Documents do not always reveal the whole story

A large financial service provider mainly dealing in asset leasing and lending provider approached us to have our people look into their capital placement process. First we looked at the databases of existing contracts to weed out risky and suspicious transactions. Based on a few well-defined indicators we were able to pinpoint the most suspicious contracts. These indicators were:

• Loans below the limit value, which could have been authorized by managers at the local branches.
• Loans where the clients stopped making payments shortly after the loan had been approved, indicating that they had not been motivated to utilize the loan to procure machinery in the first place.
• Loans where the machinery the client intended to procure was easy to sell, easy to move and difficult to identify.
• Regardless of the previous indicators, the credit placement was deemed risky if the client had missed payments for 90 consecutive days.

During the investigation of risky credit contracts it came to light that there were some very similar contracts. A number of applications had used the same type and brand of machinery as collateral, and they had applied for the same amount of credit, although the applications were submitted under different company names and were handled by different branches. At this point we began to take an even more closer look at the contracts and found out that there was a link between the ownership structure of the aforementioned companies, moreover, the applications were approved by a financial institution employee who had moved from one branch to another in the meantime.

In addition to the screening of databases and paperwork, we started a broader background analysis that resulted in new findings. For example, family members of the employee in question had a joint venture with the owners of the contracting companies.
Finally, we went out to the companies’ premises undercover. It turned out that the machinery they supposedly purchased was nowhere to be found. There was a strong possibility that their procurement only existed as a paper trail.

Following our investigation, the bank came to the conclusion that in the long run it would be worthwhile hiring the services of a risk management firm. Together have developed a pre-qualification process that includes background checks of prospective partners and on-site collateral controls, thus reducing the risk of credit placement. In addition, we have also introduced a monitoring system using pre-defined indicators, to alert the bank when a credit transaction becomes suspicious.