Diverted payments: how they happen and how to spot them

An invoice finance facility rests on one simple arrangement: when a funded debtor pays, the money reaches an account the financier controls. On a factoring facility, debtors pay the financier directly. On a confidential invoice discounting (CID) facility, they pay into a trust account in the client’s name that the financier controls.

A diverted payment breaks that arrangement. The debtor pays, but into an account the client controls on its own. The client has the cash, the financier still shows the debt as outstanding, and the funded ledger is now worth less than it says.

How diversion happens

Not every diverted payment is fraud. Debtors make mistakes, especially on CID facilities where they have never been told about the financier.

• Old bank details. A debtor keeps paying the client’s previous account from habit or from an old supplier record.
• Changed bank details. The client asks its debtors to pay a new account. On a CID facility this request can look entirely normal to the debtor.
• Cash and cards. Small debtors pay by card on the client’s own terminal, or in cash.
• Deliberate redirection. The client banks some receipts in its own account and keeps the ledger showing them as unpaid, often while asking the financier for more funding against the same debts.

The first three are usually honest errors that a client should correct and hand over at once. The fourth is a fraud, and it tends to grow: once a client has kept one payment, it needs the next to cover the gap.

The signs on your side

Diversion leaves traces in the financier’s own records long before an audit.

A healthy debtor who stops paying. When a debtor that has always paid within terms suddenly goes quiet, ask why. If the debtor is trading well and has raised no dispute, the money may be going somewhere else.

Remittances that don’t match receipts. A remittance advice listing invoices that never cleared through the trust account is the clearest sign of all. Keep remittances and compare them with what actually arrived.

Part payments that don’t add up. A debtor paying round sums that never match invoice values may be splitting payments between two accounts.

Collections slowing while sales hold up. If the client’s sales are steady but cash through the trust account falls, the gap has to be going somewhere.

Credit balances in the client’s own bank. Ask for the client’s bank statements as well as the trust account’s. Receipts from funded debtors in the client’s own account are the most direct evidence there is.

The checks that find it

Verify balances with debtors. A debtor confirming that an invoice was paid on a date you have no record of tells you exactly what happened. Use contact details you have found yourself, not ones the client gives you.

Read the client’s bank statements. At audit, and on any concern, look for receipts from funded debtors. Match each one to a later payment of the same amount into the trust account. A receipt with no matching payment is a diverted payment until shown otherwise.

Watch batched transfers. Clients who pay diverted money across in round batches make the match harder, but not impossible. Add up the debtor receipts over the period and compare the total with what was transferred.

Check the notice of assignment. On a disclosed facility, a debtor who says it never received a notice, or received a different set of bank details, needs a new notice at once.

A remittance listing invoices you never received money for is not an admin problem. It is the clearest evidence of diversion you will see.

A note for CID facilities

Diversion is harder to see on a confidential facility, because the financier never speaks to debtors as itself. That makes the client’s bank statements and the debtor’s remittances more important, not less. Ask for both as a matter of routine, not only when something looks wrong: a client that sends them every month without being chased is rarely the one you need to worry about.

What to do when you find one

Record the facts: the debtor, the amount, the date, the account it reached and how you found it. Then follow your financier’s procedure. Usually that means asking the client to transfer the money immediately, in writing, and putting the debtor’s contact details beyond the client’s reach. A single honest error, corrected the same day, is a matter for a note on the file. A pattern, or a client who can’t explain the receipts, is a matter for your manager and possibly a collect-out.

What you should never do is accept the client’s explanation without the bank statement to support it. The whole value of the check is that it doesn’t depend on anyone’s word.

The fraud library’s Banking Direct Payments and Concealment courses work through these checks with a fictional client’s trust account, bank statements and remittances, and its case scenarios show how a small diversion grows when nobody looks.