Tackling Factoring Fraud: Safeguarding Your Freight Business

Originally posted on IFA Commercial Factor on February 22, 2024

In the fast-paced world of the freight transportation industry, many people are involved with freight movement regionally and across the country. With carriers, shippers, brokers, factoring companies, and others involved, unfortunately bad actors are getting savvier and savvier about how they obtain information to defraud those in the industry. The past year witnessed an alarming surge in fraud, presenting substantial challenges for all parties involved.

According to a survey commissioned by Truckstop, the impact of fraud on the trucking industry has been substantial. A staggering 78% of brokers spend significant time resolving fraud-related issues, which has major implications for efficiency and profitability. Furthermore, 65% of brokers reported a loss in productivity due to resolving these issues, and 25% have had to contend with legal implications, underscoring the severity of the problem.

Double-brokering, a particularly insidious form of fraud, was reported by 90% of survey respondents as the most common fraud they experienced. This scheme involves the illegal transfer of a load contract without the shipper’s consent, often leading to a carrier not being paid. Fraudsters have refined this technique, impersonating legitimate carriers to secure fuel advances and vanishing without fulfilling their obligations.

Either a carrier or a broker can commit double-brokering by making the following arrangements without the shipper’s consent:

• A carrier accepts a load from a broker and transfers it to another carrier. When a carrier commits to more hauls than they can move, this can be a shortcut to getting freight delivered on time. This act is illegal without proper notice and shipper authorization and can result in financial loss and imprisonment.

• A broker gives a load to another broker. Similarly, brokers who take on too much freight might pass some on to another broker who can accommodate it. They illegally transfer the freight to another entity at a lower rate and then pocket the difference.

When double-brokering occurs, the original broker of the freight no longer knows who is handling their customer’s cargo but is still liable for its transportation and delivery. This is especially risky because the “new” carrier may not be qualified to haul the load or have the required permits or insurance.

And the carrier that delivers the freight is at risk of being left unpaid by the party who facilitated the fraud. They can also unknowingly face legal consequences, be denied an insurance claim, or be held liable in the event of an accident or lost or damaged cargo.

Risks for Factoring Companies

Factoring companies rely on the legitimacy of invoices and are particularly susceptible to these risks. The confusing chain of custody in double-brokering often results in delayed payments. Factoring companies, which thrive on the predictability of cash flow, may find their financial stability threatened by these delays. The lack of a direct relationship between the original broker, the second broker, and the carrier makes it challenging for factoring companies to verify the authenticity of invoices, increasing operational complexities.

In addition, carriers can sell the same freight bill to multiple factoring companies. When the shipper pays the freight bill, only one factoring company will receive the payment, leaving the rest at a loss.

It is essential to build strong relationships with reliable carriers and brokers that you can trust to avoid double-brokering and other types of fraud. Work together to create contracts, hammering out all the details and keeping everything in writing. Ensure that every agreement you sign is clear, concise, and detailed. Go through every section and clause, making it comprehensive and secure for both parties. Carefully managing your financial relationships will help you spot any processes that seem suspicious or potentially risky.

Identity Theft & Impersonation

Identity theft and impersonation also pose significant challenges. Scammers use sophisticated methods like slightly altering the email addresses of legitimate brokers or attempting to hack into online load board accounts. This enabled them to steal valuable cargo by impersonating carriers or brokers, creating significant losses and security breaches.

The Truckstop survey revealed that 28% of respondents experienced stolen loads, 23% were victims of identity theft, and 15% faced issues with stolen payments. Truckstop’s RMIS Carrier Onboarding and Monitoring helps truckers identify and mitigate identity theft and suspicious activity before they impact their bottom line. Users can receive daily status updates, change notifications, and carrier directory sourcing tools to save time and protect their business.

A new trend emerged with scammers obtaining trucking authority and motor carrier numbers in bulk. This strategy allowed them to operate multiple fraudulent schemes simultaneously, often posing as legitimate businesses before abruptly disappearing with a large number of loads.

Factoring companies need to employ a layered security and risk management approach to counter these threats. This approach should include rigorous verification processes, deploying advanced technologies, and regular employee training to recognize emerging fraud trends. Collaboration with industry bodies and law enforcement agencies is critical in staying ahead of fraudsters.

Factoring companies play a crucial role in maintaining industry standards. Fraud can compromise the transparency and integrity of financial operations, so working with carriers, brokers and shippers to be vigilant is vital to protect financial operations. Internal controls and audit mechanisms form the backbone of fraud prevention, uncovering vulnerabilities and potential risks. Educating employees and clients about fraud risks and effective preventive measures is critical.

In conclusion, the fight against fraud can impact the freight transportation industry overall, and specifically factoring, requires a comprehensive, proactive approach. By understanding the complexities of different fraud types and implementing robust protective measures, factoring companies can significantly reduce their risk exposure. Continuous vigilance, technological innovation, and a culture of security and awareness are necessary to safeguard the interests of factoring companies and their clients.

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