To create a business identity, you To create a business identity, you can register the name with the secretary of state by completing a few forms, and possibly obtain a D&B number online using an address and phone number. Says Pillai, "You can create a trail of activity that gives the appearance of a legitimate business. Then you can go after a number of providers and defraud them all in a relatively short period of time."

"Are [defrauders] becoming more sophisticated? Absolutely," says Dennis Jeffries, vice president and chief credit officer for Great America Leasing Corp., a small-ticket leasing company in Cedar Rapids, Iowa. Due to the nature of the business, small-ticket companies are still favorites of defrauders. The scant documentation requirements of some companies for individual transactions, the increase in automated creditscoring, and the impracticality of inspecting each piece of equipment can place small ticket firms at big risk. Also attractive to defrauders are assets that are easily moved or liquidated, such as computers and other small electronics.

But when fraud professionals discover a company with few deterrents in place, transaction size is not an obstacle. Whether the ticket focus is large, medium or small, that company becomes a target. One consulting firm that has tracked fraud in leasing companies says that of an estimated 30,000 to 40,000 leases written daily, roughly 100 to 200 are fraudulent.

"The more automation used in the decisioning process, the less likely applicants will be picked up for fraud," says Dan Rucker, managing director of fraud detection and prevention solutions for D&B (formerly Dun & Bradstreet). Intelligent fraudsters can slide right through most credit screens-and when they do, their success is nearly guaranteed. So lucrative is professional fraud that Rucker says it is becoming a profit center for organized crime and perhaps even for terrorists. The smartest defrauders constantly monitor anti-fraud procedures used by leasing and finance companies and gravitate toward the ones with the least resistance. Says Rucker, "If lessors aren't using the best available tools to fight fraud, they could find themselves in bad shape."

Vicious Vendors

A particularly insidious form of fraud is that committed by vendors. In a typical lease transaction, a vendor receives the lessee's information and then may submit the deal electronically to several lessors. All vying for the business, lessors compare the information to their credit requirements and shoot back a quick response. In the rush to get new business, good judgment can take a back seat.

In vendor fraud, victims may include the lessee as well as the lessor. But occasionally, both vendor and lessee benefit. Such is the case when a vendor agrees to inflate a purchase price and receive a kick-back from the lessee. Susan Rosenthal, a partner at Brown, Raysman, Millstein, Felder & Steiner, LLP, in New York City, says this happens a lot. "If the lessee can't pay the vendor, but needs to lease equipment, the two parties get together and say that the equipment costs more than it does," she explains. Or the lessee may have already leased equipment and now wants an unsecured loan, but doesn't believe he can get it through legitimate means. In this case, he and the vendor may agree to fabricate the equipment so the lessee can get the money he needs.

More common, says Rosenthal, is the falsification of financial statements. Here again, defrauders are gambling that the due diligence of the leasing or finance company won't be rigorous enough to verify the information on an application. They often win. "In many instances, no one can afford to do that much due diligence," says Rosenthal.

Train Your Staff

Difficult as it is to detect and prevent fraud, there are steps leasing and finance companies can take to make their firms less vulnerable. Staff training is one, because although approaches to fraud have become slicker, the types of fraud committed and the red flags they raise are still much the same:

When Dennis Jeffries or his employees detect such activity-and they are trained to do so-they use two search engines (Anywho.com or Switchboard. com) to cross-reference the applicant's phone number and address. For a fee, these search engines provide a wealth of data, from bankruptcies and tax liens to 10 years of phone numbers and addresses. Says Jeffries, "Just taking the time to determine whether a phone number represents a business address or a residential one has helped us immensely." The company has detected and rejected several suspicious applications in the last 18 months.

"Training your credit department is crucial," confirms Curt Zoerhof, chairman of ELA's Credit Committee and senior vice president of Wells Fargo Equipment Finance, in Minneapolis. "Credit professionals may have all the degrees in the world and be able to crunch numbers better than anyone, but those things are no substitute for experience."

Analyze Your Data

The challenge, of course, is to balance good service and timely turn-around with smart strategies that detect and deter attempts at fraud. Screening every applicant for fraud is not only costprohibitive, it also deters legitimate customers who want equipment or capital without a hassle. What you can do, however, is peruse your data to identify the 5 to 10 percent of transactions that need extra attention. Scrutiny often reveals patterns in suspicious transactions. You can then build one or two new questions into your applications that may deter defrauders but won't pose difficulty for legitimate customers.

While lessors can detect and deter many amateur attempts at fraud, uncovering the schemes of professional defrauders is harder. "If we have an entity that has paid fees to acquire an old corporation, set up a new address near the old one, and [registered] with D&B, it's hard to see the fraud," says Jeffries. "Occasionally we're going to get burned."

Investigate Selectively

To fight professional fraud, investigate the cause of selected defaults and then implement new policies that specify when and how to conduct background checks. Also consider appointing one or more credit specialists as investigators. "It's foolish not to find out if you're being defrauded," says Dennis Jeffries. "If you don't do anything [to change your procedures], you're going to get hit again."