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Importance of due diligence and the “Short Firm Fraud”

Due Diligence and understanding the ability and willingness to pay of your counterparties is important in all business relationships, not only for lenders and specialty financiers. In this blog post we highlight a sophisticated scam, which targets trade suppliers of goods, often early stage companies building a client book. Small companies are being advised to be vigilant by increasingly sophisticated frauds such as the one explained below.

Please do get in touch with the team if you’d like to discuss in further detail. At Optimum, we have a well-developed, thorough and efficient credit assessment procedure; we would be happy to discuss our own processes and how we mitigate credit risk and how you could use it in your own company.

The scam in question has been called “Short Firm Fraud”. In summary, fake accounts are submitted to Companies House, presenting a financially healthy company, and hence an acceptable trading counterparty. Furthermore, third party credit reference agencies, which use the Companies House filed data, use this information to issue a misleading (strong) credit rating, which doesn’t reflect the true ability to pay. Once the supplier has delivered the goods, and seeks payment, there is no trace of the customer.

Despite the increasing availability of data and information online, it remains essential to undertake your own due diligence and check your (new) customer or trading relationship. A Companies House spokesman told The Times newspaper that “[Companies House] does not have [the] statutory power or capability to verify the accuracy of the information that companies send to us and this is made clear on our website”. In addition, not all companies are statutorily required to undergo an audit (see exemption requirements here). For example, if the firm has an annual turnover of less than £10.2m and 50 or fewer employees, there is no requirement for an audit.

In 2016, a network of phantom companies were ordered into liquidation by the High Court on grounds of public interest, following petitions from the Secretary of State for Business, Innovation & Skills . Details of the court order can be found here.

The Court highlighted that building trade suppliers were highlighted as particular targets of the fraud. During a government investigation, the Government’s Insolvency Service noted that building trade suppliers were deprived of more than “£300,000 of goods comprising cable and other electrical goods, steel and reinforcing rods, ceramic tiles, paint, flooring, artificial grass and computer and office supplies.”

Common features across the fraudulent companies were highlighted by the Company Investigations, a division of the Government’s Insolvency Service, and included:

  • Inexplicable and dramatic increases in their share capital;
  • Appointment of fictitious officers and identity theft;
  • Filing of false accounts reporting significant assets and trading;
  • Providing one another with favourable trade references;
  • ordering goods whatever the price quoted by the supplier;
  • creating websites with content usually taken from other genuine sites;
  • The companies nevertheless had no presence at their registered offices.

Remain vigilant and please get in touch to discuss.

Categories: Information