As I scan the financial news I come across more and more announcements that some major financial institutions are expanding their services to include receivables factoring. This morning I read that Punjab National Bank (PNB) is adding investment services and invoice factoring to its menu of financial product offerings. The general manager of PNB stated that the target for the factoring service would be “small vendors and MSMEs which I now know stands for Micro, Small and Medium Enterprises.

But even as receivables factoring services expand around the globe,  back here in the states, two well established factoring companies were bilked out of $4 million by a U.S. Army officer and two accomplices in a bogus defense contracting scheme. Allegedly, the three set up fake communications contracts supposedly with the U.S. Armyand then convinced Federal National Payables Inc. of Bethesda, MD and Associated Receivables Funding Inc. of Greenville, SC to fork over about $4 million dollars against these contracts.

I’m not sure the author of the story about the asset factoring fraud really understood the role of the two factoring companies or how they really operate. The reporter states that the companies “hand out the dollars for federal contracts.” Just goes to show you how little understood the factoring industry is outside of certain circles. I’m sure that what really happened was that Federal National and Associated Receivables were essentially providing a factoring service to the phony federal contractor based on the assumption that the Army would be reimbursing them.

I find it ironic that on Federal National’s website, the company states the following:

“Federal National’s slogan, “Service, Value, Trust” summarizes its approach to doing business. In an industry not known for these qualities, Federal National is known for it’s professionally delivered, reliable and reasonably priced financing, fairness and strong ethical conduct.”

Whoa! That’s a ringing endorsement for the factoring industry. But in this case, the factoring company wasn’t the screw-er, it was the screw-ee. (See photo with previous post)

Factoring receivables is becoming a more popular means of generating capital or improving cash flow and as more factoring transactions take place, more opportunities to abuse the system are devised. That is what officials are warning businesses about in Birmingham, England anyway.

The scheme is actually pretty simple. A factor is engaged and systems established to move receivables to the factor in exchange for the cash value of the receivables less the factor’s fee. The factor must then wait tro collect the balances on these receivables.

What the “bad guys” do is to create what are known as “fresh air” invoices (leave it to those Brits to come up with such a descriptive moniker), which are really dummy invoices for companies that don’t exist or for products that were not actually sold. The factor unknowingly provides cash for these invoices but then cannot collect. The directors of the company are normally liable for all the amounts due to the debtor and someone within the cpmpany skims off the cas that the factor provided.

Or, entire companies can use the fraudulent “fresh air” invoice method to defraud factoring companies. It takes a fairly complex system of deception which I won’t even bother to describe here. Suffice it to say, it’s kind of like an in-house Ponzi scheme.

Oh well, the image I have of the squeaky clean factoring indistry is shattered. But wait! Maybe this is a strictly British problem. Maybe the U.S. factoring industry is squeaky clean after all. Maybe I’ll just stop reading the news so I don’t read anything that might disappoint me.

Factoring assets. Factoring Invoices. Factoring receivables. No matter what you call it, those involved represent all that’s good and pure and virtuous about the financial industry. At least compared to those slimeballs involved in mortgage backed derivatives.