Despite motor finance fraud incidence being low, it is costly for industry players. Through interviews and views expressed at Leaseurope’s Conference on Fighting Fraud in the Leasing Industry in Brussels on 17-18 November, Sotiris Kanaris analyses the market’s response

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The total number of recorded frauds in the UK has climbed steadily in the past five years, from 217,000 in 2010 to 277,000 in 2014, according to UK fraud prevention organisation Cifas.

Over the same period, motor finance fraud incidence has remained stable at very low levels. "Actual fraud cases reported by FLA members continue to be at a very low level – with cases representing less than 0.03% of car sales financed by our members," says head of motor finance at the Finance & Leasing Association (FLA) Adrian Dally.

Although the number of fraud cases is low compared to other finance industries, Dally says companies have to be vigilant about fraud activities.

But fraud can be costly for motor finance companies so in order to protect themselves from fraudsters, they need to invest in prevention and identification tools.

Fraudsters’ portrait

Fraudsters can be individuals or organised crime groups, with the latter playing an important role in the development of fraud.

Nick Mothershaw, director of identity and fraud for Experian in the UK, tells Motor Finance that Experian segments the UK population into 16 categories, with the three key perpetrators of fraud belonging to the ‘urban cohesion’, ‘municipal challenge’ and ‘aspiring homemakers’ categories.

The people belonging to the ‘urban cohesion’ category, are residents of settled urban communities with a ‘strong sense of identity’. They are typically between 56 and 65 years-old, with household incomes of around £30,000 to £39,000.

The ‘municipal challenge’ category consists of urban renters of social housing facing an array of challenges. Their typical age range is from 46 to 55 and their household income is less than £15,000.

Those characterised as ‘aspiring homemakers’ are younger households settling down in housing priced within their means. Their typical age range is between 26 and 35, with a higher household income than the other two categories at £40,000 to £49,000.

At Leaseurope’s EU Conference on Fighting Fraud in the Leasing Industry, held in Brussels on 17-18 November, Roger Potgieter, asset and consumer finance partner at law firm Shoosmiths, talked about the reasons why individuals resort to fraud.

Potgieter cites greed and opportunism as drivers to fraud, which he calls "human characteristics".

"The idea that it’s a victimless crime makes people carry on," he said. "They think it’s an easy way to make money and that nobody really suffers. Opportunism is another driver – people with no bad intent may find themselves presented with the opportunity [to commit fraud], they take the chance and get away with it. Once they have done it they may try it again, and before you know it they are into a cycle of fraud."

Potgieter highlighted that not everyone who engages in fraudulent activities regards it as a career, explaining that financial issues can act as a trigger for an individual to behave in such as way.

"People caught up in this may not necessarily be career fraudsters," he explained. "You may have people who started with good intentions, took a vehicle or some assets on finance and part way through the cycle of that activity run into difficulty. In need of some quick cash, they sold the asset thinking that the lender would never know about it, as the plan is to carry on paying the rentals. Before you know they are into fraud."

Types of fraud

More than four in five (85%) of fraud cases recorded by Experian involve application fraud, where the genuine individual applying for motor finance manipulates his or her application in order to secure the finance.

Experian finds that around 25% of the application fraud cases involve fronting, which occurs when individuals take out finance when they are not the driver or ultimate owner of the car.

"It’s often when someone is buying a car for a partner or child and they put finance in their name, because the person who will drive the car can’t get credit," says Mothershaw.

Another important type of fraud is conversion fraud, selling a car with outstanding finance.

Earlier this year, My Car Check’s call centre manager Justin Powell, who is on the UK board of the international association of auto theft investigators, told Motor Finance: "There are currently 36 million vehicles taxed and registered in the UK and a quarter of these will be subject to a finance agreement. On the whole, these agreements will be honoured, but we’re seeing a rise in vehicles being offered for sale prior to the finance being cleared. In the first six months of 2015, 32% of vehicles we checked had finance marked against them."

Identity fraud, where a fraudster has stolen the identity/details of a genuine person, consistently contributes between 40-50% of all recorded frauds by Cifas over the past five years. However, it accounts only for a very small share of the total motor finance fraud cases every year.

Commenting on the low number of identity fraud events in the industry, Potgieter says: "Perhaps our industry is less attractive to those involved with identity fraud or we have some good system in place to deal with that. On the other hand, maybe they haven’t got to us yet."

Mothershaw says that identity fraud in the motor finance industry is flat and he doesn’t expect it to rise.

"The elephant in the room for us [CAP HPI] at the moment is the threat of clocking relative to PCP agreements and certainly we’re keen to keep a close eye on that arena," says head of industrial relations at CAP HPI Barry Shorto.

In August, Geraldine Kilkelly, head of research and chief economist at the FLA told Motor Finance: "PCP as a product has been around for more than 20 years. But certainly over the last three-to-four years you’ve been seeing levels around 60-70% of new business being provided through that product." Kilkelly added that PCP accounted for approximately 35% of business in the used car market.

