked to: Develop a strong relationship with the client Increase the revenue stream from the client Extend the clients life with the lender AND be the policeman when things go wrong AND look after more and more clients This is a recipe for disaster!!!

28 Answer 1 What can be done to help? Make client management targets achievable for people and reward them accordingly Only allow them to be responsible for a manageable number of clients We would recommend a maximum of 40/45 at most so they have a chance to Know Your Client in all cases Centralise all information related to risk management in one area to allow ease of access Develop a system of exception reporting so that management time is aimed at the clients with most need

29 Answer 2 Inappropriate information Most back-office factoring systems don t present information in a format you can easily use as risk managers One option is to extract data from the core operational system and export it to spreadsheets or analysis software so that trends can be detected

30 A Test of Consistency In your company, how many places can you get risk management information from? Operational system Clients Financial data, ID reports Third party credit bureaux Spreadsheets Audits, visits, verifications, covenants, etc

31 Spreadsheets How many spreadsheets are compiled in your company to help manage risk? Many still manually produced! Many late and often containing misleading or purely inaccurate data

32 Answer 3 You choose to believe the client No software can replace the human element, the gut feel, and experience.. But in far too many cases a client or risk manager will allow their judgement (or inexperience) to be affected by emotion The statistics never lie!!!

33 What can be done to help? Answer 3 Try having a two tier structure where your risk manager does not interface with clients, but only with client relationship managers This can take the emotion out of lending decisions It becomes easier to challenge change in a client Statistics related to client performance are more easily accepted by a detached risk manager

34 Two Tier Approach Risk Manager Little contact with client Analyses client performance daily Interacts with Client Manager Monitors responses and actions Client Manager Regular contact with client Feeds information back to Risk Manager Interacts internally with Risk Manager Carries out agreed actions on client Client

35 First Test You are the Managing Director of XYZ Trading Limited Your Bank overdraft is personally guaranteed You also have a factoring facility with Fabulous Factors Limited Your marital home secures the bank overdraft You ve just signed a big new order The product is not ready to be shipped for about 10 days XYZ Trading Ltd has been struggling to meet it s bills lately You need to pay the wages this Friday WHAT WOULD YOU DO?

36 First Test Results Score 1 point if you said you would go to the bank and ask for more facility from them Score 1 if you thought of another (acceptable to me) way out of the problem Score -2 if you let XYZ Trading go bust Score +5 if you would raise the invoice to Fabulous Factors to get the money

37 First Test Results If you chose to raise the invoice then what would you expect your client to do in the same circumstances?

38 Second Test Client 1234 has the following characteristics: Established 15 years Very experienced Management Profitable - Six figure positive net worth High quality debtors (banks and financial services companies) Debt turn of around 40 days Outstanding sales ledger of $500,000 average Well spread debtor ledger Very little dilution of debt

39 Second Test Would you factor or discount company 1234 s debts?

40 Second Test Results This is a software company supplying unique applications Majority of sales are done on stage payments Others are done on rental basis Very occasionally there are retentions held by the debtor THE STATISTICS MIGHT BE GOOD BUT THE DEBT IS UNCOLLECTABLE WITHOUT THE PARTNERS BEING THERE

41 Second Test Results Score 0 points if you said you would factor/discount the debts under any conditions Score +5 if you asked for more information about the debt before going ahead

42 The fraud lifecycle The client always want to draw maximum availabilityshowing high utilisation on their facility If they are hitting a facility limit they will regularly be asking for an increase They forget to raise credit notes- dilution is always minimal in fraud cases They artificially inflate the value of invoices they are factoring causing unexplained growth in their business They ask debtors to send them their payments against invoices they bank debtor cash They create fresh air invoices

43 Effects of fraud Behaviour Debt turn on invoices increases dramatically Cash turn statistics go out dramatically The client goes overdrawn more regularly Unapproved invoice values often reduce as the client often re-invoices older invoices and creates new debtors not affected by funding or non recourse credit limits

44 Effects of fraud Behaviour The signs of problems occurring with a client can be varied and no one measure or statistic may be conclusive The measures and outputs have to be viewed as a package Statistics are not a Silver Bullet solution They merely point you in the direction of a problem more quickly

45 Results of fraud Behaviour If you don t have processes in place to uncover the problem early enough and if you don t follow those processes - you will lose money

46 Conclusions Risk Management Technology can make your work easier if used correctly But technology will never replace the human element in a portfolio management role There is no substitute for knowing your client But always be aware that your client may not be as good as you first thought. REMEMBER your best client is defrauding you now

47 Risk Management SITUATIONS CHANGE You will be the loser if you don t stay on the case identify changes and be rigorous in following them through STAY LUCKY

48 Exit strategy the 6 Rs 1. Re- finance = find a bigger fool to take the client from you 2. Regaining = Collect out / manage out 3. Rehabilitation = help turn the business around 4. Reinvestment = New money 5. Restructure = Phoenix 6. Repayment = Business/asset sale 48

49 Management of Risk, Mitigation strategies, Fraud, & Exit Strategies Accra December 2011