SafeAlert - May 2000

Factoring Receivables

Recently, several of our bank customers have experienced large losses (all in the six figures) involving alternative financing programs. The banks purchased the accounts receivables of commercial customers at a discount; a practice commonly referred to as factoring.

In all cases, software was in place to track the receivables and payments were to be sent to a lock box. A reserve account was also established to cover any receivable that was uncollected within a certain frame. Some of these banks also audited a certain percentage of the receivables to assure that they were valid.

Unfortunately, these procedures were not enough to prevent significant losses. In each case, the commercial customer encountered cash flow problems. Bogus receivables were submitted and purchased by the banks. Also, payments were in many cases sent directly to the commercial customer rather than to the bank and were not forwarded.

If your institution has such a program in place, or is contemplating creating one, we strongly recommend that you review all procedures and controls for weaknesses. Moreover, insure that all procedures and controls are consistently followed. Any suspicious activity should be reported immediately, not only to the account officer, but another member of senior management for review.

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