Shorto says that the monthly cost of buying a vehicle through PCP has been reducing, with deals offered at lower annual mileages.
"We previously had vehicles on PCP deals based on driving 12,000-20,000 miles a year. We’re now seeing deals for as little as 6,000-9,000 miles a year," he explains.

Shorto believes that those deals can lead to an increase in clocking as people who exceed the contracted number of miles in their fixed-mileage leases can end up paying thousands of pounds of extra charges.

"It’s easy to find mileage adjustment companies which market themselves online. They will come to your home or meet you in a car park somewhere and adjust the mileage on your car for under £200," says Shorto.

According to CAP HPI, clocking is on an upward curve and Shorto expresses the fear that it might be legitimised through the government’s MOT database.

He explains: "MOT mileages are available on an open access platform via gov.uk. I suspect buyers of vehicles downstream will refer to that database and take the numbers as read. Our concern is that clocked mileages are being legitimised on a statutory register to the detriment of consumers. It’s certainly something that CAP HPI is, and will continue to, lobby against."

Shorto adds: "I think because the data being provided isn’t defined as personal data, it’s misunderstood as risk-free. We certainly do not see it that way, we believe there are risks in making some of this data freely and openly available. It’s clearly data that is of valid use to some, but it’s also offering up opportunities for misuse and abuse. We think the government needs to take a look at the criteria it uses for releasing some of that data on an open access platform."

Cross-border fraud

Managing director at UniCredit Leasing Germany Frederik Linthout told the audience at Leaseurope’s event that cross-border fraud will increase across Europe in the near future.

"I’m sure cross-border fraud is the next trend," he explained. "We are still at an early stage. And we can take counter-measures so as not to be too surprised by the losses we suffer. But we have to start fighting against it now and not in five years’ time."

Dally says vehicle fraud and theft has an international element, citing cases where vehicles which have been subject to fraud in the UK are detected abroad, inside and outside the Schengen area.

On the other hand, Dally says that cross-border fraud is likely to be stronger in countries of mainland Europe than in the UK.

Dally says: "Certainly on the continent of Europe where borders are land borders and where everyone is left-hand drive that does gives some different characteristics to the risk compared to the UK, where we’re right-hand drive and living on an island. Right-hand drive cars don’t have much market appeal to criminals on the continent because they’re rather easily detectable and
you export through a finite number of ports where the National Vehicle Crime Intelligence Service (NAVCIS) is present permanently, so we do have significant advantages."

Ways to combat fraud

Also addressing the Leaseurope conference was Eric Berthelemy, corporate secretary and compliance officer at Société Générale Equipment Finance.

He said:"In the fight against fraud, the value of a fraud is not commensurate with the fraud amount.

"The little fraud will someday be duplicated into a real big loss if nothing is done in the meantime. So before having to face the iceberg, you’d better care for smaller ice cubes."

Berthelemy is among many industry experts who suggest that the sharing of information is an important way to fight fraud.

"Unless we are talking about this, sharing information and statistics, we haven’t really got a hope in defeating this," agreed Potgieter.

Potgieter highlighted the importance of trade associations getting involved and he gave as an example the FLA, which organises quarterly motor finance fraud groups, where experts from each member company share experiences and best practice.

Dally comments: "Undoubtedly what we do at a national level through the FLA

I would commend across Europe, whether it’s to member states or at a pan-European level." On the other hand, he points out that not all countries have the same issues, legal structures and threats.

Dally says that the low incidence of fraud in the UK motor finance industry compared to other EU countries is due to its good anti-fraud infrastructure.

He adds: "For many years in the UK finance companies have registered the asset – the car on HP or PCP – with one of the three asset registration agencies which are CAP HPI, Experian and CDL.

"That’s a very strong control in the sector that makes it much harder to commit conversion fraud, because the asset is registered publicly as belonging to that motor finance company. Prevention is better than cure and that’s part of the infrastructure which is very strong in the UK."

Another important weapon in the fight against motor finance fraud is the cooperation between police and the trade associations.
"There are 21 FLA members who contribute yearly to a specific division of NAVCIS, which now concentrates on automotive financial crime. Since 2007, NAVCIS has recovered 3,500 vehicles for those members for a value of £38m pounds," says Potgieter.

Legal challenge

Changes in the legal system will be needed to combat clocking, by making it illegal and closing down mileage adjustment companies.

The European Parliament is to outlaw firms that offer to wind back the mileage on cars and other vehicles by mid-May 2018. EU transport commissioner Violeta Bulc says: "The directive explicitly stipulates that if the odometer is found to have been manipulated with the aim of reducing or misrepresenting the distance record of a vehicle the member state shall ensure that appropriate penalties are in place.

"Consequently the Commission considers that offering services linked to the manipulation of the tachometer cannot be considered as a legal activity."