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Case Studies
Conspiracy to make bogus hire purchase loans
An SME owner wanted to buy new machines by hire and purchase (HP) loan at 90% of the purchase value, but banks could only lend up to 60%. A machine supplier issued an inflated invoice so that the SME owner could borrow more. The supplier then referred the SME owner to a finance company's Sales Executive who was a friend of the supplier. Despite spotting the scam, the sales executive turned a blind eye and sought credit approval for the loan, in order to meet his sales quota. Having succeeded once, the sales executive conspired with the machine supplier to help a number of other SME clients who faced similar difficulties to obtain HP loans, with bogus machine purchase transactions. The scam was exposed by some SMEs’ default payments and internal audit’s investigation.
Case Analysis
Facing keen competition in the industry and pressure to secure loan business in the bank, a bank staff may cross the line. Over reliance on sales staff to provide borrowers’ information without counter checks would increase the risk of manipulation.
The Sales Executive, an employee (agent) of the finance company (the principal), intended to deceive/mislead the company by using invoices which contained false information. Notwithstanding he did not receive any bribes, he might have contravened Section 9(3) of the Prevention of Bribery Ordinance (POBO).
The Sales Executive, machine supplier and SME owners could be charged with fraud against the finance company, or conspiracy to defraud the finance company.
The Sales Executive rationalized his acts by regarding his practice as helping the finance company to secure more loan business, at the same time helping the SMEs to overcome difficult situations. However, the fact that customers had to obtain higher loans through a fraudulent means suggested that they are high risk customers. Granting them higher loans increased the risk exposure of the finance company.
Approving a higher loan based on inflated collateral value or bogus transactions might also result in an unusual increase in bad debt cases, and internal review by the finance company would detect the irregularity involved.
Banks should adopt good control practices such as setting up a central team to conduct vigilant due diligence on high credit risk customers, conducting independent assessment of machine suppliers involved in HP transactions to ascertain their reliability, gauging reasonableness of the sales prices on invoice, and conducting regular assurance check to detect irregularities/unusual trend.